Fraser Forum

Canada faces increased competition in U.S. market

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Canada’s exports to the United States have always been a major contributor to the level of economic activity in Canada. To illustrate, Canada’s exports as a share of gross domestic product (GDP) equaled around 27 per cent in 2014, while exports to the U.S. accounted for almost 77 per cent of total Canadian exports in that year. Hence, exports to the U.S. in 2014 amounted to approximately 21 per cent of Canada’s GDP in 2014. In short, strong continued growth of exports to the U.S. market is of major importance to the future performance of the Canadian economy.

Against this background, the stagnating growth of real (inflation-adjusted) U.S. merchandise imports from Canada in the post-2000 time period is cause for concern. Specifically, from 2000 through 2014, nominal U.S. imports from Canada increased by approximately 50 per cent, while the U.S. import price deflator for Canadian goods increased by approximately 52 per cent. Hence, real U.S. imports from Canada actually declined slightly over the period from 2000 through 2014.

There are several possible explanations of the cessation of real export growth to the U.S. One is the slow growth of the U.S. economy over much of the period from 2000-2014, particularly during and following the Great Recession of 2008. Slower real growth of U.S. incomes can be expected to reduce the growth of demand for all types of goods including imports from Canada.

A second possible explanation is the appreciation of the Canadian dollar over much of the time period. For example, the Canadian dollar increased from an all-time low value of US$.6179 on Jan. 21, 2002 to an all-time high value of US$1.1030 on Nov. 7, 2007. It then depreciated modestly to a value of US$.9414 by Jan. 1, 2014.

A third possible explanation is the higher costs to shippers (and ultimately to U.S. importers) associated with tighter border security procedures implemented by U.S. authorities after 9/11.

Perhaps a more troubling and longer-lasting explanation is Canada’s loss of U.S. market share to rival exporters. For example, Canada’s share of total U.S. imports of motor vehicles and parts decreased by almost 12 percentage points from 2000 through 2013, while Mexico’s share increased by eight percentage points. Canada lost market share (particularly to China) in electrical machinery and even in its traditionally strong wood and paper products sectors.

There is fundamentally only one robust way for Canadian exporters to reverse the recent trend of market share loss to rivals. Namely, Canadian manufacturers must improve upon their very disappointing productivity performance over the past few decades—both absolutely and relatively to producers in other countries. Labour productivity in Canada grew by only 1.4 per cent annually over the period 1980-2011. By contrast, it grew at a 2.2 per cent annual rate in the U.S. Even worse, multifactor productivity—basically a measure of technological change in an economy—did not grow at all over that period in Canada.

Improved productivity growth would make Canadian goods more competitive in world markets without suppressing real wages. Improving productivity growth has been an important and difficult public policy issue in Canada for decades. Notwithstanding, it may, if anything, be an even more important issue today, and politicians running for office in the current Canadian federal election should feel obliged to state their positions on how they would improve Canada’s productivity performance if elected.

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