When a particular basket is doing well, we can’t resist putting our eggs into it. Maybe a large share, or maybe all of them. And when that basket inevitably goes south, we stare in disbelief at the short-sightedness of our singular commitment. It happens over and over again; it seems we only think of diversification after the fact. So, with uncertainty shrouding Canada’s key trading relationship, is the ‘D’ word back in export-speak?

D is for Diversification

In one very great respect, we could say that it never really left the lingo. Back in 2000, Canada’s exports to China were duking it out with Germany for 4th place in the overall rankings, well behind our dominant sales to the US, but also well behind Japan and the UK. But back then, China accounted for barely one per cent of Canada’s international shipments. A solid track record in the Chinese market has now vaulted Canada’s export sales there to second place among all export destinations, with a comfortable lead on the third-ranking UK and fourth-placed Japan. It’s a well-known story, but worth repeating. China’s share of Canada’s total merchandise exports has not only jumped up to 4.5 per cent, but it continues to rise.

But it is still just 4.5 per cent, paling in comparison to the dominant US market. One look, and many quickly lose a lot of interest; while impressive, it still seems too small to get too excited about. Given the risks and potential losses feared by a venture into China, or the sheer cost of exploring and building business there, many Canadian exporters opt out. However, that decision usually ignores the fact that Canadian export sales to the US grew on average by 0.7 per cent each year since 2000, while those doing business in China averaged 12 per cent – every year. Some industries did a multiple of that. Well, that’s now a whole different story, and raises interesting questions.

Try this one out for size: if this growth wedge remained the same over the forecast horizon, how would that trade share change? That’s a great question. The answer? It would take just over a quarter of a century, but at that point we would be shipping as much Canadian stuff to China as to the US. It hardly seems possible, but the math is pretty simple.

How soon could China be #1?

Now, some will rightly challenge the assumptions: in the middle of the 2000-2017 timeframe, we had a massive global recession that affected US sales a lot more than our exports to China. Fair enough, let’s then go with a more reasonable growth trend. The wedge between growth in our US and Chinese exports is narrower, but still significant. Under this scenario, it would take about twice the time for China to become Canada’s top overall export destination. Either way, it’s a pretty staggering change in a relatively short timeframe, and strongly suggests that every Canadian exporter should have a China strategy.

Is ‘every’ a bit rich? Well. Let’s dive a bit deeper. Drawing again on the 17-year growth trend, Canada’s wood products industry has just over 7 years before China is top customer. For refined metals net of aluminium, it’s 12 years. For processed meats, just above 12 years, and for seafood, 16 years. Moving a bit up the value chain, navigation, measuring, medical and control instruments have 23 years until China is the dominant destination, and autos – yes, that most US-centric of our industries – just over 11 years. Now in the latter case, and in that case only, growth is absurdly high, and from a very low base, so it is the only one on this list that is very unlikely to be realized. Still, it’s useful as an illustration that in even our most US-focused businesses, there is a big shift in activity underway, and one that exporters of all stripes ignore at their own peril.

Canada’s trade heat-map is changing

Angst about the future state of our trade with the US has launched the diversification word back into day-to-day trade conversations in a way I haven’t seen since the Great Recession. The China story is compelling, but when we consider that India is fast becoming a sort of ‘next’ China, and that there are other fast-growing emerging markets that we are increasing our trade with, as time goes on Canada’s trade heat map will undergo significant changes – if we broaden our focus.

The bottom line?

Diversification isn’t just talk; it’s happening, and with dramatic results. Time to join the Canadian exporters that are having the ride of their lives.

 

This commentary is presented for informational purposes only. It is 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. Neither 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.