The Dimensions of Diversification

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By Peter G. Hall *
Vice-President and Chief Economist Export Development Canada

Trade diversification is a theme that Export Development Canada (EDC) Economics has had a lot to say about in the past few years. We debuted the topic back in 2008, expanded on it a few times, and made it the theme of last fall’s forecast. Is there really more to say? Actually, much of that analysis focussed on merchandise trade alone. The truth is, there are a few other key dimensions of diversification that are equally exciting.

On its own, the merchandise trade story is arresting. While recent trade with traditional partners was languishing, Canada’s shipments of goods to emerging markets rocketed ahead at a 10 per cent annual pace. This took the total share of emerging market trade from just 4 per cent in 2000 to 11 per cent by 2011. Global recession briefly interrupted the process, but the trend quickly resumed in 2010. Much of emerging market trade was accounted for by commodities and primary manufactured goods. Even so, growth of high value-added shipments consistently outperformed the average.

Trade in services saw a similar pattern. In 2000, services trade was already more diversified, accounting for 15 per cent of total Canadian exports of services abroad. Six per cent average annual growth over the past decade – triple the growth to all countries – took the share of services exports to emerging markets up to 22 per cent of the total by 2011. Unlike trade in goods, the share of services going to emerging markets had previously been higher – it had reached 20 per cent back in 1991, but it slipped steadily in the late 1990s. Recent performance suggests that the up-trend is here to stay.

Canada has long had a diversified portfolio of direct investment abroad (CDIA). In 2000, half of CDIA was in the US, with a further 21 per cent in the EU. At the same time, 22 per cent of CDIA was in emerging markets, an impressive share. Since then, the US share has slipped to 40 per cent, while emerging markets have gained ground, rising to almost 28 per cent of total CDIA. The good news? These are trend movements that don’t appear to have been materially influenced by global recession.

Another dimension of Canada’s international activities is foreign affiliate sales (FAS). Globalization is enabling Canadian firms to establish product and service sales operations around the world. The US is Canada’s prime FAS location, and although growth has been decent in the past decade, its share of total FAS has plunged from 65 per cent to just under half. Other large markets have either a static or declining share. Emerging markets again buck the trend. Since 2003, their share has catapulted from 12 per cent to 28 per cent. FAS in these markets is now over twice the value of total exports.

Such evidence further highlights the pervasiveness of this nascent trend in the Canadian economy. We have talked about the need for diversification since the early days of our history – the data show that we are now actually doing it. Data also show that there is no major industry in Canada that is not experiencing this; there is no region in the country that is not participating; and there is no region in the world that Canadian international diversification is ignoring. What is more, mere continuation of the trend suggests a bright future for Canada’s economy. As fast-growing zones naturally become a larger share of our business over time, Canada’s overall economic growth potential rises as well.

The bottom line? Diversification is well entrenched in multiple dimensions of Canadian international trade, and it’s here to stay. And, there’s still time to prepare for the growth that it’s bringing our way.

© EDC

APRIL 2017

Vol. 11 - No. 9










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