Diversification is a done deal, globally. That’s not news; several tectonic forces have shaken the world of global commerce, opening the door to markets that were previously locked out of the economic mainstream. They initially entered as very small players, but the transformation has been swift—key emerging economies have ascended to dominant positions, and there are more coming up behind them. By the numbers, global GDP has steadily become more diverse, spreading out the sources of export growth. As a trading nation, Canada should be following this trend. How are we doing?
First, let’s illustrate the magnitude of the global transformation. China is perhaps the most dramatic illustration. In 1980, it accounted for 1.2% of world GDP. Its almost unfettered, explosive growth since then has it at 13% of global GDP, and contributing about 30% to the world’s GDP growth, and with today’s more muted 6% annual growth trend, China will take just over a decade to surpass U.S. annual economic output.
It is a remarkable shift, but China is not the only player in this space. India’s population is only 50 million shy of China’s almost 1.4 billion, but unlike China, India’s population is still growing, and will continue to do so decades into the future. Mobilizing that population by removing business and infrastructure bottlenecks has been a key challenge for India, but nonetheless it has been able to sustain a recent growth clip well ahead of China’s.
The story doesn’t stop with the emerging market giants. The explosion of technology and vastly greater trade openness have lifted many smaller economies to economic prominence. Southeast Asia, Latin America, Central and Eastern Europe all have stories to tell of economic transformation and superior growth, and collectively have become a much larger share of the world economic sphere.
Will it continue? The economic momentum is still there. Check out the rise of the middle class in the emerging world: Brazil boasts five million per year, Indonesia, seven million. India chalks up 20 million, with a goal of reaching 30 million. By the way, the ranks of India’s lower class number into the hundreds of millions, so this pace could be sustained for a couple decades or more. China tops them all, with annual growth estimates for the ranks of the middle class at roughly the size of the entire Canadian population.
What will sustain this? Trade openness is critical. Ongoing technological adoption will be a key factor. And the ability of less-developed markets to leapfrog over old technologies to the leading ones is proving to be quite an advantage. Another factor is the “catch-up”: per capita incomes in the emerging world—even in China—are still a small fraction of what they are in the West. As a measure of getting to the current technical frontier of the advanced world, emerging economies still have a long way to go—meaning, frankly, that they still have a long way to grow.
Is Canada following this trend? We have certainly diversified our trade in recent years. Since 2000, the share of our merchandise headed for emerging markets has risen from 5% to more than 13% of our exports. It looks impressive, until recognizing that the growth in our exports to emerging markets is less than their total import growth—our market share there has slipped. Then consider Canadian reticence: we aren’t usually the first to “go boldly” into less traditional markets. As our recent Trade Confidence survey indicated, we are interested in diversification when we have to, but when things are cool stateside, our desire subsides.
Based on current trends, the makeup of Canadian trade could be dramatically different in just a few years. Erase current average growth, and China could be Canada’s top market for merchandise exports in just 26.3 years. Give it a few more years, and exports to both Mexico and India could eclipse our U.S. merchandise exports. Seems impossible, but that’s what current activity suggests. Imagine what it would look like if we were actually keeping up with others!
The bottom line?
Global activity is shifting, and as a trading nation, Canada must shift with it, or risk slipping into export oblivion. This doesn’t mean abandoning our traditional trading partners; we nurture those prized relationships. But at the same time, we embrace the new customers, and scale up to serve all.
This commentary is presented for informational purposes only. It’s not intended to be a comprehensive or detailed statement on any subject and no representations or warranties, express or implied, are made as to its accuracy, timeliness or completeness. Nothing in this commentary is intended to provide financial, legal, accounting or tax advice nor should it be relied upon. EDC nor the author is liable whatsoever for any loss or damage caused by, or resulting from, any use of or any inaccuracies, errors or omissions in the information provided.