Tue, 18 Dec 2018

Time for Canada to get serious about trade diversification

Tiff Macklem - The Conversation
18 Nov 2018, 03:39 GMT+10

With the difficult renegotiation of the trade agreement with Canadas largest trading partner now resolved, its time for Canada to get serious about trade diversification.

The experience of renegotiating NAFTA or USMCA as it is now called has highlighted Canadas vulnerability to one dominant trading partner that buys roughly 75 per cent of our exports.

As a country, Canadashould not be in this position. Itneeds to diversify itstrade beyond the United States and increase itslinks to rapidly growing emerging market economies, particularly in Asia, despite the anti-China clause in the USMCA.

Given that growth has pivoted to these emerging markets in the last 15 years, the first question is why has this not happened already. The answer is straightforward.

For a long time, being right beside the United States the biggest, richest market in the world has been a great ride for Canada. Whats more, Canada isvery comfortable and good at doing business with Americans.

So why diversify? The short answer is being right next door to the United States is not the ride it used to be. Part of this is the alarmingly protectionist sentiment of U.S. President Donald Trumps administration, but the root of the answer pre-dates Trump.

In the last 15 to 20 years, the United States has not been the engine of global growth that it was in the past. The U.S. share of global growth has been almost cut in half in the last two decades, falling from about 32 per cent in the 1990s to about 17 per cent in this decade. Over the same period, Asias share has risen from 32 per cent to just over 50 per cent, according to our analysis of World Bank trade data from the Institute for Competitiveness & Prosperity. This has created a double challenge for Canada.

First, we are significantly underexposed to emerging market economies, so we are getting little upside from their acceleration in growth.

In addition to the 75 per cent of Canadian trade that goes to the U.S., another 10 per cent goes to other slow-growth advanced economies, largely in Europe. Only about nine per cent of our trade is with faster-growing emerging economies like China, India, South Korea, Mexico and Brazil.

This is much lower than Canada'speers. In Germany, the share of exports to emerging markets and other developing countries is in the 20s; for Japan and the U.S., its in the 30s; and in Australia, its in the 40s.

Second, these rapidly growing economies are providing increasingly fierce competition for our products in the U.S. market. In 2000, Canada was the leading source of American imports. Today, China has the largest share of U.S. imports at 22 per cent, up from only eight per cent in 2000. In the same period, Canadas share has declined from just over 18 per cent to about 13 per cent.

Canada should have developed a diversification strategy a decade ago. But without a crisis, there has been little imperative. Call it lack of vision, risk-taking or leadership.

Emerging markets and Asian markets, in particular, are often seen as distant and less familiar. They are seen as risky and more expensive to penetrate. The consequences have been stark.

In the last 15 years, Canadas share of the world export market has slipped from about 4.5 per cent to about two per cent. Part of this trend was inevitable as large emerging market economies joined the global trade and investment network, but Canadas slide has been particularly precipitous.

Across the worlds Top 20 exporting countries, Canadas performance since 2000 has been the second worst only Japan has seen a bigger decline in its trade share than Canada.

Canada is losing share in the U.S. market that itself is losing share globally. We should instead be focused on gaining share in markets that are gaining share. This means diversifying our trade towards emerging market economies, particularly in Asia.

The place to start is with Asias two biggest economies, India and China. The new USMCA contains provisions that allow signatories to pull out of the deal if one country pursues a separate free-trade agreement with a nonmarket country namely, China. But that should not be a barrier to this pivot.

India is a thriving democracy with strong ties to Canada. And as highlighted in a recent report on trade diversification from the Public Policy Forum, there is much that can be done with China short of a comprehensive free-trade agreement through sectoral agreements that offer the best means for realizing quick and significant gains.

Instead of waiting for a crisis, Canada should make trade diversification the priority it should have been for at least the last decade.

(The writerTiff Macklem is Dean and Professor of Finance, Rotman School of Management, University of Toronto).

The Conversation

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