 | | Michael Burt
Associate Director
Industrial Outlook, Trade & Investment |
Canadian exports to the United States over the past decade have been generally stagnant. This indisputable fact has been the source of growing angst and speculation as to its cause. An easy justification is “border thickening”, but as is often the case, complicated problems belie simple explanations or solutions. Previous work done by the Conference Board of Canada has found that the border has had a minimal impact on trade in goods; instead it was found that the exchange rate and industry specific supply and demand factors were far more important in explaining this phenomenon. However, another factor is at play—China.
China surpassed Canada in 2007 to become the largest source of merchandise imports into the United States and at some point in the not too distant future, China will supplant Canada entirely to become the U.S.’s largest trading partner. Since U.S. trade with Canada has been stagnant while it was growing by leaps and bounds with China, Canada has lost market share to China for virtually every major product it sells in the U.S. market. This is even true for products where you would think Canada had a comparative advantage, such as forest products. In fact, wood and paper products are among the industries where Canada has experienced the largest drop in market share over the past decade.
For example, in 1999 73 per cent of wood products imported into the United States were sourced from Canada. By 2009 that share had fallen to 46 per cent. Over the same period, China’s share of U.S. wood product imports rose from 4 per cent to 23 per cent. China has been increasingly importing raw logs from other countries in Southeast Asia, processing them and then shipping these wood products to export markets. Other Canadian industries that have experienced a major loss of market share to China over the past decade include furniture, paper products, printed materials, plastics and fabricated metal products. The effect on these industries has varied depending on how dependent they are on the U.S. market, but it has been a factor contributing to the malaise in Canada’s manufacturing sector in recent years.
China’s rise as the workshop of the world has not been universal. Its market share for products like food and beverages, petroleum products, chemicals, primary metals and transportation equipment remains small. A key reason for this is that it is still a net importer itself for many of these products, with domestic production unable to meet domestic demand.
It is also important to note that Canada is not alone in its loss of market share in the United States. Most developed countries and even some developing ones have lost market share over the past decade. For example, Canada has never been a major source of imported textiles and apparel for the United States, so it did not have much market share to lose. However, China’s share of U.S. textile and apparel imports has steadily climbed, with the largest declines occurring in a variety of locales including Mexico, Hong Kong, South Korea, the Dominican Republic and Taiwan.
So, not surprisingly, China represents an increasing competitive threat to Canada and other countries. As China’s role in the world economy grows, these competitive pressures will only increase, so how should Canadian businesses respond? Protectionism is not the answer. Although Canada should continue to seek equal and/or preferential access to the U.S. market, limiting imports from China is not a permanent solution. Instead, Canadian businesses must continue to adapt by finding new markets, creating new products, and improving their competitiveness.
This process has already begun. For example, between 1999 and 2009 the share of Canada’s merchandise exports destined for the United States has fallen from 87 per cent to 75 per cent. In its stead, a variety of countries in the European Union, as well as China, Mexico and India have all experienced an increase in market share. In fact, although exports to the U.S. have been stagnant over this period, they have nearly doubled to the rest of the world. Thus, Canadian exporters have already begun to diversify amongst the markets to which they are selling. Part of this process entails altering the products that we are making so that they are adapted to the market conditions in countries outside of North America.
The other thing that businesses can do is improve their international competitiveness by increasing their productivity. On this count Canadian manufacturers have been less successful. Multifactor productivity in Canada’s manufacturing sector has been stagnant over the past decade. Although, this is better than the Canadian average for all sectors, which recorded a decline, it is not sufficient if producers are to overcome the effects of the strong Canadian dollar and increasing international competition. More investment in productivity enhancing equipment and better integration into international supply chains are potential means to this end.
The rise of China does pose a challenge to Canada’s manufacturing sector and its strong relationship with the U.S. market. However, there are means to address this new competitive environment. Exporters have already begun to undertake the necessary transformations, but more will need to be done in the coming years. As a result, what we produce in Canada, how we produce it, and who we sell it to, is expected to change considerably over time.