Canada’s trade growth to return to pre-recession levels, says HSBC

TORONTO—The table is set for Canada’s trade growth to blossom, with historic ties to a resurgent U.S. market bolstered by a number of trade pacts and a growing presence in emerging markets.

Indeed, the latest HSBC Trade Forecast says growing trade flows will push real GDP growth in Canada to average 2.1 per cent from 2021 to 2030.

At the same time, amid a low dollar environment and a plunge in world oil prices, greater diversification of Canada’s economy towards exports and business investment will mitigate the impact of sluggish energy export growth, should companies leverage the opportunity.

Tepid growth in world oil demand and a need to rebalance global supply will lead to subdued Canadian oil prospects and impede growth into the long-term.

In the near term, world merchandise trade should increase by about 8 per cent a year from 2017, according to the report. Trade agreements still in negotiation have the potential to further underpin growth in trade flows in the years ahead.

Deals such as the proposed Trans-Pacific Partnership (TPP), a trade deal with South Korea and potential bilateral trade accords under negotiation with other countries all have the potential to underpin export growth as they expand access to fast-growing economies in Asia.

The TPP and Transatlantic Trade and Investment Partnership (TTIP) agreements also have the potential to bring down trade barriers and expand Canada’s reach in existing markets.

“With faster growth in developed economies and a recovery in emerging markets on the horizon, Canadian trade growth looks set to accelerate back to pre-financial crisis levels,” says Andrew Skinner, head of global trade and receivables finance at HSBC Bank Canada. “But we shouldn’t limit ourselves to returning to status quo levels—uncovering opportunities for new product development and trade partners in fields like electronics, pharmaceuticals and hi-technology would provide meaningful support to Canada’s long-term economic health beyond traditional industries and trade routes.”

Import/Export corridors to watch
At the sector level, the mix of goods imports is not expected to change much in the coming years. Industrial machinery will remain the most important import sector and is expected to contribute more than 20 per cent to total import growth over 2015-30. Further, HSBC expects Canada to import less petroleum products over the same period, and that this sector will be less important for imports as domestic supplies and increased refinement ability curb the need to import energy.

With energy accounting for about a quarter of total export growth from 2015 to 2030, low oil prices and expectations of only a subdued rebound will weigh on exports in the coming years. However, a weaker Canadian dollar and lower oil prices will support non-energy export growth in the years ahead.

Machinery and transportation exports are also expected to grow in importance in export flows, particularly as US demand rises, although the automotive sector faces some competitiveness issues.

Risk still looms
Downside risks to the outlook include delays to the negotiation and implementation of trade liberalisation agreements and the continued shortening of global supply chains—the trend to re-shore production, reducing cross-border traffic in intermediate manufactured goods.

Sector to watch: Electronics
Canada’s electronics industry is diversifying away from a narrow focus on communications equipment, a trend the bank forecasts to continue in coming years, powering exports growth in electronics.

HSBC cites a World Economic Forum report showing a surge in patent applications in Canada’s information and communications technology (ICT) industries.

From a geographic perspective, Canada is expected to benefit from strong demand in emerging markets, as these economies develop and their demand for electronic goods increases.

Electronics imports should rise in the long-term, driven by Canada’s knowledge-based economy, highly-skilled workforce and rising household spending and business investment as the economic mix becomes more diversified.

Electronics exports are forecast to grow about 4 per cent a year on average from 2015 to 2030, but this will be outpaced by growth in imports of electronics averaging more than 6 per cent a year as domestic demand remains firm.

Through Canada’s membership in the WTO’s Information Technology Agreement (ITA), tariffs on most of the electronics products covered by the agreement have been removed. An expansion of the agreement to cover an additional 200 products is expected to gradually reduce the average rate of duty on these goods applied in Canada from the current level of 6 per cent to zero-tariff and duty-free guarantees. Finally, research cited by the Information Technology and Innovation Foundation shows that sectors of the economy that adopted ICT have seen a rise in labour productivity. The report expects that businesses will increasingly adopt ICT where possible, contributing positively to long-term growth prospects.