Canada’s Curious Deglobalization

Everyone knows globalization is an irresistible worldwide process enveloping every economy, including Canada’s, in its market-driven tentacles.  Right?

Wrong.

In fact, since 2000, Canada’s economy has been curiously de-globalizing before our eyes.  The importance of global markets to our employment and production has been diminishing, not increasing – and at a remarkable pace.  Year-end GDP numbers for 2006, recently released by Statistics Canada, confirm this surprising trend.

 

My recent Globe and Mail column on this unexpected trend follows below.  I think it reveals a few important political points:

 

* FTAs have been a lousy way to stimulate exports (especially in recent years)

* this trend is yet another manifestation of Canada’s accelerating deindustrialization: the decline of export-oriented manufacturing is the main source of this de-globalization, along with the associated reallocation of economic activity into non-tradeables

* market forces are allocating resources into relatively LESS productive industries, which are the only ones relatively insulated from what is currently (for Canada) the destructive impact of global competition — so much for the invisible hand

* to arrest and reverse this trend would require powerful, pro-active industrial & development policy interventions — exactly the things that have fallen so out of favour in the free-trade era

 

Here is my column in its entirety:

            Everyone knows globalization is an irresistible worldwide process enveloping every economy, including Canada’s, in its market-driven tentacles.  Right?

            Wrong.

            In fact, since 2000, Canada’s economy has been curiously de-globalizing before our eyes.  The importance of global markets to our employment and production has been diminishing, not increasing – and at a remarkable pace.  Year-end GDP numbers for 2006, recently released by Statistics Canada, confirm this surprising trend.

           In 2000, Canada’s total exports were equivalent to 45.6 percent of our GDP.  That was the highest share ever, and reflected the effect of globalization on our economic orientation.  Since then, however, globalization began to unwind for us, and the export share began to fall.  By 2006 it shrank to just 36.5 percent of GDP.

            This occurred despite a historic expansion in Canada’s energy exports (especially oil, and especially to the U.S.), which almost doubled in the same time.  Non-energy exports, therefore, fell even faster: from 40 percent of GDP in 2000, to 30 percent last year.  In other words, an amount of output equivalent to one-tenth of our entire economy has been redirected away from global markets (and toward our home market) in just six years.

 

            This decline in the importance of international trade is utterly unprecedented in
Canada’s postwar economic history.  Incredibly, Canada’s economy (excluding energy) is now less dependent on exports than it was in 1994, when the NAFTA was signed.  Exports are now falling in economic importance more quickly than they expanded during the early years of continental free trade.

 

            A word of caution is required here, because this measure – exports as a share of GDP – is somewhat misleading.  It includes the value of imported commodities (such as auto parts) that are then processed and reexported in another form (such as finished vehicles).  Erin Weir’s work has been very important in revealing this problem in the usual trade/GDP statistics.  In reality, Canada’s actual production is less dependent on exports than this imperfect measure implies.  But until we get a more accurate measure of trade flows, this one will have to do.  And it captures the trend in globalization, if not its precise level.

 

            A few more statistics round out our understanding of this curious economic about-face.  Exports of services have declined proportionately as much as exports of merchandise.  About half the decline in the importance of exports since 2000 reflects falling relative prices for our exports (again, despite rising energy prices), and half is due to declining real trade.  Imports have declined, too, but only two-thirds as much as exports.

            The tribulations of Canada’s auto industry (which once accounted for a quarter of total exports) are key to this story.  Flagging auto sales account for much of the decline in our total exports since 2000.

 

            Why has the engine of globalization been suddenly thrown into reverse (at least for
Canada)?  Most of the decline in trade has occurred since 2002 when our loonie first took off – fuelled by rising commodity prices, and ratified by the Bank of Canada’s what-me-worry attitude.  This undermined Canadian exports dramatically.  Developments in the
U.S. market, which absorbs most of our exports, have also hurt – especially China’s growing share of that market.

 

            On the whole, this de-globalization is a negative development.   Canada is reallocating labour and other resources away from export industries (which are highly productive, and pay wages 25 percent above the rest of the economy) to purely domestic sectors, many of which (like fast food, retail, and personal services) feature dead-end jobs and lousy productivity.  Indeed, this de-globalization is a key reason for Canada’s abysmal productivity performance this decade, despite all the business-friendly policies we’ve implemented in the name of “efficiency.”

            And if we are concerned with boosting exports (as we should be), then it’s abundantly clear that free trade agreements are not the way to do it.  Countries like
China and Korea export successfully on the basis of pro-active policy strategies, not free trade.  These numbers prove that Canada needs to learn that lesson, too.

 

            On the other hand, there may be a silver lining to Canada’s surprising de-globalization.  We are now less dependent on the vagaries of world trade than in many years.  The flip side of this coin is that we’re increasingly masters of our own economic destiny.  The standard argument of the tax-cutters and down-sizers – namely, “globalization made me do it” – rings more hollow with every downtick in our actual trade.