Is trade diversification worth it?

Is trade diversification worth it? I’m amazed – no, flabbergasted – that eminent Canadian economists think not. Their arguments seem compelling: we are on the doorstep of the world’s largest, most efficient economy, with whom we share language, much heritage, customs, tastes and preferences, and the longest undefended border on the planet. It is intuitive that we should always be each other’s number one. But global growth dynamics categorically disagree. Could it really be that over time, Canada’s trade map is in for a seismic shift?

Recent trends are disappointing. Take China, Canada’s second-largest merchandise trading partner. Despite China’s superior economic growth, our shipments there since 2012 have only just matched growth to the US market. To some, that’s a permanent state, case closed. Data suggest otherwise. First, the 2014-16 global commodity price plunge weighed on receipts for raw goods. Second, China’s inventory overhang in steel and other industries has temporarily lowered demand for industrial inputs from Canada. Third, China has been trying to wean itself off public stimulus, causing volatility in demand. And finally, the US economy has been in recovery mode, boosting its need for our goods and services. Clearly, temporary factors are shifting the numbers about; the recent phase is not a benchmark period. 

Trend growth stretching back to 2000 is perhaps a better gauge. Here, there is an 11 per cent wedge every year between export growth to the US and to China. If this were to persist from today onward, China would become Canada’s top global merchandise export customer in a mere 26.3 years. To some, that growth assumption is a stretch. Fine, let’s then take relative growth from 2014 to 2017, where China has a 6 per cent annual advantage. In this case, China would be our number one in just over 44 years. All things considered, that’s still very fast.

Are either of these assumptions reasonable? It all comes down to the potential economic growth of our trading partners, and our ability to meet their growing demands. Most agree that the US economy can grow by about 2.5 per cent annually in the long run; outside estimates would stretch to 3 per cent. At the same time, China’s potential growth is double that, and India’s is arguably in the 8 per cent range. Simple math on the relative import requirements of these customers suggests a natural, or automatic, diversification.

If so, there should be examples that we can appeal to. Let’s first go to Australia, a small, open economy like Canada. Back in 1987, traditional customers (Japan, the UK, the US and New Zealand) accounted for about 50 per cent of exports. China was at the 3 per cent level, but was growing three times faster. Even so, its share of Aussie exports was a mere 5 per cent by 2000. But the growth wedge persisted, and compounding did its magic: by 2016, China had vaulted to first place, and it now accounts for a handsome 31 per cent share of Australian exports. This is perhaps the clearest live example of what a revolution in overall trade composition can look like.

So, is it possible that Canada is on the same path? Specific industry data strongly suggest so. China has long since been British Columbia’s top market for sales of pulp and logs. In recent years, China’s imports of BC sawmill products have been 50 per cent of US sales. Cross-Canada food shipments to China are also rising dramatically, and in certain sectors have risen to about a quarter of exports to the US. In fact, China is a key driver of a diversification trend that since 2000 has impacted all provinces and major industry categories across Canada. Over this time, our sales to the emerging world have risen from 5 per cent to over 13 per cent of total merchandise exports.

If these new millennium trends persist, Canada will quickly become a transformed export space. Several industries will call China their top customer within the next two decades, including meat processing, seafood, rubber manufacturing, refined and recyclable metal, and the starch and vegetable oil manufacturing industry. Ask those in the industry, and they will quickly agree that this is happening, and hard to keep pace with.

Diversification of Canada’s trade isn’t just worth it; far more than that, it is an inevitability that is already a reality for industries on the leading edge of the trend. So let’s just end the debate, and get on with the definitive trend that is already transforming Canada’s long-term potential economic growth.