Why Is Interprovincial Trade Down and International Trade Up?

The drop in the share of interprovincial exports in GDP can be fully explained by several factors: the reductions in Canadian tariffs that have opened up the domestic market to foreign competition; the slower growth of that market compared with the U.S.; and relatively low increases in the prices of goods traded interprovincially. Those concerned about the weakening of the Canadian internal market should take some comfort that, except for the relatively small increases in the prices of interprovincial exports, these factors should have run their course and are unlikely to cause any further declines in the share of interprovincial exports in GDP. Even more encouraging, there is some evidence the AIT has helped to increase interprovincial exports. The jump in international exports can be fully explained by improved Canadian labor costs relative to the U.S., reductions in tariffs paid on U.S. imports from Canada almost entirely as a result of the FTA/NAFTA, and, most importantly, the U.S.’s prodigious growing appetite for imports, some of which may be unsustainable given the recent magnitude of the U.S. current account deficit. The increase in Canada’s international exports, remarkable as it was, would have been even larger if it had not been for the decline in their price relative to the price of GDP.