For years, oil maintained Canada’s healthy trade balance. Now that is changing – with major consequences
A new geopolitical order is emerging. The globe is quickly realigning itself under the American and Chinese spheres of influence and the pandemic has only increased the stakes. How can Canada finally take seriously its internal stability and external security so that it can effectively play a middle power role? Today, Jesse Snyder takes a look at the worrying development of our exports.
In the summer of 2006, former Prime Minister Stephen Harper outlined his ambitions to significantly increase Canadian oil exports.
Economic growth in China and Africa would propel the tar sands to new heights, Harper told a crowd of business people in London, England, and set the stage for a large Canadian industry that would rival building ” pyramids or the Great Wall of China ”. “
In the years that followed, tens of billions of foreign capital poured into northern Alberta as the global economy turned red, creating a prolonged period of export growth in the region. But Harper’s vision was never fully realized. Now, years after the oil markets collapsed in mid-2014, investments in the fossil fuel sector have collapsed. Legal and regulatory hurdles continued to stifle large pipeline projects, scaring potential investors away.
The crisis has exposed Canada’s dependence on oil exports for decades. Over the past 11 years, Canada has experienced repeated annual current account deficits, with an average annual deficit of between $ 50 billion and $ 60 billion (the current account represents a country’s net economic transactions with the rest of the world ). The reason, in layman’s terms, was a gradual decline in oil and gas investment with no clear replacement to make up the difference.
“We were no longer building our future at home, but rather receiving rents in the present on investments of the past, as living coupons from past prosperity,” wrote David Dodge, former Governor of the Bank of Canada, in a report for the Public Policy Forum in September.
Dodge, among other observers, says the prolonged current account deficit is a useful – albeit worrying – barometer of the Canadian economy, a barometer that should serve as a warning signal for a federal government focused almost exclusively on redistribution rather than on economic growth. Many say it’s time for Canada to take seriously a question that has stuck policymakers for years: how can we materially increase Canada’s exports to ensure a healthy future economy?
While Ottawa’s emergency funding measures to tackle COVID-19 only amplify that account balance, Dodge says it’s part of a much larger trend that dates back several years.
“We were already on a slippery slope going into COVID,” he said in a recent interview with the National Post.
Prior to the 2008 financial crisis, Canada’s exports exceeded imports by a “healthy” margin of three to five percent, Dodge said in the PPF report. That has since been reversed to an average annual deficit of minus two to three percent.
And while annual current account deficits are not synonymous with problems for a country, a chronic deficit can be problematic as governments continue to dip into public funds to pay for expensive social programs such as child care. , the extension of unemployment insurance and health care for an aging population.
“It’s not a very sustainable situation,” Dodge said. “You can maintain it for a while, but we know that over time it deteriorates as the cost of servicing foreign debt increases over time. “
The problem is not specific to offsetting natural resources, which still contributed $ 76.6 billion to the current account in 2019, of which around 80% came from crude oil and bitumen production. Exports from the automotive and aerospace sectors have continued to decline over the years, while consumption of automobiles or travel services has increased.
From the onset of the financial recession until the end of 2019, Canadian investment in assets abroad exceeded foreign direct investment by $ 804 billion, Dodge said in the report.
Observers are divided on how to address the persistent shortfall. Many say the next generation of export-based industries will be in cutting-edge products like artificial intelligence, financial technology, or electric vehicles, to name a few.
Jim Balsillie, former head of Blackberry and chairman of the Council of Canadian Innovators, has for years called on Ottawa to tighten intellectual property rules, which would give Canadian businesses here the opportunity to grow and sell their products. in the world. . In particular, there is concern that, in a digital economy increasingly dominated by American heavyweights like Google and Amazon, Canada will increasingly become a “satellite” economy developing intellectual property for foreign companies and not gleaning that little benefit in return.
Instead, Canada’s trade diversification efforts have largely focused on signing new trade agreements with partners – an approach that was necessary in the past, but has now run its course, according to many trade experts. .
“The truth is, we’re basically done negotiating trade deals at this point,” said Sean Speer, former Conservative adviser and professor at the Munk School of Global Affairs and Public Policy.
Canada has now signed over 50 trade agreements with foreign governments, with varying degrees of success. But observers like Speer say the shortcoming often lies in the lack of follow-up. Canadian policymakers often sign trade deals, participate in photo ops, and then let business owners search for new opportunities on their own.
“It is one thing to sign an agreement, it is quite another to take advantage of the new market access that has been obtained,” said Speer.
Even some recent trade deals with allies have only created further divisions. In a September letter to four cabinet ministers, for example, the Canadian Agri-Food Trade Alliance (CAFTA) lamented that Canada’s recent trade deal with Europe “failed to deliver on its promises for agri-food exporters in the country. Canada ”, and instead led to an“ overall deterioration ”of Canada’s trade balance with its European partners.
Nowhere are trade concerns more prevalent than with the United States, which still accounts for the vast majority of Canadian exports. A belligerent and protectionist Trump administration has reignited long-standing concerns about Canada’s overdependence on the United States, causing a shift in mindset among business leaders.
“The good old days are over,” said Goldy Hyder, head of the Ottawa-based Business Council of Canada, which represents a number of Canada’s largest corporations. “We have become a complacent and comfortable country, relying only on the ease of doing business in the United States. “
Hyder calls for a range of supports for the industry to help it expand into new markets. They include more advice for private companies in navigating foreign markets and ensuring the construction of essential infrastructure such as seaports and pipelines.
Hyder and others are quick to recognize that it will be a steep climb to climb, as Canada has sought for years to diversify away from the U.S. market only to increase its dependence on the world’s largest economy. .
Over 50 years ago, Prime Minister Pierre Trudeau told a room full of members of the United States Congress that sharing a border with the United States was like “sleeping next to an elephant,” in which the smallest country is “affected by every twitch and growl.” . “
At the time, relations with the United States had seriously deteriorated with the election of Richard Nixon, prompting Ottawa to explore new trade options. This ultimately led to the Third Option Report in 1972, a trade diversification plan that was widely seen as a failure decades later.
Today, Canada is once again in a position where it will need to broaden its trade base to reassert itself on the world stage, or threaten to sink into long, slow decline.
This is a point that Dodge, the former BoC governor, tries to stress as Ottawa assumes increasing levels of foreign-funded debt while apparently putting little emphasis on economic expansion.
“At the end of the day, we Canadians cannot consume what we do not produce.”
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