Beyond Diversification: What Canada Makes Matters

By Laurent Carbonneau
CCI Vice President of Policy and Advocacy

We have American tariffs, in part, to thank for Canada existing at all.

Shortly after the U.S. Civil War, a protectionist Congress dominated by Republicans from manufacturing states raised up a steep tariff wall to promote American industries. This policy tore up an 1854 trade pact that itself replaced British Imperial trade policies favourable to Canadian exporters of grain, ores, wood, and fish.

The American tariffs cut the staples trade of Britain’s North American colonies off from an emerging continental market and left colonial governments – after a stern admonishment that our distant sovereign’s government in London could and would not render substantial aid – with only each other to look to. Confederation quickly followed.

We’ve spent subsequent generations fretting in various ways about what and how much of our things the rest of the world buys and what and how much we buy from others. That’s not new. The National Policy, the Auto Pact, the 1988 free trade election, and more recently, of course, the fallout from the United States’ decision to re-impose a tariff wall around their economy, have all shaped the course of our history and provoked existential debates about Canada and our place in the world.

What is new is an appetite to think hard about how we can trade more with the world, and, as a really interesting new report from Export Development Canada (which you can – and should – read here) puts it, we also have to be strategic about how much wealth for Canada our trade can create.

And to do that, we have to think about how we can export more of what is irreplaceable and ensure that we are well-positioned to capture the value here.

The news over the last year has not been all bad, though it has probably aged everyone an additional couple of years. We do three-quarters of our trade with the US, leaving us very exposed to the vagaries of American policy. Exports to the rest of the world have, in aggregate, compensated for lost sales there so far.

There is a worrying wrinkle here, though. Research from TD Economics points to significant softening of industrial exports (where our big customer is the US) while global commodities exports have done fairly well. Sky-high prices for commodities like gold, and more recently, oil, alone have done most of the heavy lifting of keeping Canada’s trade statistics stable. There is a lot of churn happening under a deceptively placid surface.

A situation where exports are stable or rising but shifting from industrial goods to commodities is not a disaster in the short term, but it is worrying if it goes on too long.

We’ve talked before about economic complexity, a measure of both how valuable and hard-to-replicate our basket of exports is. The situation I’ve described above is a recipe for lower complexity.

Economic complexity is not a nice-to-have. Commodity exports are valuable and can and do create lots of value. But the defining characteristic of a commodity is that it is replaceable. Countries that export mostly commodities are at greater risk from business cycles and from their customers’ freedom to shop around. Canada’s economy has already become less complex over the last generation.

Export Development Canada’s report has a really useful illustrative example about yellow peas, a commodity we export a lot of. This is nice, but why aren’t we making snacks or pasta with branding recognized around the world?

We’ve also got to be mindful of where we fit in to global value chains. Trading relationships between firms and between countries are, in fact, relationships. And like any relationship, the ones based on mutual respect and where both parties bring something important to the table are the likeliest to be happy for all involved. Our relationship with the U.S. has always had an obvious inequality baked in and even our success stories of integration, like the auto industry, have an ambiguous vampirism to them.

But other trading partners will not cut us a bigger piece of the pie – let us go from peas to pasta – out of the goodness of their hearts, either.

If Canada trades closeness and (unequal, ambivalent) integration into the US industrial economy for an economic geography more like Australia’s (my thanks to Ricardo Hausmann and Eric Protzer for this striking metaphor), where we ship commodities across the oceans to whomever is there to buy them, we are not becoming more sovereign just by doing that. We would become less reliant on one customer, yes, but potentially at the expense of losing the capabilities to make things that can’t be made elsewhere, which is where real leverage comes from.

Smart trade diversification while our economic geography changes around us isn’t just about selling more things to more places. It means being strategic about building up our capabilities to innovate and make and sell things our customers can’t get elsewhere. And it means building trading relationships where Canadian companies are in a position to secure value and wealth for Canada while doing business with partners.

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Laurent Carbonneau is CCI's Vice President of Policy and Advocacy. He can be reached at lcarbonneau@canadianinnovators.org. Mooseworks is the Council of Canadian Innovators' innovation policy newsletter. To get posts like this delivered to your inbox, sign up for CCI's newsletter here.

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