Is Canada too dependent on the US for Trade? “Not necessarily”

There are things about Canada’s economy that Canadians take for granted: We are unusually reliant on exports; and we are exceptionally reliant, even precariously so, on trade with one particular market, the United States. But despite the fact that we are accustomed to believing such things, a closer examination reveals a different picture.

A report released today by Eugene Beaulieu and Victor Yang Song of The School of Public Policy shows that while it is true that Canada has a high ratio of trade to GDP, our ratio is similar to those of France, Great Britain and Australia. Further, the conventional wisdom of Canada being “too dependent” on the United States for trade and that we must therefore diversify, actually ignores the reality of global trade patterns.

Throughout the world, open economies are typically concentrated on regional, rather than wider global trade. It is true that more than 80 per cent of Canadian exports went to the United States between 1995 and 2010. But in 2012, 69 per cent of European exports went to other European countries. In Asia, 53 per cent of exports were traded within Asia. The reality is that, across the world, trade is predominantly based around regional value chains, and the North American region is, of course, heavily dominated by the United States.

The report also challenges the assumption that Canada lacks diversity of export products — that we are too dependent on energy or automobile exports. Looking at regional-level data, Canada’s export products are, in fact, more diversified than Australia’s, Poland’s, Austria’s, Mexico’s, Hong Kong’s, and those of many more countries. Out of 121 countries measured, Canada ranks roughly in the middle, at 51st, on export-product diversity.

Is there any benefit to Canada increasing trade diversification? “Yes”, say the authors, but Canada should focus trade policy both on deepening its regional trade ties with the U.S., while also developing, as much as possible, other global export markets. Moreover, it is a reality of international trade that trading patterns have emerged around regional value chains. Assuming that diversification policy could possibly redirect so many market-level decisions would be naïve at best, while contriving policy aimed at interfering with the normal flow of these market-based decisions could only invite economic danger.