Stop me if you've heard this argument before: Canada's international trade footprint barely sticks a toe beyond the United States. And while that has often served us well (if you're going to rely on one trading partner, why not the world's biggest economy?), it's not healthy. For our own long-term good, we have to diversify into more foreign markets.
Thing is, we already did. This old thinking is not only behind the times, it's also stuck in an outdated definition of "trade."
Yes, Canada still sends the bulk of its exports to the U.S. market – 76 per cent last year, by value. But that's down from nearly 85 per cent in the early 2000s. While exports to the U.S. grew just 14 per cent in the past decade, exports to the rest of the world surged 65 per cent.
It's a good start. But a new report from the Institute for Research on Public Policy illustrates that in the modern reality, direct exports represent only the tip of Canada's global-trade iceberg. And the rest of the iceberg has spread further into waters beyond North America.
The report, written by Export Development Canada (EDC) researchers Todd Evans, Daniel Koldyk and Lewis Quinn, notes that, increasingly, Canadian companies have conducted their foreign dealings not through shipments of goods made in Canada, but rather via their own businesses set up in foreign countries. These foreign affiliates generate annual sales of more than $500-billion; for nearly a decade, Canada's foreign-affiliate sales have surpassed its merchandise exports. Foreign-affiliate sales rose by nearly 40 per cent from 2004 to 2013, the report says, while goods and services exports rose by just 17 per cent.
Foreign-affiliate sales, together with Canadians' foreign direct investment in companies abroad, are what the authors call "offshore output" – essentially, a new form of Canadian exports for the modern, globalized world economy. You haven't just exported goods, you've exported a piece of your business, operating closer to the markets where the demand is.
"A growing share of Canada's offshore output is displacing exports to overseas markets," the report says.
The shift toward more offshore output may, in part, help explain Canada's apparent loss of export-market share in the global economic recovery of the past half decade. With Canadian producers increasingly relying on operations based overseas, they are meeting demand from foreign buyers without relying on traditional exports.
These affiliate sales, obviously, don't directly involve Canadians producing goods at home. But they do reflect, as the authors put it, "Canada's broader participation in global value chains." And they still contribute significant income to Canadian companies and the domestic economy, fuelling investment, expansion and job creation at home. The authors said these operations also open the door for additional exports of Canadian goods.
And, importantly, Canada's exposure to foreign markets through affiliate sales is much more diversified than its merchandise exports.
The U.S. market represented just 48 per cent of Canada's foreign-affiliate sales in 2013. Emerging markets – which offer far faster growth than advanced economies such as the U.S. and Europe – accounted for 28 per cent, and have been growing fast. Over the 2004-13 decade, emerging-market sales surged 187 per cent; sales in the U.S. rose just 18 per cent.
Canada's foreign-affiliate operations are also much less beholden to the mood swings of commodity markets. Mining, oil and gas, and agriculture made up only about 20 per cent of foreign-affiliate sales in 2013, compared with about 40 per cent of the country's export sales. That's a bit of good news for Canada at least for 2015, a year in which EDC has forecast that energy exports will fall 23 per cent.
On the other hand, the heft of Canada's offshore output may mean that enthusiasm in Canada for the anticipated U.S. economic acceleration this year is overstated. The widespread expectation is that a healthy and growing U.S. economy will fuel strong demand for Canadian-made goods as the year progresses, thereby allowing Canada's economy to ride the coattails of a strong U.S. recovery the way it has so many times in past economic cycles. But it would appear Canada's broader linkages to the global trade system don't flow through the U.S. market nearly as much as they used to. The Canadian economy may be more reliant on non-U.S. growth than has historically been the case.
In the longer term, though, that will be a very good thing. Growth potential in the U.S. economy looks doomed to slow in the coming years, bogged down by an aging demographic mix; growth will be lucky to average about 2 to 2.5 per cent a year for the next decade. Growth in China and India, for example, over the same period is expected to be 5 to 6 per cent. The foreign-affiliate trend will be Canada's friend in the long run.
David Parkinson