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Illustration of two people standing on a map of Canada, both looking through binoculars; one at the United States, the other overseas. (Jori Bolton/The Globe and Mail)
Illustration of two people standing on a map of Canada, both looking through binoculars; one at the United States, the other overseas. (Jori Bolton/The Globe and Mail)

Agenda 2020

Are Canadian businesses too dependent on selling to the U.S.? Add to ...

Canada has always looked directly south of its border for most of its trade. But globalization has opened the trade world, as technology, international institutions and free-trade agreements make emerging economies more viable partners. Looking ahead to the next decade, most experts forecast that these countries will likely see much greater growth than mature economies, which leads us to ask: Should Canada be looking beyond the United States more often for trade?

To discuss this possibility, The Globe and Mail turned to two prominent Canadian economists: Peter Hall, vice-president and chief economist of Export Development Canada, and Someshwar Rao, a former top economist with the Economic Council of Canada and Industry Canada, and currently a research fellow at the Institute for Research on Public Policy, and president of S. Rao Consulting Inc. Mr. Rao recently co-wrote a paper that recommended, among other findings, that Canada should look to offset slower demand for its goods in the U.S. and Organisation for Economic Co-operation and Development (OECD) economies by looking at growing emerging markets.

Are we too dependent on the U.S. market, looking ahead five or six years?

Someshwar Rao: Right now, the U.S. accounts for about 65 per cent of our exports. The U.S., Europe, Japan, China and the East Asian emerging economies, in total, account for about 90 per cent of our exports. And in my view, they will continue to dominate Canadian exports as a destination. The U.S. and European economies will continue to grow at a slower pace because of the demography and population aging, which are interlinked. So what I see is, even though the U.S. has continued to be the dominant destination for Canada’s exports, if Canada wants to increase exports as well as aggregate demand, it needs to strengthen commercial linkages with emerging economies – large and fast-growing economies like China, India, Brazil and South Africa and Indonesia. We need to strengthen our commercial linkages with these economies if we want to increase the export growth as well as aggregate demand.

Peter Hall: The United States cannot be lumped together with the rest of the OECD markets in terms of its overall market potential growth, because its demographic fundamentals are quite different from those of western Europe and a lot of the other OECD nations. They don’t have an aging population problem that’s as grave. And that is actually, together with their superior productivity performance, allowing for a rate of potential growth that is quite superior to the rest of the OECD. We can foresee U.S. potential growth in the 3-per-cent zone going forward, versus the rest of the OECD, which might struggle to get 1.1- or 1.2-per-cent growth. Going forward, we don’t actually see the dampening growth dynamic. That’s the U.S. side of things. I have to say that market diversification is actually under way. Since about 2000, emerging market trade has gone from just 4 per cent of Canada’s merchandise trade to, now, 12 per cent. Were that trend to continue, we could easily see, by 2025, the share of emerging market trade to the total of Canadian getting as high as a third to 40 per cent of our trade. So I don’t think we’re too dependent on the U.S. market. I’ll qualify that by saying that in certain industries, absolutely we are – oil and gas being one of them. Our share of trade with the United States is high, but we’ve got to remember that we do a lot of trade with other nations through the United States, either through American supply chains or through shipments, from Canada to another country through the U.S. as strictly a geographic thing.

SR: Peter says the potential growth is going to be 3 per cent, but I’m not so sure about that. And labour productivity growth is not a constant, so it will react to the growth in demand as well as the supply-side factors. All these are interlinked, so my feeling is: When we slow down in U.S. growth, it will not be 4 or 5 per cent like in the past. Unless productivity growth takes off, I do not see a big increase in economic growth in the U.S. I agree with Peter that the U.S. is going to continue to be the dominant destination for Canada’s exports, and I don’t think we are too dependent, given the geography and our historic linkages. But we have a lot of barriers in the emerging economies – trade barriers, as well as investment barriers, so we need to strengthen our linkages.

PH: I’m one who believes that the U.S. economy is the engine of world growth at the moment, and that emerging markets are still follower economies. And so that engine is actually firing up now. Their growth hasn’t been spectacular to date, but our view is that’s precisely because the American economy, until this point, has been in the business of using up the excesses that were accumulated ahead of the recession actually occurring.

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