The Future of Canadian Trade Relations

Image By: CTV News Vancouver

Canada-US Trade relations

Canadian economic development and prosperity has long since been significantly shaped by international trade. As a key commodity exporter in global supply chains, Canada’s economic prospects are intertwined with global trade dynamics. One in six jobs is being supported by exports, while global trade contributes to nearly one-third of the annual GDP. 

Canada’s exports landscape is highly influenced by its longstanding trade relationship with the United States — the destination comprising 75% of its exports. This relationship, while beneficial, has revealed fragilities amidst global shocks highlighted by the COVID-19 pandemic, US-China trade tensions, and political instability down south. These risks have spotlighted the vulnerabilities of reliance on a single market, reignited discourse over the necessity for trade diversification to shield the Canadian economy from global volatilities and geopolitical strains.

Objectives of reducing trade dependence on the US have been touted as early as the 1970s with the government of Prime Minister Pierre Trudeau. Echoing this sentiment, Prime Minister Justin Trudeau, in 2018, emphasized the importance of trade diversification in his government’s agenda. A federal government report further reinforced this assertion, advocating for the geographical diversification of Canadian exports to mitigate the risks posed by protectionist measures from trading partners. 

opportunities in emerging markets

Canada has progressed with diversification initiatives, notably bilateral trade agreements with the UK and Japan, and the Canada-European Union Comprehensive Economic and Trade Agreement (CETA) established in 2017. However, opportunities for rapid economic development are concentrated in emerging markets, which accounted for 50.1% of global GDP in 2023 and 66% of global GDP growth in the past 10 years. Policy-modeling from the University of Ottawa found that trade diversification away from the US to countries with more youthful populations and rapid growth, such as India, are considerably more beneficial than diversification to older countries including Europe and Japan. 

Canada’s export share to emerging markets has inched up modestly, from 4% to 10% over the past decade. Recent ventures into emerging markets such as the Canada-Africa Economic Cooperation Strategy (CA-ECS) and the Indo-Pacific Trade Strategy (IPS) aim to broaden Canadian trade horizons beyond geographical diversification. These ambitious initiatives incorporate broader goals of fostering international cooperation on salient issues ranging from climate change to international security. 

However, regulatory, cultural, and geographical barriers coupled with geopolitical tension pose challenges in expanding trade relations. As a consequence, international trade tends to be localized with regions or “intra-regional”, rather than “inter-regional, due to the higher costs associated with trade among countries separated by great distances.

This complexity is highlighted in Canada’s proposed IPS, which necessitates navigating international relations to strike a balance between forming new engagements while preserving existing alliances. The backdrop of political tensions involving deteriorating diplomatic ties with India and China, the US-China trade war, and post-Brexit Europe, questions the viability the strategy’s viability. An analysis from the Fraser Institute remarks the “deliberately vague” language used in the IPS regarding Canada-China economic relations, a curious choice given China's dominance in the Asia-Pacific supply chains critical to the strategy's success.

resurgence of “homeland economics”

Another response to economic and geopolitical shocks runs parallel to diversification endeavors, calling instead for governments to have faith in the ability of Canadian companies. This sentiment echoes the emerging trend of “homeland economics”, advocating for a focus on strengthening domestic economic capacities. A recent study from the University of British columbia observed a rise in industrial policies over the past two years, which tend to carry protectionist overtones. Notable policies include the CHIPS and Science Act and the Inflation Reduction Act, implemented by the US in 2022, to which the EU responded with the equivalent European Chips Act and  Green Deal Industrial Plan in 2023. Following these developments, Canada too responded with its Made-in-Canada Plan supporting manufacturing and technology sectors, accompanied by the message, “we will not be left behind.”

A core tool used in industrial policies involves subsidies to spur innovation and development in desired sectors. However, subsidies can oftentimes fund the survival of inefficient firms, thereby reducing industry competitiveness. This method of growth is unsustainable in the long run, as seen in the financial collapse of companies such as Lightyear, a Dutch solar-car producer supported by the European Commission and Britishvolt, an electric-battery company backed by the British government. 

The allure of building strong, domestic manufacturing bases promised by homeland economics are unlikely to succeed. This is exemplified by numerous governments’ wishes to secure a hefty portion of global chip manufacturing, with governments around the world providing subsidies of $400 billion to boost capacity. For instance, America’s attempts to cultivate semiconductor manufacturing have been unsuccessful since 1987, when the government pledged $100 million ($250 million today) to form an R&D consortium in hopes of challenging Japanese market share. Today, the US faces a shortage of specialist workers, which will delay chip production until 2025. Other chip-keen countries face similar constraints.

Beyond chip production, a global skilled-labour shortage is affecting a multitude of industries, including healthcare and lifesciences. In 2022, labour and skills shortages in the manufacturing sector alone cost the Canadian economy $13 billion in lost sales, late delivery, and cancelled or delayed projects. This shortage, coupled with the comparatively higher costs of local manufacturing, are not conducive to policymakers’ ambitions of reviving home production.

Ultimately, policies that push for the homeland economics narrative will fail to strengthen production capacity or diversify supply chains, especially in the short-term. Production offshoring has been evolving since the 1960s, reflecting decades of deepening relationships and dependencies between individual firms, supply chain networks, and international economies. As Canada pursues new opportunities for trade diversification and domestic capacity development, its strategies must consider the longstanding economic dependencies among the national and international stakeholders of trade policy.