The hard reality is that the situation in the US, and grim future prospects in our traditional markets, have serious implications for Canada’s economic future.
A maturing tonic for Canada
In our Foreign Affairs article last week we argued that, for various reasons, relations with the U.S. were at a low ebb. Results benefiting Canadian interests have been skimpy. More worrying is the failure of the U.S. economy to rebound from the 2008/09 recession, in large part because of political paralysis and a lack of leadership from all quarters in Washington.
It is not a matter of personalities or likeability, however. The hard reality is that the situation in the US, and grim future prospects in our traditional markets, have serious implications for Canada’s economic future. As our report Winning in a Changing World issued last week indicated, the major transformation affecting the global economy should serve as a wake-up call or a maturing tonic for Canadians as a whole and not just for government.
Canadians have lulled themselves into thinking the United States will always be the market of choice for our goods and services. But consider the facts: Canada’s share of the U.S. merchandise import market fell to 14 per cent in 2010 from 19 per cent in 2000. In the other direction, the U.S. share of Canada’s merchandise imports fell from 64 per cent to 50 per cent during the same period, representing 23 versus 19 per cent of U.S. merchandise exports.
U.S. demand will remain weak for the foreseeable future. TD Economics projects that by 2020 the U.S. market will account for only two-thirds of Canadian exports. The inability of the U.S. to address its fiscal problems remains a major drag on its economy and will continue to slow down full recovery in other economies.
We need to shake off the false comfort of complacency, relying too heavily on the past to determine our future.
A significant portion of the world’s growth now comes from a group of fast developing, dynamic economies led by China, India, and Brazil, and includes Colombia, Mexico, Korea, Turkey, Vietnam, Indonesia, and South Africa. Each has achieved more than double the growth rates of advanced economies during the past decade. All now enjoy rapidly growing middle classes, high savings rates, and more stable regulatory regimes — three solid pillars for continued growth.
Canadians are minor players in these markets: less than 10 per cent of Canadian exports and less than four per cent of outward investment go to these emerging markets. Yet this is where our future prosperity lies.
By midcentury, emerging markets will be home to 70 per cent of the world’s wealth and 60 per cent of global trade. According to the Asian Development Bank, Asian economies will account for 50 per cent of world production and have 50 per cent of the world’s population. By then, North America will account for less than 8 per cent of global trade compared to 15 per cent today.
In our report, we advocate a hardheaded approach for negotiations establishing clear priorities for emerging markets with significant promise and using our comparative advantages on trade and investment to extract benefits that serve our national interest. The reason is simple: governments and firms in major emerging markets (China, India, and Brazil) do not always play by conventional, market-based rules. The Economist reports that 28 per cent of the emerging world’s 100 biggest companies are state-owned enterprises (SOEs) who operate in conditions where cost of capital rates are not necessarily market-based. In some cases, as with China, most of the major players are SOEs.
The other reality is that in emerging economies the state may use its power to direct major companies to act in its interest rather than in the firm’s interest.
Conventional means for access to emerging markets will not be adequate. The fact that these markets want to buy much of what we offer, and want to invest in Canada to secure access to what we have, offers unique leverage, which, if deployed shrewdly, can bring real negotiating dividends.
The U.S. will always be important, but it is time Canada focused more strategically as well on the potential in the key new markets of the Asia-Pacific, Latin America, and Africa.
The opinions expressed in this article/comments are those of the author(s) and do not necessarily reflect the views of CIGI or its Board of Directors and/or International Board of Governors.