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Plastic bottles filled with soda before being labelled are carried on a conveyor belt at Cott’s bottling plant in Toronto.

Fernando Morales/The Globe and Mail

Canada has a large and swelling processed-food trade deficit despite decades of government efforts to make the sector an export powerhouse.

The deficit hit $6.3-billion in 2011, up more than six-fold from a $1-billion gap in 2004, as exports stalled and imports rose rapidly, according to a report being released Wednesday by the Canadian Agri-Food Policy Institute (CAPI).

Before 2004, the deficit had held steady at roughly $1-billion a year for more than a decade.

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"We need to better understand the implications of sustained and deepening trade deficits for the future competitiveness of the processed-food sector and the agri-food sector as a whole," CAPI president David McInnes said.

Canada enjoys large trade surpluses in agricultural commodity exports, such as wheat and canola.

The report identifies the high value of the Canadian dollar, which took off after 2000, as a major problem, but hardly the only reason for the worsening trade gap. It also suggests other possible explanations, including an "erosion of benefits" from free trade deals, over-reliance on foreign branch plants, falling capital investment and unspecified regulatory problems.

For example, the report points out that Canada has gradually lost its competitive advantage as the U.S. signed numerous other trade deals in the years after the 1988 Canada-U.S. free-trade agreement.

Canadian branch plants may also be losing product "mandates" to U.S. factories. And investment (as measured by capital stock) peaked in 2002 and has been declining ever since, implying "net disinvestment" by food processors in Canada, the report said.

But the report by CAPI – an independent federally funded think tank – does not specifically identify Canada's supply management system as a problem. The regime tightly regulates production of milk, eggs, cheese and poultry. Supply management restricts the availability of key food ingredients, and inflates prices. The system is also a source of constant friction with many of Canada's trading partners.

Mr. McInnes explained that the impact of supply management is implicitly covered in a paragraph on "policy and regulatory changes."

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"The most difficult question is whether specific policy or regulatory changes have induced the changes in Canada's net trade in food and beverages," according to the report.

Among other key findings:

– Canada recorded a $1.3-billion processed-food trade deficit with its NAFTA partners in 2011, against a $2.2-billion surplus in 2004.

– Canada's deficit with the rest of the world was $5-billion in 2011, up from $3.2-billion in 2004.

– Canada exported $10.3-billion worth of processed foods in 2011, up from $2.1-billion in 1990. But imports rose much faster – to $16.6-billion in 2011 from $3.6-billion in 1990.

– The largest contributor to the food trade deficit is the beverage sector.

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