Exports: Performance Factors, Border Risk, and New Opportunities

Archived Topic Box from the 2004 Fourth Annual Benchmark Report

Canada and British Columbia have always been, and continue to be, dependent on the U.S. as our main trading partner and the market for the overwhelming majority of our exports. Like Canada, BC's dependence on the U.S. market has increased from 53.0% in 1993 to 66.3% in 2003, while trade to Japan, the Pacific Rim, and Europe has declined in the same period. While this relationship with the world's largest economy is highly beneficial to BC and Canada, lack of market diversification also puts our economy in a precarious and dependent position.

In a small open economy such as BC, increased trade exposure and an emphasis on export-led production are important elements in increasing productivity and GDP growth. However, simply focusing on current export categories and exporting a limited range of products to a concentrated group of buyers will inhibit the growth enhancing effects of export openness. Diversification of trade and the composition of exports would strengthen the basis for ongoing economic growth while reducing BC's economic vulnerability to the vagaries of world markets and individual trading partners.

Exports: Performance Factors

The world economy provides numerous examples of small open market economies, similar to BC's, that have improved their economic performance through export-led growth. Openness to foreign trade and an emphasis on export focused production are factors that are broadly recognized as having a profound effect on both productivity and GDP growth. The reasons behind the growth enhancing impacts of trade exposure are many, but a number of broad ones are outlined below.

Economies of Scale: in small economies, firms are generally unable to take advantage of economies of scale in their business activities. Selling to a broader, and larger, market allows for a number of cost saving measures and efficiencies in operations, production, and sales that could not otherwise be realized. This factor is especially salient for BC with a population that is small relative to many competitors.

Comparative Advantage: open, export oriented economies are able to specialize in those industries and areas of production where they have comparatively fewer disadvantages than other economies, often also leading to a 'competitive advantage' in terms of cost, quality, or both on world markets.

Investment: trade exposure allows not simply for enhanced emphasis on exports but also encourages an influx of trade-related capital and foreign direct investment which may not have been otherwise available in a small economy.

Innovation Performance: the link between innovation performance and productivity growth has been made frequently. Export and trade exposure increase competition for local firms as well as increasing the rate at which foreign technologies and practices are diffused in the economy and technologies are transferred, all of which drive innovation.

Canada as a whole is generally considered a very open economy with an exceptionally high level of trade activity relative to many other OECD nations. With the advent of the FTA and NAFTA, Canada's trade has increased rapidly in the last decade and a half, from roughly 50% of GDP in 1990 to about 80% today. Despite enhanced trade openness, Canada's productivity gap with the U.S. has continued. Although those industries most directly impacted and liberalized by the FTA and NAFTA have shown some productivity increases, many industries (including the ICT sector, an industry at the forefront of recent U.S. productivity increases) have been significantly less affected. Moving toward increased trade in, and liberalization of, technology and services will be essential in order to ensure BC's trading relationships are diverse, sustainable and profitable on an ongoing basis. While resource industry exports, especially forestry and energy, will continue to account for a large portion of trade activity into the future, increasing the technological and knowledge-based content of these and other exports is also important.

Border Risk

Ease of access to external markets – in particular the United States market – is critical for Canada as a small, open market economy. In the wake of the North American Free Trade Agreement, there was much discussion and speculation during the 1990s that the Canada-United States border would become 'invisible' and no longer a real barrier to flow of goods and people. This view changed with the terrorist attacks of September 11, 2001. Since then – despite the Governments of the United States' and Canada's "Smart Border Declaration", a 30 point program issued in December of 2001 to improve border security and thereby public and economic security – border security issues have risen to the forefront of trade and commercial irritants between Canada and the United States.

British Columbia depends on fluid – and to the greatest extent seamless – access to external markets. With exports to the US approaching 70 per cent of British Columbia's total, the importance of removing border line-ups and other irritants is an imperative. At risk are many commercial arrangements that have developed over the past decade between British Columbia based exporters and US-based customers. Also at risk are future green-field and brown-field investments. If customers in the US can not be assured the Canada-US border will not impose a risk to them obtaining products or services that form part of their business supply chain, alternative suppliers on the US side of the border may benefit to the detriment of similar operators in Canada. And, foreign direct investment in British Columbia (and Canada) from US and other jurisdictions may be at risk if access to the US market is not assured because of chokepoints, bottlenecks or other procedural delays at key border crossings. The best way to deal with this risk is to ensure that border security issues are viewed in terms of the "North American" perimeter, rather than the continental US perimeter. By developing cross-border security arrangements together together, Canada and the US can ensure smooth trade flows and a secure North America.

Seizing New Opportunities – China, India and Japan

While British Columbia (and Canada) pursue better security arrangements for cross-border trade, British Columbia's strategic location on the pacific and already existing ethnic and business ties present substantial opportunities to tap into fast-growing Asian markets, particularly China and India. What differentiates China and India from other potential Asian markets is their sheer size. China is home to one in five people in the world. China's GDP already accounts for 13 percent of global GDP, second only to the United States. Robust economic growth in these two countries is leading to a growing middle class, thereby driving demand for imports of goods and services from industrialized jurisdictions, including British Columbia (and Canada). China's real GDP growth for 2004 is expected to be about 8.7 percent, and a slightly lower 7.7 percent in 2005. Meanwhile, India is expected to expand by 6.7 percent in 2004, with 6.6 percent real growth expected for 2005. Meanwhile, the value of BC-origin merchandise exports to China more than doubled during the five years preceding 2003, to $1.1 billion. This represents about 4.0 percent of BC's international export receipts, suggesting there is likely further room for growth. While BC's exports to Japan have fallen by 50 percent from 1995 highs, they still accounts for about 13 percent of BC's export receipts and should not be overlooked for further development, especially as a favourable market for BC forest products. All other Asian economies – including India – represent the balance of BC-origin (or about 6 percent), meaning about one-quarter of the value of BC's international exports are derived from Asia, compared with 4 percent for the other nine provinces. Given this advantage over the rest of Canada and the need to "hedge" against an increasingly protectionist United States, British Columbia ought to redouble efforts to diversify markets into fast-growing Asian economies, especially China and India, but also Japan and others.

Source: BC Manufacturers Directory; Conference Board of Canada, Global Economic Trends and Prospects, World Outlook, November 2004, pg. 12; Scotiabank, Global Economic Research: Provincial Pulse, July 2004, pg. 1.