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Canada’s next trade and economic era

Glen Hodgson
Senior Fellow

Originally published in the Globe and Mail on January 12, 2017.

Over the past hundred years, Canada’s economy has evolved through two quite different economic eras, guided by trade policy.

A new trade and economic era for Canada is now at hand. A protectionist Trump administration is accelerating the emergence of this era, but the trends have been under way for a decade. This next trade and economic era is globally oriented, has more of a role for services and investment and is about emerging technologies and services in areas such as a low-carbon future. Is Canada ready to act decisively to shape and strengthen its position in this new era?

Let’s briefly consider how Canada’s trade and economic development has evolved. Early colonial economic development was based on immigration and expansion westward, and on the export of commodities to European consumers.

This approach was set aside during the 20th century, when trade policy became more central to defining Canada’s economic evolution and performance. The first trade and economic era of the 20th century was shaped by high tariffs on imported manufactured goods introduced at the end of the First World War. The policy goal was to grow Canadian manufacturing behind protectionist trade barriers and replace imported goods.

Some Canadian companies, like farm-machinery manufacturers, succeeded under this approach, but foreign manufacturing firms eventually dominated the Canadian market. By the 1960s, the majority of manufacturing in Canada was U.S.-owned, with factories and businesses designed to specifically serve the Canadian market. Critics at the time, and resulting government policy, focused largely on the symptoms—foreign ownership of branch-plant manufacturing—and not the root policy cause, which was trade protectionism.

The next trade and economic era saw Canada’s progressive economic integration into the U.S. and North American economy. Global tariff reductions under the General Agreement on Tariffs and Trade (GATT) began to set the conditions, but the first major milestone was the Canada-U.S. Auto Pact of 1965, which gave automobiles made in Canada duty-free access to the U.S. market.

The defining policy stroke for this era was the Canada-U.S. free-trade agreement in 1989, followed by the North American Free Trade Agreement (NAFTA). There is widespread consensus that North American free trade was a success for Canada, with growing economic integration and strong growth in exports and imports, jobs and GDP.

But there were also consequences—namely, very heavy Canadian trade dependence on the U.S. market. Canadian exports to the U.S. peaked at 87 per cent of exports in early 2000s and still represent 70 per cent of what we sell internationally.

Arguably, this second economic era of deep U.S. integration has run its course. Most Canadians recognize that freer trade and investment are central to our national wealth creation. Canadian international trade and investment has been steadily diversifying over the past decade, with significant trade growth with Asia generally, and China in particular. Trade with the U.S. has been essentially flat over the same period. Canada has also finally committed itself to pursuing free trade with large regions, notably the Comprehensive Economic and Trade Agreement (CETA) with the European Union.

We see three elements to a fully developed new trade and economic era, each of them requiring accompanying shifts in policy.

Element one: Position Canada as an open, integrating hub for global trade and investment. Canada could build upon the success of CETA and actively seek to conclude other major free-trade deals, notably with Japan, and with China under the right conditions. It could position itself as a preferred investment destination and trade enabler for global firms, offering tariff-free market access to both the U.S. and EU. Asian businesses in particular could be attracted to invest more in Canada, in order to gain duty-free access to these markets.

Element two: Seek a global leadership position in services trade and investment. Many Canadian firms are already taking advantage of the new trade and technology paradigm based on services, data, people and investment. For example, a significant expansion in Canada’s international financial services business has quietly taken place, in banking, life insurance and wealth management.

Other attractive services trade sectors include computing, professional services, education, and entertainment and culture. A trade policy explicitly aimed at promoting high-value services, and technology-driven digital trade, could produce even better results. Canada has the highly educated, multicultural and multilingual workforce necessary to play such a role.

Element three: Develop and sell low-carbon expertise in technology and services to the world. Canada has much to offer in shaping the low-carbon economy, but we are late to the party; Europe and now China are ahead in adapting to lower greenhouse-gas emissions. We have not yet provided adequate support to low-carbon tech and service providers in terms of home-market demand, availability of financing and global marketing support. Canadian low-carbon businesses will need to consider going global from the outset, especially if only parts of the U.S. market (like California) have the right enabling conditions in place.

These three elements are not mutually exclusive. They could be acted upon together, in whole or in part. But regardless, the second trade and economic era of deep U.S. integration has reached a point of maturity. Beyond domestic policy reforms being considered to reinforce economic growth, embracing a new trade era will likely be required to re-energize the Canadian economy.

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