Our trade partners are now 30 per cent more diversified, suggesting Canadian firms are lessening their dependence on the U.S.
October 5, 2011
by Matt Powell
TORONTO—Canadian companies are lessening their dependence on U.S. trade, with exports now 30 per cent more diversified than a decade ago, according to CIBC World Markets.
“The main catalyst here is the surge in exports to emerging markets and the significant decline in exports to the U.S., which are currently back to the pre-NAFTA levels,” says Benjamin Tal, CIBC’s deputy chief economist. “At this rate, the U.S. share of total exports will fall to 60 per cent by the end of the decade, with emerging markets picking up nearly 90 per cent of the gain.”
The report notes Canadian companies are taking advantage of historically low interest rates to finance investments, which are being directed towards expanding export opportunities.
While the strong Canadian dollar isn’t significant to the surge of expenditures, the rise of machinery and equipment imports are about the same as they were when the loonie was much weaker.
While targeting export markets requires new investments, it also improves a company’s bottom line, the report suggests.
“When the mix of export destinations is changing, you’re improving your bottom line growth because trade has become even more of a part of your overall mix in changing your overall growth rate,” says Peter Hall, chief economist at Export and Development Canada (EDC).
Hall suggests this diversification process for Canada’s economy is not a new one, but one that acted as an outlet for Canadian firms suffering the effects of the economic crisis.
He notes sales in key markets averaged about 0.7 per cent growth between 2001 and 2008, averaging about 3.3 per cent annual growth if lumped together.
But non-traditional markets had grown by 12.3 per cent.
“What was amazing about this trend is that you could go anywhere in Canada and see this same kind of thing going on,” he says. “Diversification…was something that transcended any real boundary out there. Even as recently as six months ago, I’m walking around the country with this report about the diversification of our exports and no one was really talking about it because it didn’t seem like enough of a market.”
He explains that non-traditional markets represented about five per cent of Canada exports in 2001. By 2008, that number had grown to 12 per cent—still too small for businesses to care about.
But compounding that growth is something Canadian businesses need to take seriously.
“Consider we have the same success going forward,” he says. “Through the power of compounding growth, the trade shares are going to grow dramatically.”
If that compounded growth works out the way Hall hopes, non-traditional markets will represent 34 per cent of Canadian exports by 2020. By 2025, that number climbs to 50 per cent if a 3.2 per cent annual growth is sustained.
“That’s transformational. It takes your economy and makes it something different,” he says. “This is medium term stuff we’re seeing here. 2025 isn’t that far away.
It says Canada has made progress in new markets but lags behind on the range of goods it exports.
In his report, Tal says increased diversification of exports by destination and product is not only necessary to maintain profitability, but hedges against increased economic volatility likely to be an integral part of the economic landscape for years to come.
Jim Milway, executive director at the University of Toronto’s Institute for Competiveness and Prosperity, says Canada’s talented immigrant population is also playing a role in increased trade diversification, although he admits that’s speculative.
“We may have a lot more immigrants in our start-ups that are taking these companies back to their native countries,” he says.
“I’d like to think more Canadian businesses are realizing it’s a big world out there,” he says. “I’d like to think our trade with the U.S. is going up because any trade is good trade. Diversification is encouraging, but it’s not absolutely mission critical that we rely less on the U.S.”
Improving the diversity of Canada’s trade partners could also improve its position in the World Economic Forum’s global competitiveness rankings, which has fallen three spots in the last two years. Diversifying trade relationships should also help develop Canadian innovation as companies may have an easier time acquiring capital from global partners to invest in much needed R&D and commercialization at home.