A new analysis from Canada’s export agency estimates that we’re undershooting our current export potential by nearly $50-billion a year, and argues that we have room to roughly quadruple exports over the next 30 years, if we play our cards right.
But the trick, as always, is how to bridge the gap between potential and reality. That growth would require a shift away from our high concentration on traditional markets – a hurdle that has long been a tricky one for Canada’s exporters.
The report, written by Export Development Canada senior economist Meena Aier, assessed Canadian trade performance against “gravity models” – gauges of structural factors such as economy size, geographical proximity and political stability, which do a good job of predicting how much trade one could naturally expect between trading partners. This analysis found Canada is exporting significantly less than the models predict – US$39-billion (C$48.6-billion) a year less, in fact. That’s equivalent to about 9 per cent of total exports in 2019 (the last full year unaffected by the COVID-19 pandemic).
It’s no huge shock that Canada isn’t penetrating export markets as much as models might predict; our country has nagging competitiveness issues that have hindered our ability to gain footholds in new markets, and to maintain our share in others. It doesn’t help that many of the fastest growing and highest potential markets are far from Canada’s borders, something that leaves the country at a geographical disadvantage.
But one of the most surprising aspects of the EDC’s analysis is the biggest areas of underperformance are actually in Canada’s largest export markets, places where we have long assumed to have a natural advantage and a historically favourable status as a supplier.
The EDC said two-thirds of that export shortfall is to the United States, our single biggest trading partner – despite a deeply ingrained trading relationship and long-standing trade pacts that have significantly integrated the two economies. With China, our second-biggest trading partner, Canada is leaving about US$5-billion a year on the table – equal to nearly 30 per cent of our annual total in 2019.
“In fact, Canadian exports tend to ‘underperform’ in countries where there are inherent trade advantages,” the report said. “Even with its closest ally and trading partner, Canada could and should be doing more to improve its export performance.”
Further, Ms. Aier suggests Canada’s overreliance on a handful of key export markets might actually be at the root of its underperformance. She points out Canada’s exports are the second-most concentrated among OECD countries, behind only Mexico (which is also heavily beholden to the U.S. market).
It’s hard to argue that being next door to the U.S. – which consumes three-quarters of Canadian exports – has been anything short of a winning lottery ticket for Canada’s exporters. We share the world’s longest border with the world’s biggest economy; how can that be anything but a good thing?
But maybe it has become a bit like living above an ice cream store. It’s convenient, it’s filling, but it’s an invitation to unhealthy overindulgence. It’s left us looking increasingly out of shape.
There is certainly cause for hope that at least in some other large and high-growth markets, Canada could raise its game over the next few years. We’ve barely scratched the surface on two relatively recent trade agreements, the Canada-European Union Comprehensive Economic and Trade Agreement and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, which offer Canada an expanded foothold in Europe and Asia.
But the best you can say about other high-potential markets is Canada still has plenty of room to improve. The report cites exports to India and Brazil, in particular, as well below where they could and probably should be, and too narrowly focused.
Then there’s China, which has long been Canada’s great hope for export growth and for diversification away from our U.S. dependence. Hopes to expand in that massive and fast-growing market have been seriously set back by the strained relationship between the two countries’ governments – and China’s willingness to use trade as a diplomatic weapon. The EDC report identifies China as both the market with highest potential for Canadian exports, and the highest source of potential trade risk.
The report argues that for Canada to capture a significant portion of its export potential over the next few decades, it has to reduce its dependence on a few big markets, and make better inroads in emerging economies that offer better room to grow and diversify.
For that to happen, though, Canada is going to have to overcome some competitive disadvantages and old habits that, frankly, have been blocking the path.
If innovation, technology and a skills-driven economy are where Canada’s future lies for growth domestically, the same goes for its chances to reach its export potential in the coming years.
“Winning in these emerging markets will require taking a hard look at Canada’s current export basket, which is rich in primary commodities, but lags other advanced economies in value-added, next-generation products and services,” the report concludes.
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