What Dependency Issues? Re-Examining Assumptions about Canada's Reliance on the U.S. Export Market

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, to the point where these assumptions inform discussions about developing trade policy, a closer examination reveals a different picture. In reality, while it is true that Canada has a higher ratio of trade to GDP than some of the largest countries in the world, we are not, in fact, an outlier relative to other countries. In fact, our trade-to-GDP ratio is similar to those of France, Great Britain and Australia. Canada’s ratio of exports to GDP is not only unexceptional, it has been steadily declining, almost to the point where soon, rather than debating whether we are too dependent on the U.S. export market, Canadians may find the more urgent policy question to be why our trade openness has been underperforming in international markets. The conventional wisdom that Canada is “too dependent” on the United States for trade has veered many trade policy discussions toward the conclusion that it is essential for Canada to diversify its trade. But this ignores the evolution of trade patterns globally. 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 where Canada is situated is, of course, heavily dominated by the United States. A comparable economy to ours, such as Australia’s, may appear to have a more diverse trading pattern, because it trades heavily with several Asian countries, but it is still principally reliant on the Asian region. And when comparing intra-regional trade dependency, Australia is actually more dependent on a single regional market than Canada is. Similar assumptions about a lack of diversification in Canada’s export products — that perhaps we are too dependent on, say, energy or automobile exports — also dissolve under closer analysis. Looking at regionallevel data, Canada’s export products are 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. None of this is to say that there is no benefit to Canada increasing trade diversification; rather, 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. It does, however, reveal that Canada’s attachment to the U.S. is not unusual in the global context, let alone cause for concern. Moreover, it is a recognition of the reality of international trade: That such trading patterns have emerged around regional value chains for good reasons. These are the export decisions made by countless firms to meet the demand decisions of tens of millions of consumers. Assuming that diversification policy could hope to redirect so many sensible market-level decisions would be naïve at best, while contriving policy aimed at interfering with the natural and entirely normal flow of these market-based decisions could only invite grave economic danger.