Trade agreements, climate policy are keys to diversifying export markets
In the strategy board game RISK, players are represented by colors so you can tell who’s gaining ground on a map of the world.
If economic strength were mapped out that way, it wouldn’t take long to spot China as the powerhouse or the US, as one of the world’s largest debtors.
Although the Canadian economy may not look dominating, a new report from the University of Calgary’s School of Public Policy says Canada could have the cards to be a big player in the new global economy.
But just like in the game of RISK —where alliances can change everything— it’s going to take the right strategies and trade agreements.
In the wake of the global meltdown, Canada’s economy is faring better than most, posting a 6.1 per cent growth in the first quarter of 2010 and a “credible” plan for fiscal consolidation over the next five years, the report notes.
With its finances in shape and an advantage in natural resources, Canada can afford to “up its game and raise its profile,” says the report’s author, Wendy Dobson, co-director of the Institute for International Business at the University of Toronto’s Rotman School of Management.
“The first step is to differentiate ourselves,” Dobson says.
Canada should diversify its export markets and reduce vulnerability to US policies and consumers.
Emerging markets, new partners
“Diversification should aim at large markets. Asia, in particular, is and will grow much faster than we seem to realize,” she says.
The report recommended Canada join the Trans-Pacific Partnership (TPP), a free trade agreement between New Zealand, Singapore, Chile and Brunei Darussalam.
The US, Australia, Vietnam and Peru have already opted to join in the next round.
Dobson says the TPP could provide Canada with access to fast growing and potentially large markets while offering a route to update the North American Free Trade Agreement (NAFTA).
Canada considering TPP
The Canadian government says it welcomes the development of TPP, although it has not yet tried to get on board.
Federal Minister of International Trade, Peter Van Loan said, “we are engaging with the TPP members to assess how Canada could add value to the discussion, and are following developments closely.”
He added Canada is in negotiations with close to 50 other countries including the European Union and India.
A Canada-India free trade agreement could boost the economy by $6 billion to $15 billion and increase bilateral trade by 50 per cent, the Minister said.
Exports diversifying slowly
According to Statistics Canada data, the shift to other export markets is already underway.
The proportion of Canada’s exports going to the US fell from 80.8 per cent in September 2006 to 74.1 per cent in September of this year.
Meanwhile, the proportion of Canada’s imports coming from the US hasn’t changed as much, falling only a couple percentage points from 65.7 per cent in September 2006 to 63.2 per cent in September 2010.
Compared to 10 years ago, Canada is exporting fewer goods to the US ― a drop of 359, 289 total merchandise exports in 2000 to 270,129 in 2009. Total US imports also declined during the same period, from 229,660 to 186,804.
“We have seen trade going to other countries, it’s a phenomenon over the past few years,” says Mychèle Gagnon, an economist with Statistics Canada’s International Trade Division.
“The importance of the US is not as big as it was and we are dealing with more countries,” Gagnon says.
Companies are diversifying, Birgit Matthiesen, a US advisor with Canadian Manufacturers and Exporters, agrees.
But she cautions that Canada shouldn’t be quick to dismiss its neighbour to the south.
“China and India’s middle classes are becoming more affluent and buying our products, but the US remains critical and I can’t foresee that changing in the next few years,” she said.
Matthiesen says Canada’s priority should be removing barriers to US markets, such as cross-border delays.
“For Canadian exporters, it has become more of a cost and compliance burden that we’ve ever had before,” she says.
Matthiesen says the problem is “…not just trucks lined up at the border, but the wall of data exporters are required to provide before even crossing.”
Despite those inefficiencies, she says it’s less costly getting shipments to the US market and pointed to other trade advantages south of the border, such as sheer size and a known business climate and culture.
“The US economy will bounce back and we should be well positioned when it does,” she said.
Energy could be Canada’s strongest card
While the US is still Canada’s largest trading partner, relying on their markets for oil and gas exports is increasingly risky, the report said.
It pointed to the mounting criticism of cross-border energy projects, Alberta’s “dirty” oil sands, and high-profile environmental disasters.
Dobson said green protectionism is highly likely in the US and Europe and Canada should seek out alternative markets like China and India, where oil demand is expected to grow by 3.5 per cent a year from 2015 to 2030.
But she cautioned Canada shouldn’t settle for merely exporting resources. The country’s energy supply also provides another opportunity to become a leader in climate change policy.
Right now, Canada is “standing on the sidelines,” which in turn is stalling production decisions for companies awaiting a predictable price and regime.
Canada could better protect itself by pricing carbon with a tax that can be changed when the US gets its policy sorted out, she said.
Opportunities in climate change
Proactively shaping a North American climate change policy isn’t the only move Canada can make to distinguish its economy.
“The cleantech industry is expanding at a significant rate and presents global opportunities for firms,” says Randy Soifer, a partner at the Edmonton office of consulting firm Grant Thornton International Ltd.
“Canadian manufacturers need to position themselves in that market place,” he says.
Soifer expects sectors such as solar, wind, and biofuels will see increased demand in years to come.
As more nations introduce incentives and mandates to reduce climate change, we can become leaders in clean energy, he says.
Cards stacked against Canadian businesses
Canada as a clean energy leader sounds great in theory, but there are several hurdles along the way, according to Bill Murphy, national leader, climate change and sustainability services with the advisory firm KPMG.
Murphy says Canadian companies are facing uncertainties around both federal and provincial legislation.
Businesses first need clear policies and incentives to build up clean technologies. “Then they need to build those technologies to scale to become successful exporters of the products to other countries,” he says
Local content rules to stimulate cleantech development are a Catch 22.
“It helps satisfy the earlier steps in getting the technology and manufacturing capacity locally, but the challenge comes later when companies try to export those technologies into other jurisdictions that are doing the same thing.”
He points to one solar technology company, Arise Technologies, in Waterloo, Ont.
“It was offered a more attractive package by the German government than Ontario so it set up a facility there instead,” he says.
“Other major countries are running ahead of us, especially Denmark…these are formidable players,” Murphy says.
He notes some provinces are making headway, pointing to efforts in British Columbia and Ontario, such as the Green Energy Act.
“But the fact is, it’s being done on a fragmented basis, which makes it difficult to achieve the economies of scale to compete globally,” he says.