Economic neighbourhoods used to be defined by proximity. Post-war regional integration put a sharper focus on the need for larger neighbourhoods. A combination of closer global trade ties and technological breakthroughs have shrunk what Marshall McLuhan called the global village down to what is a global highrise condominium… or something even smaller. And the resulting trade linkages and commercial arrangements—a vast array of complex supply-chain arrangements—has redefined further what a neighbour really is. So, is Canada’s neighbourhood shifting?

Before going there, what is our current neighbourhood? Good question. The easy answer is our immediate geography: the U.S. economy, extended to Mexico through NAFTA. Stretching back further and going wider, the post-war period did a lot to redefine the ’hood. Prior to the two world wars, our immediate ties were to the U.K., the U.S. and the other European nations from which we had emigrated. The wars showed how intensely immediate neighbours can fight with each other, and when the second bout was over, almost obsessive efforts were made to harmonize relations. The Iron Curtain was further motivation for Western consolidation. Out of this came institutions like the UN, NATO, the OECD, the EEC (now the EU), various international financial institutions like the IMF, the World Bank and so on. 

Western nations drove this unification, which was largely on economic grounds. Even so, there was the “other side of the tracks”, so to speak. COMECON (the Council for Mutual Economic Assistance) was definitely a different neighbourhood, and a third large complex was the emerging economic world. The former was separated by ideology, the latter by an inability to viably converge to the same standard of living as the fully developed world.

Although a fair measure of global integration occurred in the post-war period, it was relatively slow through to the mid-1980s. At that point, technological progress and pivotal free trade initiatives caused a marked upshift in global economic interaction, one that was sustained into the early part of the new millennium. At that point, it actually experienced a further upshift, impelled by the late-cycle global bubble. During this period, China’s accession to the WTO was a defining moment.

Things settled down a bit with the Great Recession, but even in the aftermath of the correction, global integration has continued. One of its key manifestations is a convergence of GDP. Since 1980, China’s GDP has catapulted from a mere 9% of the U.S. GDP to 60% in 2018. If China sees average growth of 5-to-6% in the coming years, it will surpass the U.S. GDP sometime during the next 15-to-21 years. India is further behind, but if it were to maintain average growth of 8%—today’s pace, but maybe a bit of a stretch—it would overtake the U.S. GDP in just 35 years. The neighbourhood is definitely shifting.

Some doubt the ability of China, India and other emerging markets to sustain higher growth rates. There are good reasons to worry about sustainability. But in terms of average well-being, both economies still have a long way to go. Although per capita GDP is growing much more quickly in China and India than in the West, China still needs about 60 years to catch up with the U.S., and India is likely looking at 80 years, at the very least. Given that convergence of economic well-being is indeed a goal for these and other emerging markets, then long-run growth potential for their economies is more or less a reality.

As the community shifts, is Canada keeping up? Well, we are interacting more with non-traditional markets. Diversification of trade to emerging markets took a big turn in 2000, rising from 5% to 13% of total exports through 2018. China is a large driver of this, rising quickly to our number two destination for goods, but we are experiencing torrid growth in a good few other emerging markets. Current progress suggests a bright future—but that will require careful planning, both at the industry level where scale is badly needed, and in supporting infrastructure.

The bottom line?

The ‘hood has been shifting for awhile. As others move in, Canadian exporters need to ensure we do not become alienated; that could be really costly. What’s required is a strategy to meet and get to know these new neighbours. They and others like them have a lot to offer, and will increasingly define the future. 

 

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