Glen Hodgson is senior fellow at the Conference Board of Canada.
As the North American free-trade agreement negotiations proceed, the future of the pact threatened by the spectre of a U.S. withdrawal, the prospect of greater trade and business diversification beyond North America becomes ever more attractive to Canada. Even if the NAFTA talks don't lead to the demise of the agreement, the prevailing uncertainty is affecting business planning and delaying decisions on investment and expansion.
This uncertainty reinforces the advantages of the long dreamed-of diversification of Canadian trade and investment. Canada's trade has quietly diversified since the early 2000s. The U.S. share of Canadian goods and services exports has fallen from 83 per cent in 2002 to about 73 per cent today. Further rebalancing could reduce Canada's reliance on one dominant trade partner.
To diversify successfully, Canadian firms require a full understanding of how international business works today and where the opportunities lie. Nimble exporting businesses and innovative policy-makers know that the traditional model of selling commodities and manufactured goods to foreign buyers has evolved – into a more modern and sophisticated approach to international business. Trade today is an integrative process, involving many elements, including: exports; imports used as inputs to create exports; foreign investment flows both into Canada and abroad; sales from foreign affiliates; exports of services as well as goods; rapidly expanding digital trade; and success breaking into global and regional value chains.
The European Union should be at the top of the list for Canadian business development, thanks to the implementation of the Comprehensive Economic and Trade Agreement (CETA). The European market is larger than that of the United States, with 500 million relatively wealthy consumers and many global businesses. Europe's economic performance was surprisingly positive in 2017, and the prospect of labour-market reform in France has provided a welcome boost to EU growth expectations.
Canada's largest trade and investment partner in Europe is Britain. However, the Bank of England and the International Monetary Fund have provided sobering assessments of weakened British economic prospects owing to Brexit and its consequences. Britain has agreed to pay £50-billion ($86.8-billion) to settle its outstanding EU liabilities and is now negotiating how it might retain open trade and investment relations with the EU. Canada could eventually reach out to Britain and propose bilateral free-trade negotiations, but only once the Brexit terms are clarified.
Asia-Pacific countries offer another special opportunity, thanks to robust growth across much of the region, a rapidly growing middle class and increasing regional economic integration. Japan is a key regional player and home to some of the most innovative global firms. Real per capita incomes in Japan are high and rising, making it an attractive trade and investment partner even if its potential growth is weak owing to a now-shrinking population base.
The Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), or TPP 11, is a massive new opportunity for Canadian firms. This agreement will give Canadian exporters improved and preferred market access in Japan, Australia, New Zealand and other Pacific Rim countries. With the United States currently outside the CPTPP, Canadian exporters will have better access than their U.S. competitors.
China and India are the global growth leaders among large economies, each projected to grow at around 6 per cent in 2018. However, there are limitations that constrain their performance, notably aging demographics and rising debt in China, and growing policy shortcomings in India. Freer trade with China and India would be complicated to deliver. Free-trade negotiations with India have moved very slowly; labour mobility is a major sticking point. Engaging more deeply with China is an important over-arching trade policy objective for Canada, but it will not be easy to separate commercial interests from political forces.
The bottom line? If ever there was a time for Canada and its firms to accelerate international trade and business diversification, now is that time.