Canada: the non-trading free trader

The Trudeau Government may seem like a lonely advocate for free trade in a world of rapidly closing borders, but here's an odd thing: the importance of trade to Canada's economy has been steadily shrinking in recent decades, despite the Canada-US free trade agreement and NAFTA.  This story from Bloomberg calls Canada "a trading nation that's forgotten how to trade".

In brief,  Canada's goods exports now stand at 31 percent of GDP, down a stunning 14 percentage points since the beginning of the century.  Canada's export growth is the second lowest within the G-20.  Imports are also declining in relative importance, dropping to 34 percent of GDP currently from 38 percent in the year 2000.  This would be a recipe for a full-blown crisis but for the fact that service exports have been increasing strongly in recent years.

The decline in goods exports can in part be blamed on the commodity price boom in the early part of this century, which pushed the exchange rate to a level at which manufactured good exports simply became uncompetitive in foreign markets.  Most experts, including, it appears, the Bank of Canada and the Government, assumed that non-resource exports would bounce back once the currency retreated.  That simply hasn't happened in the past few years, so there must be something else going on, something structural.

Has Canada simply "forgotten how to trade", as the Bloomberg article suggests?  There may be something to that, but it can also be argued that aside from the resource sector, Canadians never really did know how to trade.  Canada's manufacturing exports have always been dominated by branch plants owned by big US companies, including the Big Three automakers and metal-bashing companies like John Deere, rather than by fully Canadian-owned and -managed companies.

Before the Canada-US free trade agreement came along, the so-called "Auto Pact" required the Big Three to maintain a certain level of production in Canada in order to gain tariff-free access to the Canadian market for their US-built product.  The Auto Pact protections disappeared when the free trade deal was made, and the industry's longer-term fate was sealed when the tripartite NAFTA arrangement came along in 1994.  The level of "Canadian" exports always depended largely on decisions made in Detroit;  since NAFTA, those decisions have increasingly favoured investment in Mexico or "right to work" US states rather than in Canada.

The surprise here is that it has taken so long for Canadian policymakers to cotton to the fact that the manufacturing jobs that have been lost are not going to come back just because the exchange rate has weakened. Bloomberg suggests that former Bank of Canada Governor Mark Carney was particularly culpable in this regard, despite warnings from the OECD and elsewhere.  Carney's successor, Stephen Poloz, finally seems to be acknowledging that parts of the export sector are irretrievably lost, which explains his support for more aggressive fiscal policy in an effort to get the economy moving again.  The fact that the Trudeau Government is adopting a much more expansionary fiscal stance suggests that, for all its free trade rhetoric, it too understands that exports are unlikely to provide the growth and employment that they once did.