Forever hewers of wood and drawers of water?

The following is from the 24 October 2012 edition of Embassy Magazine.

Canada urgently needs a 21st century economic strategy that goes beyond natural resources and focuses much more on building a high-value, knowledge-based economy that can compete, says Crane.

It is ironic that at the same time that former prime minister Brian Mulroney is using the 25th anniversary of the Canada-US free trade agreement to boast of the deal’s success, the Harper government is warning that Canada has become too dependent on the slow-growth US market and not active enough in faster-growing Asian markets.

The free trade agreement was signed in 1987, despite fears we were putting too much of our future in US hands. Moreover, for all the enthusiasm by its backers, the agreement never lived up to its promises. Canadians were told they would enjoy a higher standard of living and the wealth for more generous social programs because the productivity gap with the US would close. Instead, it has widened significantly.

Canadians were also told we would export finished products to the US rather than raw materials because there would no longer be tariffs on processed resources. Yet Canada continues to export raw materials rather than finished products—as the Keystone XL pipeline would do, if approved, with unprocessed oil-sands oil refined into gasoline in Texas, not Alberta—and other manufactured products.

As well, Canadians were promised a dispute settlement system that would “make us the envy of the world,” according to a senior economist from the C.D. Howe Institute. That never happened and the dispute settlement arrangement, after its finding on softwood lumber was ignored by the US, is now almost never used.

Today, Canada’s export performance is suffering due to our high dependence on the US market, our high dollar and our poor productivity performance along with our neglect of the rest of the world.

According to a new working paper by three Bank of Canada economists, The Evolution of Canada’s Global Export Market Share, Canada has been distracted by the US market while ignoring much of the rest of the world. Today, we are paying the price with a disappointing export performance, which is holding back Canadian growth and jobs. Canada’s world market share has fallen from 4.5 per cent in 2000 to 2.7 per cent in 2010. And it would have fallen further were it not for oil exports.

While acknowledging the impact of the high dollar and poor productivity, the three economists also contend that “Over the past decade, the structure of the geographic market to which Canada exports, with a large weight on the relatively slow-growing US market, and a small weight on other economies, particularly the relatively fast-growing emerging market economies, has exerted the majority of the overall net negative impact on Canadian exports.”

Canada also lost market share in the US. As the economists argue, “the substantial real effective appreciation of the Canadian dollar, along with the opening of North American and global trade markets to emerging and developing economies, which intensified global competitive pressures on Canadian firms, appear as key determinants.”

For the time being, Canada’s global market share will continue to depend on a slow-growth US market and world demand for raw materials.

But looking ahead, ‘’it appears crucial to improve the productivity of Canadian firms to raise competitiveness and to help support Canadian exports on a sustained basis,” the Bank of Canada economists argue.

But there is no strategy to significantly pursue advanced manufacturing capabilities in Canada. Instead, the Harper government’s strategy is focused on expanding markets for oil-sands oil and promoting regional trade agreements whose benefits will be marginal.

Yet as a new study by HSBC Global Research, Consumer in 2050, forecasts, “A global consumer revolution is in the offing—and it will be driven by an unprecedented expansion of the world’s middle class. Almost 3 billion people—more than 40 per cent of today’s population—will join the middle classes by 2050, and these entrants are to be found almost exclusively in today’s emerging markets.”

As the HSBC study says, “As workers in the emerging markets are provided with more machinery and technology and their skills rise, productivity and incomes will continue growing at rates that far outstrip those of the developed world.”

What this means, the London-based banking group argues, is that emerging market consumption will make up about two-thirds of global consumption in 2050, compared to about one-third today.

This represents enormous trade potential. But the question for Canada is whether we will have a Canada Catalogue that contains the goods and services that consumers in these countries will want to buy. And that means, will we have the companies that can produce these high-value goods and services? Or will we simply continue digging stuff out of the ground to be sold to these countries, which will sell the raw materials back to us in the form of high-tech electronics, automobiles, machinery, chemicals, solar panels, and pharmaceuticals?

Simply signing more trade deals won`t do it. And relying on increased oil exports won’t either.  Canada urgently needs a 21st century economic strategy that goes beyond natural resources and focuses much more on building a high-value, knowledge-based economy that can compete in the rich worldwide markets of the future. We also need this because without high-value, high-productivity businesses that can succeed in world markets, we will have a tough time affording an aging society.

David Crane is a Toronto-based writer on economic, political, and environmental issues. He can be reached at [email protected].