Glen Hodgson, senior vice-president and chief economist at the Conference Board of Canada
Canada's international trade has been mediocre for much of the past 15 years. Exports to the U.S., our dominant trading partner, were flat over the decade of the 2000s, and manufacturing export performance has been dismal since 2000.
As the trade picture changed, Canadian exporters found some success diversifying into other growth markets. Thanks to strong prices, exports of energy and some other resources were robust; in addition, traded services emerged as a new area of strength.
Now the trade game appears to be changing (again) and the Conference Board believes that Canada is entering "the next trade era." In our view, four key factors are at work to define the next trade era, as we discussed at the most recent meeting of our Global Commerce Centre.
First, economic growth in the BRICs has faded – in some cases, badly. Both Brazil and Russia are in deep recession due to the commodity price collapse combined with poor economic policies, and no quick turnaround is in sight. India is the new growth leader among the BRICs, with the potential to grow by up to 8 per cent annually. However, sustaining strong Indian growth will depend on the ability of the Modi government to advance its policy reform agenda.
China is transitioning from export-led growth, based largely on assembly of goods, to growth based more on domestic consumer demand. The transition is proving to be tricky. After three decades of spectacular growth, the economy is projected to grow by 6 to 7 per cent in the coming period. China's inefficient state enterprises and an aging work force, the consequence of the just-modified one-child policy, will be a drag on future Chinese growth.
Moreover, China has yet to confront the fundamental contradiction between the economic and personal ambitions of its growing middle class, and continuing governance by the controlling one-party state. This contradiction will eventually have to be addressed if China's economic miracle is to avoid stalling.
Second, we are at the end of the commodity supercycle. Compared to the 2000s, real commodity prices are expected to be lower in the future. Some commodity prices may even fall back into the long-time pattern of slow and steady decline in real terms (with inflation removed).
Third, after a strong decade, the value of the Canadian dollar has slipped back into a more familiar range in the mid-70 cents (U.S. )versus the greenback. The end of the commodity supercycle has fed the decline in the loonie's value. So has further Bank of Canada monetary accommodation, judged necessary to ward off incipient recessionary and deflationary forces.
Fourth, a full seven years after the 2008 financial crisis, the U.S. economic recovery is at last real and sustained. More robust and widespread U.S. growth, anchored in the private sector, is arguably the best news for Canadian goods and services.
These four forces define the next trade era for Canadian exporters. Canada has the potential for renewed trade growth opportunities in the U.S. market, combined with the prospect of improved market access in the EU and the Trans-Pacific region.
But are Canadian firms ready to seize the opportunities? Our preliminary assessment is that they are not. Exports will add positive energy to Canada's economic outlook in 2016, but our projection for export growth is well below the highs achieved in the 1990s.
The key limiting factor is weak Canadian business investment activity, which has undermined the ability of Canadian firms to respond to export orders. Private investment growth numbers were feeble in 2013 and 2014 and are even worse for 2015. Driven principally by a 40-per-cent collapse in oil sector investment, private investment is expected to contract by 8 per cent.
The Conference Board is now undertaking more detailed analysis of the readiness of specific export sectors to capitalize on increasing U.S. demand. Our preliminary research results are mixed. More than half of the industries being studied have invested and are ready to seize U.S. opportunities. Other industries face improved U.S. demand, but will need to up their game to take advantage of it.
In our view, it is primarily the responsibility of businesses, not policy makers, to up their game through investment. Governments have already undertaken measures – expanded free trade, specific business tax action – to create the conditions for deeper business engagement in international trade.
Canada has entered a new trade era. It's now largely up to Canada's business leaders – specifically senior management teams and boards – to consider the specific trade opportunities and undertake action to make their firms engaged players.
Glen Hodgson is senior vice-president and chief economist at the Conference Board of Canada.