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Canada’s trade reality: stuck between a rock and a hard place

This Op-Ed was originally posted by The Globe and Mail on May 8, 2019.

Pedro Antunes is chief economist at the Conference Board of Canada.

We know it, and we hear it all the time – Canada is an open, export-dependent economy. Our fortunes generally align with our success at selling to global buyers. However, the current administration in the United States (our biggest trade partner) has changed its attitude about the benefits of open trade. And more recently, our second-biggest trade partner, China, is putting up barriers. We seem to be getting the brunt of retaliation for our role in the extradition of Huawei executive Meng Wanzhou, even if the request for extradition originated in the United States. Many Canadian exporters are truly caught between a rock and a hard place – what will this mean for Canada’s near-term economic outlook?

In recent years, Canada’s export performance has not been stellar. In fact, excluding oil exports, the volume of merchandise exports has been flat since 2015, or even 2007. Oil exports have masked the underperformance, as they’ve increased in line with expanding capacity in Alberta’s oil sands and new production from the Hebron platform off the coast of Newfoundland. Moreover, Canada’s export underperformance has been offset by robust household and government spending, especially over the past two years. Looking ahead, we expect households to deleverage and contribute less to overall growth while provincial and federal governments are also tapped out, and we will likely see their contribution to growth also ease.

The situation suggests that Canada’s economic growth will be weak in 2019. The Bank of Canada has recently revised down its GDP growth forecast to 1.2 per cent this year – also hinting that interest rate hikes are on hold for now. This view is in line with our own forecast (1.4-per-cent growth this year), with the expectation that a better export (and investment) performance will help boost growth somewhat next year. On the surface, the conditions appear ripe – a weakened Canadian dollar coupled with a solid pace of growth in both the United States and China would ordinarily jump-start exports – unfortunately, many challenges remain.

The United States – the “rock,” if you will – accounts for three quarters of our exports of goods but our ability to ship more goods to our southern neighbour is being hampered by capacity constraints. The current U.S. administration has created a long period of heightened uncertainty as investors and exporters consider the risks associated with Canada losing its tariff-free access to U.S. consumers. Despite the U.S.-Mexico-Canada Agreement (USMCA), the situation has not been resolved. USMCA has yet to be ratified and it could get stalled in the U.S. Congress or in Canada and Mexico, whose leaders have expressed frustration over the United States’ unwillingness to drop tariffs on steel and aluminum (among other things). The situation has seriously undermined private investment in Canada, to the point where it is currently hurting our ability to expand production, especially in autos and other manufacturing segments.

In 2018, China – the “hard place” – accounted for just 5.4 per cent of our merchandise exports but it has been punching well above its weight in providing growth opportunities for many Canadian exporters. The value of merchandise exports to China has increased at an average pace of 11 per cent annually since 2006. In 2018, export values increased by 17 per cent, a $4-billion addition to Canadian export revenues. This trend will most certainly not continue this year. In what is largely thought to be retaliation for the arrest of Ms. Meng, China has taken aim at some of our highest valued exports – cancelling shipments of canola (based on claims that the product is contaminated) and, more recently, delaying shipments of soybeans, peas and pork. Canadian producers are having to scramble to find alternative buyers, at discounted rates. And of course the fallout goes well beyond trade: Think of the grim challenges surrounding the detainment and imprisonment of Canadians in China.

The acrimonious situation with China is also affecting tourism. After the arrest of Canadian citizens in China, Canada issued a travel advisory for Canadians going to China, and the Chinese authorities have followed suit with their own travel advisory about Canada. While Chinese travellers will have booked travel to Canada well in advance, the longer the travel advisory, the more impact it will have on deterring Chinese from visiting Canada. Estimates suggest that the Chinese account for about $1.6-billion, or 7.3 per cent of all tourism spending in Canada – at least a portion of which is at risk.

Canada’s economy is dependent on trade. An improved trade performance is at risk from deteriorating relations from our biggest trade partners – the United States, our large stable market, and China, our source of growth. Certainly, it’s good news if the United States and China successfully de-escalate the current trade tensions between them. The prospects of the world’s two largest economies battling out a tariff war would not be welcomed by anyone, as this would assuredly slow the global economy. Still, Canada is caught in the crossfire. For the Chinese, making an example of Canada is much less risky than taking on the U.S. administration. And when it comes to USMCA, Canada shouldn’t hold its breath – even if ratified the pact is unlikely to fully eliminate uncertainty.

Luckily, Canada has been working at diversifying its access to other markets. According to Global Affairs, Canada has 14 free-trade agreements with 51 countries representing roughly two-thirds of global GDP. The new Comprehensive and Progressive Agreement for Trans-Pacific Partnership is giving us freer access to many new markets including Japan (the world’s third-largest economy), while the Canada-European Union Comprehensive Economic and Trade Agreement is slowly reducing tariffs into a market of more than 500 million people. The business incentives to diversify are clear – no producer wants to be held hostage by a single buyer – but diversifying will take time. Diplomacy, changes in government and time will, one hopes, help re-establish better trade conditions with our two biggest trade partners. In the meantime, export growth will likely remain soft while Canadian exporters adjust and look to other markets.

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