Many people automatically think about resources or manufacturing when describing Canada's economy. But that image of Canada as a producer and exporter of forest products, energy or autos is archaic and out of step with today's reality.
It's about time that our self-image got in sync with the facts. Canada today is first and foremost a services economy in terms of employment, wealth creation and international business. Services have steadily grown to more than 70 per cent of gross domestic product, with many highly skilled and well-paying jobs. Future economic success will be determined by our ability to stay at the front of the pack in providing services to the world. Does Canada have what it takes to be a services superpower?
The Canadian economy is now dominated in all regions by services that are provided by the private, public and not-for-profit sectors. Services dwarf manufacturing (which represents just less than 10 per cent of GDP) and are many times larger than resources, utilities and construction. Not surprisingly, the vast majority of Canadian jobs created over the past three decades – more than 80 per cent – have been in services. So the debate on the fundamental nature of Canada's economy is over; services dominate.
Moreover, services have quietly moved to the cutting edge of Canadian international business, growing rapidly in importance over the past decade. Traditionally, selling services globally was mostly an afterthought for Canadian businesses, representing less than 15 per cent of Canadian exports. But the Internet, the digitization of information and, in particular, the expansion of global value chains as a dominant business model have fuelled a rapid international expansion in Canadian services.
A recent Conference Board of Canada report, Spotlight on Services in Canada's Global Commerce, reveals that services already account for 44 per cent of Canada's exports. This estimate includes direct sales to international customers, but also indirect sales of services that help strengthen Canadian and global value chains. Finance and insurance services are now Canada's largest and fastest-growing exports. Management services are the third-fastest growing export, and computer and information services (including telecommunications) are fourth. Agricultural products, and metals and mineral products, are second and fifth respectively.
In Ontario in particular, our research shows that direct and indirect services exports offset the weakness in manufacturing exports over the past decade, helping to ensure that Ontario remains an export-driven, high-wage economy.
But there's more to the internationalization story. Services now account for 43 per cent of all sales by the foreign affiliates of Canadian companies. This is hardly surprising when you take a moment to reflect on it. Services are generally delivered to clients person to person, so a Canadian service provider often needs a physical presence in other countries to build and maintain specific international business relationships. Canada ought to actively encourage international investment by Canadian businesses if we want to keep building upon this success in international services delivery.
There are still some important gaps in Canada's progress toward becoming a services superpower. Health care and education have a noticeably low profile in this story. Both are dominated by public-sector institutions at the provincial level, whose strategic and operational focus has been to serve the needs of local populations.
But that's beginning to change. Canada's universities and colleges have recognized the opportunity of a large and growing global market in postsecondary education. They are actively "exporting" their educational services by competing for and securing international students against market leaders such as Britain, Australia and the United States. Some are setting up campuses abroad.
Health care is a different story. Canadians selectively buy (or import) international health-care services through medical tourism, but Canada sells (or exports) very limited expertise in health system management and health-care delivery to the world. The Conference Board of Canada recently concluded that international sales of health-care services via patient visits to Canada need not detract from service delivery in Canada, although strict guidelines and study trials would be required. Indeed, if properly designed and managed, international sales of health-care and education services could help to built greater delivery capacity within Canada.
Canada cannot afford to rest on its laurels in any aspect of international services trade. It is a highly competitive world, and firms in other advanced economies are capitalizing on the shift to enhanced global trade and investment in services. Subtle regulatory barriers to services trade and investment, both internationally and via interprovincial barriers inside Canada, remain in place and will constrain growth for Canadian firms in key services market segments unless addressed.
The bottom line? Driven by the Internet, digitization and global value chains, services are now at the cutting edge of Canadian international business. Canada has the potential to become a global superpower in high-end (and therefore well-paying) services if we can get all parts of our services economy, including health care and education, fully into the game.
Glen Hodgson is senior vice-president and chief economist at the Conference Board of Canada.