Canada’s Position in Global Trade

What are the main forces impacting Canada’s exports and international trade relationships?

Before we get into the specifics, it is worth mentioning why RBC Economics wrote a report about trade and why we did it now. Because there are forces reshaping global trade that are going to reshape opportunities for Canada going forward, we need to take stock of where Canada fits in the new global trade order, and with the right strategies we could position Canada’s export sectors for growth to fuel economic recovery. 

“We need to take stock of where Canada fits in the new global trade order, and with the right strategies we could position Canada’s export sectors for growth.”

There are several forces reshaping global trade, manifested mostly on the rhetoric around reshoring, which is the bringing back or repatriation of lost manufacturing capacity sent offshore over the last couple of decades. Many countries are talking about reshoring and focusing on priority areas for national interest to establish dominance in new or growing supply chains. Some of the drivers of these are public health supplies, for instance, personal protective equipment (PPE) and vaccines. There are also concerns over national security and geopolitical positioning that we are increasingly seeing with the US and China, as well as areas for jobs that will fuel the recovery. It all leads back to growing areas that have been propelled forward by the pandemic. Digital technologies and green technologies are increasingly going to be defining areas of growth and value in economies in the decades to come.

According to RBC Economics’ report Trading Places, what are the problems in Canada’s global trade strategy? 

We did not get into all the specifics about the “why,” but looked more at the outcomes to make the point that Canada approaches the shifting landscape with challenges to export competitiveness. Exports have not been a significant source of economic growth in Canada for years. For the last two decades, that area has had less economic growth compared to those of prior periods. Canada is overly exposed to shocks in the housing or consumption sphere where our growth is concentrated. Furthermore, we have a lot of free trade agreements but Canada continues to rely on the US as a chief export market. The US is the destination of 70% or more of Canadian exports as it has been for the prior three decades. Yet, in this very market, we have been losing market share not just to low-cost labour locales like China and Mexico for high-labour input goods, but also to those very same places for some increasingly complex products. Overall, we are not a major exporter to the US of advanced technology products, which is an area you might think would be a comparative advantage for Canada with our highly skilled labour force and knowledge economy. 

“Exports have not been a significant source of economic growth in Canada for years.”

These forces that are shifting global trade are also going to be impacting our traditional export basket. Over 50% of Canadian exports to the US, worth about $230 billion annually, are concentrated in three buckets: energy, auto and parts, and metals and minerals. Increasing digitization, the green economy, and reshoring, all of which will be propelled forward in the US by the Biden agenda, are going to transform these sectors. This represents both a threat to Canada’s export competitiveness but also an opportunity if we can appropriately pivot.

“Over 50% of Canadian exports to the US, worth about $230 billion annually, are concentrated in three buckets: energy, auto and parts, and metals and minerals.”

At RBC, we looked at what could be an alternative path for Canada’s exports and we found that if Canada only recovered a portion of parity between export growth and economic growth, it could represent another trillion dollars in exports over the next 10 years. This could be an important driver of growth in the post-pandemic recovery.

How does the Canadian government’s federal budget relate to the findings in RBC’s report? 

There were quite a few budget announcements that aligned with the issues we identified in the report and some of the general recommendations. In the budget, there are targeted measures to support select growth industries, supply chain competitiveness, and Canada’s trade position. There was money to promote clean technology products, funding for research and development (R&D) into critical minerals, infrastructure spending for specific trade infrastructure, and also a strategic investment fund which involves public money that is to be matched with private money to promote targeted investments in areas of future growth. These and other actions by the government including the communiqué in the post-Trudeau-Biden summit showed that the government recognizes these issues.

“The government can set the conditions and infrastructure, but it is also up to businesses, public institutions, and research institutions to pivot and take advantage of these opportunities.”

What we are calling for in the report is to go a step further. We need to articulate a strategy for how Canada positions itself holistically and make policies that support competitiveness, innovation, trade, and industry to push in the same direction. There could be more work in that direction but the government is not the only actor here. The government can set the conditions and infrastructure, but it is also up to businesses, public institutions, and research institutions to pivot and take advantage of these opportunities.

How can Canada position itself to benefit from the Biden Administration’s Build Back Better plan? 

President Joe Biden looks to accelerate these global forces in a big way by supporting a green economy, new technologies, and reshoring. He is seeking to establish the US as the centre of new and growing digital and green supply chains. In doing so, the US will pivot from reliance on China in these strategic areas and become a geopolitical counterweight. Right now, President Joe Biden has a $2.3 trillion infrastructure package being discussed that includes some of these foundations, and a lot of them are climate policies that ultimately support both his economic and trade policy. His policies will see traditional packages of climate incentives helping to promote domestic green technology adoption, the re-establishment of American manufacturing, and significant funding for research and development to make the US a research and technology powerhouse in these growing areas. Not only does that greenify the American economy, it also attracts high-paying manufacturing jobs and, in the words of the Joe Biden campaign, allows the US to win the competition for the future against China. 

“A successful US growth strategy is going to be beneficial for Canada given how our economies are intertwined.”

Where does Canada fit in all of this? There are specific areas we highlight in the report that Canada can probably benefit from. A successful US growth strategy is going to be beneficial for Canada given how our economies are intertwined. However, we also see a strong America-first agenda. The question for Canada is how to take our leverage to extract the most out of this opportunity. We have to leverage what we have: enhanced market access to the US, integrated companies like our auto companies, and specific leverage in certain areas like critical minerals as the Biden administration is looking to secure a consistent supply from an ethical and trusted supplier. Canada needs to use our leverage to convince the Biden administration that we are a strategic and trusted partner, to encourage Biden to change the America First agenda to a North America First approach.

Who are the key stakeholders and what must they do to drive Canada’s competitive opportunities forward?

RBC’s hallmark recommendation is ultimately that the right people need to get together to take a comprehensive look at our policy framework to support trade, competitiveness, and industry. These stakeholders include the public sector, private sector, academia, labour, and the whole gamut. In many areas, Canada already has industrial policies that support some of these areas. There have been announcements such as the Superclusters Initiative and other green technology initiatives. The latest budget shows we are already pursuing these directions in terms of industries that are supporting these green and digital growing areas of the economy. We should probe more about whether our policies are coherent and support our trade objectives, re-evaluating them in light of the shifting circumstances of this big Biden opportunity. 

“The right people need to get together to take a comprehensive look at our policy framework to support trade, competitiveness, and industry.”

There are a couple of other recommendations. One of them is to find partnerships within North America with the US and Mexico as ways to strategically further our interests, whether it be for critical mineral development with the US or other areas of strategic cooperation so that we can become a trusted partner and meet our own reshoring and domestic needs. The second one is embracing President Joe Biden’s vision of a North America First approach. While this certainly has a lot of prospective benefits, it also backtracks from another plank of our trade strategy which was strategic diversification away from the US market. We certainly cannot ignore the Biden opportunity but at the same time, it makes sense to continue to diversify and open up more markets so that we still have markets for the goods we produce in both new and existing areas.

Which Canadian industries stand to benefit the most from enhanced global trade?

Many Canadian industries have opportunities in trade globally from agriculture to ocean tech, and to the services that could benefit from the increased digitization of the economy. In the report, we focused on particular areas stemming from the Biden agenda, which are the three major export components in our US export basket: energy, metals and minerals, and autos. We identified opportunities that they could pivot to such as clean technology, electric vehicles and batteries, and critical minerals.

What should be the main pillars of a comprehensive strategy for the future of Canadian trade? 

First of all, a comprehensive Canadian strategy needs to recognize the context that there are these global forces and be more specific about how they are challenging, threatening, or reshaping some of our traditional industries. Secondly, we need to take stock realistically of where Canada has strengths, where our best opportunities for export competitiveness are, and where the opportunities are for meeting our own domestic goals. Anything that supports the domestic imperative such as greening or decarbonizing our own economy can also be used to fuel export-led growth. We need to focus on competitiveness, innovation, commercialization, tax competitiveness, skilled labour and immigration, and how our policies support them. 

“As a function of our climate policies, carbon taxes in some areas are not possible or only go so far.”

We are increasingly hearing that we need to rethink industrial policy. Industrial policy can be a bit of a controversial topic because it has histories of both successes and failures but like most other economies, Canada is engaging industrial policy and we are doing it more. As a function of our climate policies, carbon taxes in some areas are not possible or only go so far. Like other countries, Canada is willing to pursue policies that support more direct decarbonization efforts. The question is whether we are using those tools in a deliberate way and to support these objectives.

A final component of this type of strategy is who outlines the strategy. The federal government and government in general will obviously play a big role, but a comprehensive strategy also needs to take into account the private sector, businesses on the ground, academia and research institutions, and labour organizations. They all need to fully take stock of Canada’s position and how we can best leverage it going forward.

Who and what would you pitch to improve Canada’s global trade position?

The federal government needs to convene the right people in the public sector, private sector, academia, and labour to articulate a strategy for Canada to compete in this new trade landscape. We need to position Canada advantageously in the decisions that are being made globally right now that will shape opportunities in trade for the decades to come.