Trade diversification away from the U.S. a long-term solution

Troy Media – By Todd Hirsch   

It hasn’t been a good summer for the United States. July was consumed by political bickering over the deficit, August saw a credit downgrade, and markets convulsed.

Jobs in America are still hard to come by, and GDP growth is slowing at an alarming rate.

So where does this leave the Canadian economy, which is so heavily dependant on exports to the U.S.?

There have been plenty of suggestions for Canada to diversify its global trade. Increasing exports to China, India and the other emerging economies seems like an obvious solution. Their economies continue to grow, and the some 2.5 billion people in China and India combined offers huge potential as a market for Canadian oil, lumber, food and other natural resources.

Long-overdue trade initiatives

As well, the federal government has just concluded a high-profile tour and trade mission of South America. The Prime Minister was busy through much of August, signing trade agreements and shaking hands with political leaders in places like Brazil, Argentina and Honduras. These sorts of initiatives are long overdue. The more Canada can diversify its trade away from its overly heavy reliance on the U.S., the better (and more stable) Canada’s export-oriented economy will be.

The problem is math.

Imagine the ice surface of a standard hockey rink, and a whole lot of standard hockey pucks laid side-by-side. It would take a LOT of pucks – some 317,000 of them – to completely cover the ice surface. Now imagine that all of these pucks represent total exports from Canada to the global economy last year.

Of these, 237,000 pucks would be sent to the United States, or about 75 per cent.

The next biggest set of pucks – only 13,000 – would be sold to the United Kingdom, which was Canada’s second-largest trading partner in 2010.

Just over 10,000 pucks would go to China, the world’s largest country by population and the one economy in the world that seems to be propping up global growth.

Brazil would receive fewer than 2,000 pucks, or only 0.6 per cent of the total pucks on the ice. And tiny Honduras, with which Canada just signed a free trade agreement, would get only 32 pucks. That’s about 0.01 per cent of the total.

Belarus would get only one puck. And European light-weight Andorra would get a shaving off of one puck the size of a small french fry.

Now imagine that the shipments of the 237,000 hockey pucks to the United States fell by, say, 10 per cent – an amount perfectly within the range of possibilities if America is to slip into another recession next year. That would represent a loss of nearly 24,000 pucks.

To make up for this loss, Canada’s shipments of pucks to the UK (another country mired in its own economic woes) would have to double. Pucks to China would have to nearly triple. And pucks to Brazil – another one of the “emerging economies” of the world still growing – would have to increase more than 10-fold.

U.S. will always remain our No. 1 trade partner

While sales to China are growing, the chance of tripling trade with China in one year is essentially zero. Our best chance of expanding exports to that country – or any of the emerging Asian economies – is by pumping a lot of Alberta’s bitumen through a pipeline to the west coast, and shipping it by oil tanker. Of course, plans for such a pipeline are well underway (even though the obstacles standing in its way are enormous). But even if construction on such a pipeline got started today, it would take years for it to be completed.

The point in all of this is that trade diversification for Canada is desperately needed right away. But because of geography and existing trade linkages, the U.S. will always remain our No. 1 export market. We can (and should) work hard to expand trade with Asia and South America. Yet even doubling or tripling sales to these markets over the next decade would not make up for a 10 per cent drop in trade with the U.S.

Canada should be concerned about the prospects for the U.S. economy, but worrying won’t do a lick of good. This is America’s problem, and no policy action by Ottawa or the Bank of Canada can do anything about it. The best we can do is hunker down, keep our fiscal house in order . . . and work as fast as we can to diversify our trade.

Todd Hirsch is Senior Economist with ATB Financial.

Category: Business