“Don’t put all your eggs in one basket.” Good investment advice, but easy to ignore when the return on a certain asset is particularly good. Canadian international trade faces the same dilemma.
“Don’t put all your eggs in one basket.” Good investment advice, but easy to ignore when the return on a certain asset is particularly good. Canadian international trade faces the same dilemma. We know that more diverse trade would be a good thing, but over the years, the yield on trade with the US has been too tempting. But do we ignore trade diversification at our own peril?
Canada’s trade is staggeringly skewed. In 2009, the US accounted for 75% of merchandise exports. The next-largest destination, the UK, even after increasing its share significantly in 2009 accounted for just 3.4% of total exports. A handful of large industrialized countries account for 84% of exports, and the remainder is carved up into very small, widely-distributed segments. That sounds concentrated enough, but it is actually an improvement – just seven years ago, the US accounted for 87% of merchandise exports, and the large countries, 93%. This does suggest that a certain amount of diversification is underway, a positive development – but is it enough?
Imagine a radically different trade profile – a scenario where the large industrialized markets accounted for just over half of the export pie, and where emerging markets took up the remaining space. Conservative assumptions based on recent export growth trends produce an eye-opening overall result. In place of the 6.5% average growth seen in the 2004-08 period, Canadian merchandise exports could easily have expanded by 10% annually. Calculated this way, diversification would have partially cushioned the recessionary blow that exports suffered last year.
The impact on Canadian economic growth would be dramatic. Taken in isolation, the increase in export growth could add up to 1% annually to GDP growth. Realistically, such an upsurge in export growth would also boost the annual increase in imports, muting or even cancelling the impact on the bottom line. But both exports and imports create jobs, and on balance, there would still be a very strong impact on the overall economy. In addition, with the trade sector growing more quickly, Canada’s trade intensity – exports plus imports as a share of GDP – would rise significantly.
Structured as it is presently, Canadian trade faces longer-term risks. Our traditional customers face the prospect of diminishing future growth as populations age and productivity concerns mount. Longer-term potential growth in OECD nations is between 2 and 2.5%, and in some key cases, annual growth prospects are weaker. In contrast, emerging markets can collectively sustain growth in the 5-6% range for a long time to come, with certain key markets pushing the 8-9% range. This is perhaps the simplest case that can be made for diversifying Canada’s trade arena.
Will it happen? A radical short-term shift is unlikely, but diversification was already underway before the recession hit, if only modestly. Growth of merchandise exports to emerging markets tipped the scales at well over 20% annually in the 2004-08 period. Commodity price increases drove a good part of these gains, but volume increases were also significant. We can hope that these are the beginnings of a shift in our trade patterns that last year’s economic crisis will only encourage.
The bottom line? Diversification is not just a prudent strategy; in today’s economy, it is actually a ticket to greater long-term prosperity. Those who embrace its risks face handsome rewards.
