Business Adviser

Watch out, world – Canada is on the move

By Peter Hall
Vice-President and Chief Economist
Export Development Canada

Prior to 2009, this title might have inspired a few chuckles, both here and abroad. Nobody’s laughing now. The developed world envies our public finances, admires our financial institutions, is impressed by our solid domestic growth, and is jealous of our extensive natural resources. Many are looking to Canada for solutions. It’s an impressive turnaround, and we should be grateful. But there’s more – a lot more.

It’s not yet in mainstream conversation, but Canada is undergoing a quiet economic transformation – one that may turn out to be our most significant economic development in recent times. Canadian businesses are diversifying into riskier, less-familiar economies of the world, with head-turning effects.

A critical feature of these new markets is their explosive growth rates. Firms that have caught on to this wave of activity are experiencing dynamic growth that is the stuff of dreams. And there are enough of these firms that the activity is adding up to impressive stats for the country as a whole.

Consider our sales of goods to the rest of the world. Over the past decade, recent trade with traditional partners languished, thanks in part to a meteoric rise in the loonie. Stressed, Canadian exporters shifted to emerging markets – and grew shipments at a stunning 10 per cent every year. This rocketed emerging market exports from just 4 per cent of the total in 2000 to 11 per cent by 2011. Global recession interrupted things, but businesses were back at it in 2010 and 2011.

Exports of services were much the same. Historically more diversified than trade in goods, with a 15 per cent share in 2000, exports of services to emerging markets continued to outperform, grabbing a 22 per cent share by 2011. Unlike trade in goods, much of this was a recapturing of share lost in the late 1990s, but recent performance and global growth patterns suggest that the current up-trend is here to stay.

The shift of trade to emerging markets also seems to be influencing Canada’s international investment patterns. True, diversification is nothing new for Canadian direct investment abroad (CDIA). In 2000, half of CDIA was in the US, and a further 28 per cent spread across other OECD countries. The remaining 22 per cent was in emerging markets, an impressive share. But look what has happened lately: the US share has plunged to 40 per cent, while emerging markets are closing in on 28 per cent of total CDIA. Will this continue?

At least part of the answer lies in another key development. Canadian exporters aren’t just selling from our shores. They are increasingly establishing international sales operations, and the growth of these foreign affiliate sales (FAS) is actually outpacing traditional exports by a large margin. The US is Canada’s prime FAS location, and although growth has been decent in the past decade, its share of total FAS has plunged from 65 per cent to just under half. Other large markets have either a static or declining share. But since 2003, emerging markets’ share has vaulted from 12 per cent to 28 per cent. Emerging market FAS are now over twice the value of total exports.

Taken together, these developments emphasize the depth of the shift to diversification of Canadian trade. As the country has proposed, debated, and hoped for diversification for generations – and without a lot of fanfare, it’s actually happening. As far as we can see, every major industry, every region in the country and every major region in the emerging world is caught up in this new trend. In our own quiet way, Canada is taking on the world – and succeeding.

Diversification paints a bright future for Canada. As fast-growing zones become a larger share of our business over time, economic potential rises. Better still, many firms have not yet joined the party. If they do, growth can only improve. Consider also that, as impressive as Canada’s numbers are, our share of emerging market business is actually slipping. Just keeping pace adds even more growth to the mix.

Canadian business pioneers are blazing a trail into lesser-known but lucrative markets. In doing so, they’re making it easier for others to follow. Maybe our greatest future challenge will be accommodating all of the resulting growth.