There’s No Fairy Tale Ending to G-20’s Worst Export Slump
(Bloomberg) -- Canadians like to see themselves as the perennial optimists of global trade, even now as questions mount almost everywhere else over the benefits of open economies.
But it’s getting awfully hard.
The country is struggling to emerge from a 15-year slump in exports -- among the worst track records anywhere. And with globalization trending in the wrong direction, it may be a bad time to look for an export recovery as governments elsewhere turn away from the free-trade ethos that’s prevailed for the last two decades.
Maybe better times will come, but the permanent loss of export capacity partly due to last decade’s commodity boom is starting to become a prominent theme for economic policy makers -- none more so than Bank of Canada Governor Stephen Poloz, who makes his next interest rate decision on Wednesday -- discouraged by the long-awaited, never-realized manufacturing rebound.
Trade by Numbers
That’s because data right now show a trading nation that’s forgotten how to trade.
- In 2000, Canada was by far the most trade-dependent country in the Group of Seven, and one of the most among industrialized countries, with combined imports and exports making up 84 percent of gross domestic product. That ratio has fallen by about 20 percentage points.
- The country’s export growth rate, averaging just below 1 percent in volume terms since 2000, is the worst in the Group of 20 and second-worst among developed economies.
- As a share of GDP, Canadian exports have fallen 14 percentage points since 2000 and has been hovering at about 31 percent in recent years, levels unseen since the North American Free Trade Agreement came into force in 1994.
- Imports are also dwindling in significance. They accounted for 38 percent of GDP in 2000 and today that figure is 34 percent.
- Things started looking a little better in some sectors in recent years, particularly after the currency started to weaken along with oil in mid-2014, but the nation’s trade performance recently took a new hit. In 2016, exports are rising at the most sluggish pace since the recession.
There were many reasons for the poor performance, which Bank of Canada deputy governor Larry Schembri summarized in a recent speech.
However there’s no denying surging commodity prices played a key role by driving the exchange rate from a record low in 2002 to a record high five years later, pricing many manufacturers out of business.
Some, including OECD economists, expressed concern at the time that Canada’s energy boom would lead to a so-called Dutch Disease. Those worries were brushed off by policy makers such as former Bank of Canada Governor Mark Carney, largely on the assumption the good times would endure. It didn’t matter if exporters were closing by the thousands. Canada was getting rich.
The picture has certainly changed.
In addition to C$60 billion ($45 billion) in lost income annually from lower commodity prices, the erosion of export capacity is costing Canada another C$30 billion, Poloz said in a Nov. 28 speech, or 1.5 percent of GDP.
While the causes of Canada’s trade malaise are more or less known, one mystery remains: Why in the face of a weaker currency and a U.S. recovery aren’t traditional exporters picking up more of the slack.
One answer: once exporters leave town -- as they have in their thousands in Canada -- they tend to be gone for good. Or, as Poloz put it at a press conference after the speech: closed companies are “not like Sleeping Beauty, suddenly they come back.”
“The deeper we dig the more we find there are pockets of exports that have actually fallen to zero from significant numbers in the past and those are what we refer to as the lost capacity,” Poloz said. “They closed their doors and in the economic literature we talk about that as kind of a hysteresis effect, or a scarring effect.”
Canadians -- ever the optimists -- are keeping an eye on the bright side.
Trudeau is toying with new trade strategies that focus less on selling commodities and more on tapping the global market for consumer goods. The marquee commercial event of the prime minister’s September trip to China was a side visit to Alibaba Group Holding Ltd., China’s dominant online retailer, where company founder Jack Ma launched a dedicated portal for Canadian goods -- think lobsters.
Service exports, Poloz pointed out last week, are on a bit of a tear, increasing by a third since 2010 and now generating more than C$100 billion in receipts for the country.
And if economies everywhere are turning inward, and the political pressure is for countries to be more self sufficient, perhaps Canada getting a head start will be a silver lining.
In the meantime, even the optimists aren’t predicting an export renaissance. While the IMF estimates Canadian exports will grow by 2.9 percent annually between 2017 and 2021 -- three times the pace of the previous 15 years -- that will still be below the G-7 average.
As for finding new markets, Trudeau’s trade record is more likely to look like a “saving-the-furniture” exercise than anything that resembles the next big thing, as he confronts a growing wave of protectionism, especially if U.S. President-elect Donald Trump follows through on his promise to re-open the North American Free Trade Agreement.
The biggest lesson from Canada’s trade performance may be that once your exporting sector falls asleep, it’s tough to wake it up.