Remarks by Lawrence Schembri
Deputy Governor of the Bank of Canada
Atlantic Institute for Market Studies
Halifax, Nova Scotia
8 November 2016
Wood, Wheat, Wheels and the Web:
Historical Pivots and Future Prospects
for Canadian Exports
Introduction
It's always a pleasure to visit Halifax.
Thank you for that kind introduction. And
thank you to the Atlantic Institute for Market Studies for the opportunity to speak
here today. The research papers you publish on economic and social issues are
thoughtful contributions to the public discourse.
Since its founding in 1749, Halifax has served as a critical point of transit for
Canadian trade. With its extensive port facilities, this city has supported the
growth and evolution of Canadian exports from the early trading of fish and fur in
sailing vessels to modern consumer and industrial goods in huge container ships.
Canada's
Inspired by the historic and ongoing contribution Halifax has made to
international trade, my speech today is about the evolution of and prospects for
our exports. The question I will try to answer is: What insights can we draw from
the history of Canadian exports that will help us better understand our recent
export performance and prospects for the future?
This is a particularly important question today, given the slower-than-expected
recoveries in global demand and Canadian exports since the Great Recession of
2008-09. While Canadian exports have grown over this period by approximately
4 per cent per year, their growth to date remains below the experience of past
recoveries. For example, exports grew nearly 8 per cent per year over a similar
length of time during the recoveries from the recessions of 1981-82 and 1990-
91. This difference is important because stronger export growth is critical to
achieving a more sustainable growth path for the Canadian economy.
Throughout our history, we have successfully relied on trade, both exports and
imports, to support our rising standard of living. Exports have always been an
important source of economic growth for Canada (Chart 1). Today, exports and
- 2 -
imports represent about 65 per cent of our output, which is one of the highest
ratios among the G7 countries (Chart 2).
Exports are not a goal in and of themselves, however, but a means to acquire
imports for consumption and investment. Furthermore, trade generates global
benefits because it encourages countries to specialize in the production of those
goods and services in which they have a comparative advantage-in other
words, in the goods and services they are relatively more efficient at producing.
Chart 1: Trade has always played an important role in the Canadian
economy
Nominal shares, trade and goods imports and exports as a share of GDP, annual data, 1926-2015
%
80
60
40
20
0
1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Trade Exports Imports
Sources: Statistics Canada and Bank of Canada calculations Last observation: 2015
Chart 2: Canada remains a trade leader among advanced economies
Nominal share of GDP, total imports and exports of G7 countries, 2015
%
100
80
60
40
20
0
Germany Canada France Italy United Japan United States
Kingdom
Sources: Organisation for Economic Co-operation and Development (OECD) database and Bank of Canada calculations Last observation: 2015
- 3 -
Because of our geography, which has given us an abundance of natural
resources and proximity to the largest market in the world, resource-based
products destined for the United Sates have dominated our export mix.
Nonetheless, over our history, Canada has transitioned from being a primary
goods powerhouse-principally, wood, wheat and other agricultural goods-with
a limited set of trading partners to a well-diversified modern economy. Today, we
export a broad range of manufactured goods, including almost anything with
wheels-automobiles, trucks, airplanes and subway cars-and an expanding
range of web-based services. To sustain our success as an exporter, we must
continue to develop new exports and new markets.
or "pivot"
Our demonstrated ability to adjust flexibly, in response to a variety of
external and internal forces, reflects, in part, our strong political and legal
institutions and our commitment to policies that support economic activity and
trade. These include well-defined property rights and legally enforceable
contracts, as well as growth-promoting economic policies, such as trade
liberalization, and prudent fiscal and financial policies. In addition, our
inflationtargeting monetary policy and flexible exchange rate have helped us adjust to
shocks and achieve low, stable and predictable inflation and strong and
sustainable economic growth.
I'll begin
my presentation with a simple analytical framework that highlights the
key factors that have influenced the evolution of our exports. I'll discuss how
those factors shaped the changes in our exports and their destination over
I'll review three phases in our
history. recent export history. And, in the last
section, I'll consider the prospects for Canada's exports and their contribution to
the Bank's outlook for the economy.
The Determinants of Exports: An Analytical Framework
For the purpose of this analysis, I'll use a framework that focuses on three broad
and often related factors that influence the volume, value, composition and
destination of Canadian exports over time:

economic growth and development in other countries, chiefly in our trading
partners and competitors;

trade policies, including tariffs and quotas, and other structural factors,
such as changing technology and tastes; and

natural resource or commodity prices and the exchange rate (Figure 1).1
These factors affect what we sell, to whom we sell, how much we sell and at
Using this framework, let's look
what price.2 at how our export mix and trading
- 4 -
partners have changed since Confederation in response to these key
determinants.
Figure 1: Analytical framework: Determinants of exports
Commodity prices
& exchange rates
Trade policy,
Global economic
technology and
growth and
preferences
development
Exports
characteristics
(volume, value,
composition and
destination)
Historical Pivots: What We Trade and Who We Trade With
Since Confederation in 1867, the composition of our exports has evolved
considerably (Chart 3), as have the destinations to which we ship them. In
Canada's earliest years, we exported what we extracted from our
forests and
produced on our farms.3 This pattern continued until the early 20th century, when
commodities such as iron ore, nickel and copper became more prominent.
The two world wars accelerated two important trends: the move from rural to
urban life and the adoption of new technologies in the form of mechanization and
electrification. These trends facilitated the transition to an industrial, export-driven
economy based on new commodities, such as oil and gas and manufactured
goods.
Perhaps the most significant development following the Second World War was
trade liberalization, a trend that continues to this day. The world learned a hard
lesson about the cost of protectionism during the Great Depression, when trade
collapsed, partly as a result of misguided policies such as the US Smoot-Hawley
tariff.4
- 5 -
The composition of Canada's
Chart 3: exports has evolved through history
Canadian nominal goods as a share of exports, 3-year moving average, annual data, 1870-2010
%
100
80
60
40
20
0
1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
Agricultural products Wood and paper Other non-energy commodities
Energy commodities Vehicles and chassis and parts Other manufactured goods
Last observation: 2010
Sources: Statistics Canada and Bank of Canada calculations
Trade agreements have been transformative for Canada.
The first General Agreement on Tariffs and Trade (GATT), signed in 1947 by 23
countries, including Canada, reduced or froze more than 45,000 tariff rates.5 That
agreement, together with subsequent GATT rounds, led to a more than sevenfold
increase in world and Canadian goods exports between 1948 and 1972.
The 1965 Canada-United States Automotive Products Agreement, more
commonly known as the Auto Pact, marked an even more important turning point
for Canadian exports and the economy.6
The Auto Pact freed trade in autos and auto parts between the two countries and
guaranteed Canada a share of total auto production. The auto industry in Canada
expanded, became more efficient and was able to export on a large scale.
let's look at our trading partners
Now, (Chart 4). Again, we see the flexible
adjustment of Canadian exports in response to changing circumstances.
which raised tariffs to record levels on a broad range of imported goods. Like other countries,
Canada responded almost immediately, imposing new tariffs on the major imports from the
United States. In the three years when the Smoot-Hawley tariffs were in place, US imports
declined by more than 65 per cent.
5
The GATT was superseded in 1994 by the Uruguay Round Agreements, signed by 123 nations,
which established the World Trade Organization.
6
Of the sevenfold increase from 1948 to 1972, more than a quarter of this was in the category of
"vehicles and chassis and parts" post-1964, which underscores the importance of the Auto Pact
agreement for Canadian exports.
- 6 -
Chart 4: The destination of our exports has also evolved
Nominal share of goods exports by principal trading partner, customs basis, annual,
%
1948-2015
100
80
60
40
1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013
United States European Union Japan Mexico China Rest of world
Sources: International Monetary Fund Direction of Trade database and Bank of Canada calculations Last observation: 2015
After the Second World War, most of our exports were destined for the United
Kingdom and the rest of Europe and the United States. You can see in the chart
the spike in trade to the United States after the first GATT agreement in the late
1940s and the steady rise in the importance of the United States with subsequent
trade agreements. In recent decades, we've seen an increase in the shares to
Mexico and to China.
Today, while the United States remains our dominant trading partner-it is the
destination for about 75 per cent our exports-our markets have become more
diverse relative to 15 years ago.
I've compressed a great sweep of Canadian
history into these charts. They
illustrate three important points about our exporting history:

first, exports have been critically important to our economic development;

second, we have been able to flexibly adjust to shifts in demand for our
exports, global shocks, new technologies and trade policies; and

third, we have been able to sustain our economic success by developing
new exports and new markets.
let's
Now consider the more recent forces that have affected our exports and
their economic impact in greater detail.
Recent Experience: Three Phases
Phase 1: 1988-2002-Canada-United States Trade Liberalization
The Canada-United States Free Trade Agreement (CUSFTA), signed in 1988,
and the North American Free Trade Agreement (NAFTA), which came into effect
in 1994, continued the postwar trend in trade liberalization. Momentum at the
multilateral level under the GATT process had been slowing, and the two new
- 7 -
agreements were intended to maintain the pace at the regional level.7 They had a
major impact on our exports, which grew strongly in volume and as a share of
GDP (Chart 5).8
The agreements provided privileged access, and thereby increased exposure to,
the United States during the 1990s (Chart 6), when it was one of the
fastestgrowing economies in the world The 1990s was also a period when
(Chart 7).
commodity prices were relatively low and our flexible exchange rate adjusted
downward, which facilitated the expansion of the export of manufactured goods.
As a result, the share of our goods exports to the United States increased
steadily, from roughly 70 per cent in 1988 to just under 90 per cent in 2002.
Non-commodities led the way. Within non-commodities, machinery and
equipment experienced the strongest growth, while growth in motor vehicles and
parts, which account for the largest proportion of non-commodity exports, was
lower because trade in these goods had already been liberalized under the Auto
Pact (Chart 8). Energy exports also grew rapidly as these agreements helped
integrate the North American energy market. As a consequence, our exports
became more diversified throughout the 1990s.
Chart 5: 1988-2002-Exports grew strongly and as a share of GDP...
Real shares of GDP and real exports, year-over-year percentage change, quarterly data,
1986Q1-2016Q2
%
%
20 50
15
10 40
5
0 30
-5
-10 20
-15
-20 10
1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Real export growth (left scale) Total volume of exports relative to GDP (right scale)
Sources: Statistics Canada and Bank of Canada calculations Last observation: 2016Q2
...and Canadian exposure to the US
Chart 6: market grew
Nominal share of goods exports by principal trading partner, customs basis, quarterly,
1986Q1-2002Q4
%
100
100
CUSFTAa
NAFTAb
75 90
50 80
25 70
0
60
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
United States European Union Japan Mexico China Rest of world
a. CUSFTA = Canada - United States Free Trade Agreement b. NAFTA = North American Free Trade Agreement
Sources: International Monetary Fund Direction of Trade database and Bank of Canada calculations Last observation: 2002Q4
Chart 7: Over this period, the United States was one of the fastest-growing
economies
Nominal share of US merchandise imports over world imports and US GDP over world GDP,
annual data, 1980-2015
%
40
30
20
10
1980 1984 1988 1992 1996 2000 2004 2008 2012
US share of world goods imports US share of world GDP
Sources: International Monetary Fund Direction of Trade and World Economic Outlook databases,
Haver Analytics and Bank of Canada calculations Last observation: 2015
Chart 8: Within non-commodity exports, machinery and equipment
experienced the strongest growth
Real exports, index: 1986Q1=100, 1986Q1-2002Q4
Index
800
CUSFTAa NAFTAb
600
400
200
0
1986 1988 1990 1992 1994 1996 1998 2000 2002
Non-commodity exports excluding services Machinery and equipment
Motor vehicles and parts Consumer goods
a. CUSFTA = Canada-United States Free Trade Agreement b. NAFTA = North American Free Trade Agreement
Sources: Statistics Canada and Bank of Canada calculations Last observation: 2002Q4
Phase 2: 2002-08-Enter China
Shortly after the turn of the millennium, China joined the World Trade
Organization (WTO), which had a profound effect on global trade and on
Canada's
exports. While growth in export volumes slowed relative to the previous
period, the value of our exports, primarily commodities, increased substantially
(Chart 9).
China's
rapid development as an industrial and export powerhouse and its rapid
urbanization represented a large shock to the global supply of manufactured
goods for export. More importantly for Canada, the changes in China greatly
increased the global demand for commodities as inputs for the production of
manufactured goods and the construction of transport systems, housing and
other urban amenities (Chart 10).
The economic impact on Canada of these shocks was immense. Canada
benefited from the lower prices for imports from China-whose share of our
imports rose from under 4 per cent in 2000 to more than 12 per cent in 2015-
and from the higher prices for exports of commodities to China. The commodity
price increases in turn caused a rise in the value of the Canadian dollar
(Chart 11).
entry to the WTO increased the value
Chart 9: 2002-08-China's and
Canada's exports
slowed the volume of
Real shares of GDP and real exports, year-over-year percentage change, quarterly data,
1986Q1-2016Q2
%
%
20 50
15
10 40
5
0 30
-5
-10 20
-15
-20 10
1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Real export growth (left scale) Total volume of exports relative to GDP (right scale)
Sources: Statistics Canada and Bank of Canada calculations Last observation: 2016Q2
China's share of global resource consumption increased
Chart 10:
Percentage of global consumption
%
60
50
40
30
20
10
0
Petroleum Coal Aluminum Copper Nickel Zinc
products
2002 2008 2015
Note: The latest coal consumption data are for 2012.
Sources: World Bureau of Metal Statistics, US Department of Energy and Bank of Canada calculations Last observation: 2015
Chart 11: Movements in commodity prices and the value of the Canadian
dollar were closely linked
Quarterly data, 2000Q1-2016Q3
Index
Index
1972 = 100
1992 = 100
125 900
105 600
85 300
65 0
2000 2002 2004 2006 2008 2010 2012 2014 2016
Canadian-dollar effective exchange rate index (left scale)
Bank of Canada commodity price index (right scale)
Source: Bank of Canada calculations Last observation: 2016Q3
The sizable increase in commodity prices spurred the expansion of our
resourcebased industries and exports, particularly oil and gas. And the lower import prices
an improvement in Canada's terms of trade
and stronger export prices caused
and gross domestic income (GDI).9
However, the substantial appreciation of the dollar and a broader opening to
world trade among emerging-market economies (EMEs) led to significant
structural adjustments in what we exported and their destination.10 US import
demand was growing more slowly than global demand and Canadian exporters
Canada's share of US
lost US import market share.11 Between 2001 and 2009,
merchandise imports fell by more than 4 percentage points. We were competing
with China and other EMEs not just in the United States, but in markets all over
the world.
With these global shifts, Canadian goods exports once again transitioned. Our
share of exports to the rapidly growing EMEs increased significantly. Our exports
destined for China rose from 1 per cent in 2001 to just over 3 per cent in 2009.
And the share of exports destined for the "rest of world" (i.e., not the European
Union, Japan, Mexico, China or the United States) rose from 4 per cent in 2001
to 10 per cent in 2009.
Phase 3: 2008-16-The Great Recession and its aftermath
The strong global expansion of the 2000s came to a screeching halt with the
global financial crisis of 2008-09 and the resulting Great Recession. Global trade
and Canadian exports plummeted.
Given the magnitude of the economic downturn, this decline in global trade and
Canadian exports was not unexpected. What is now proving more difficult to
explain is the weak recovery in exports, especially non-commodity exports, since
2012
(Chart 12).
Chart 12: 2008-16-Canada's exports plummeted and have been slow to
recover in the wake of the financial crisis
Real shares of GDP and real exports, year-over-year percentage change, quarterly data,
1986Q1-2016Q2
%
%
20 50
15
10 40
5
0 30
-5
-10 20
-15
-20 10
1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Real export growth (left scale) Total volume of exports relative to GDP (right scale)
Sources: Statistics Canada and Bank of Canada calculations Last observation: 2016Q2
At the global level, trade has been held back by the slow recovery in demand,
particularly in the United States and other advanced economies.12 And the ratio
of trade to output at the global level has stopped increasing at the rate it had
been before the crisis. At that time, global trade was rising twice as fast as global
GDP and, more recently, the ratio has been essentially flat (Chart 13). A number
of explanations have been advanced to explain this shift, which are also relevant
Canada's recent export performance.
for explaining
First, the composition of global demand has changed. The share of business
investment, which is intensive in traded goods, has declined. A good part of
Canada's
slower-than-expected export performance can be explained by the
weak recovery in US business and residential investment. This pervasive
weakness in global business investment growth is also a challenge to
understand, but the most compelling explanations are the combination of
heightened uncertainty, especially about the profile for demand growth, which
has been compounded by political events, and elevated risk aversion on the part
of firms coming out of the Great Recession.13
Chart 13: Since the Great Recession, world trade has flattened relative to
GDP
Nominal goods imports and exports as a share of GDP, annual, 2000-15
%
80
70
60
50
40
30
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Canada World
Sources: International Monetary Fund, Haver Analytics and Bank of Canada calculations Last observation: 2015
The second explanation for the recent weakness in global trade growth is that the
pace of trade liberalization has recently slowed, if not reversed. Clearly, China
can join the WTO only once, as it did in 2001. However, since the crisis, the WTO
has recorded a troubling increase in the number of protectionist measures.14 For
Canadian exports, the most noteworthy concern being expressed by firms we
US "Buy
survey is about the American" policies.
13
For recent discussions of elevated risk aversion and heightened uncertainty, see A. Haldane,
Bank of England, "Stuck" (speech to the Open University, London, England, 30 June 2015) and
M. Carney, (speech at the Court Room, Bank of England,
"Uncertainty, the Economy and Policy"
30 June 2016). Other explanations include slower than expected trend growth, especially in
advanced countries, and a shift in these countries to production that is less intensive in traditional
forms of business investment in plant and machinery and equipment.
14
According to the WTO, from mid-October 2015 to mid-May 2016, the G20 economies applied
145 new trade-restrictive measures, or an average of almost 21 new measures per month. Since
2009, a total of 1,583 trade-restrictive measures were imposed by G20 countries. See Report on
G20 Trade Measures: Mid-October 2015 to Mid-May 2016, World Trade Organization, 21 June
"A New Balance Point: Global Trade,
2016. See also S. S. Poloz, Productivity and Economic
Growth" (speech to the Investment Industry Association of Canada and the Securities Industry
and Financial Markets Association, New York, New York, 26 April 2016).
The third global explanation is the diminishing impact of global value chains.
Improvements in logistics technologies promoted an increase in production
specialization and cross-border trade in intermediate inputs. The declining impact
is most clearly seen in China, which has started to move up the value chain and
produce intermediate goods domestically rather than import them.15
In terms of factors more specific to Canada that have held back our exports in the
wake of the Great Recession, the most important are related to our ability to
produce and export non-commodity goods, which represent about 60 per cent of
our exports since the financial crisis. The remainder is split between energy and
non-energy commodities.
Our goods exports were severely affected by the sharp decline in global demand
during the Great Recession. Our non-commodity goods exports were harder hit
than in any post-war recession, decreasing by about 17 per cent between the
third quarter of 2008 and the second quarter of 2009.16 A big part of that
decrease was the shutdown of a substantial portion of Canadian auto
production.17 In addition, from the peak in 2008 to the trough in 2010, the number
of exporters fell nearly 20 per cent, dropping by almost 9,000 firms.18
This shock to non-commodity exports exacerbated an ongoing trend, discussed
in the previous section, in which Canada was losing US market share, owing to
the appreciation of the Canadian dollar, relatively weak labour productivity growth
and the entry of new exporters. In our surveys, companies have also mentioned
deficient infrastructure, regulatory uncertainty and relatively high electricity costs.
All of these export competitiveness challenges suggest that our export shortfall
may be more persistent than previously believed.
While countries, most notably China, Mexico and other EMEs, have seen their
exports of non-commodities to the United States increase over the past 15 years,
Canada's exports have essentially remained unchanged in nominal terms
(Chart
14). The loss of US market share for our non-commodity goods exports was
particularly concentrated in motor vehicles and parts, in which Canada had been
historically strong.19
15
Canadian firms have also experienced a reduction in their use of imported intermediated
goods.
16
About one-quarter of the subsectors for non-energy goods exports (about 500 out of 2,000)
have registered export declines of more than 75 per cent since 2000. See A. Binette, D. de
Melanson,
Munnik and J. "An Update-Canadian Non-Energy Exports: Past Performance and
Future Prospects," Bank of Canada Discussion Paper No. 2015-10, October 2015.
17
peak to trough, Canada's auto sector saw a 70 per cent decline in production. See S. S.
From
Poloz, "Reconstruction: Rebuilding Business Confidence in Canada" (speech to the Oakville
Chamber of Commerce, Burlington, Ontario, 19 June 2013).
18
T. Macklem, "Global Growth and the Prospects for Canada's Exports" (speech to the Economic
Club of Canada, Toronto, 1 October 2013).
19
Forest products also lost significant market share. These losses were found to have taken
place over the 2002-14 period, although they were more rapid before and during the crisis. For
more details, see R. Barnett and K. Charbonneau, "Decomposing Movements in U.S.
NonEnergy Import Market Shares," Bank of Canada Staff Discussion Paper No. 2015-5, August 2015.
Chart 14: US non-energy goods imports from Canada have stagnated
relative to imports from other countries
Nominal US imports by country, annual data
US$ billions
2,200
2,000
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
2002 2004 2006 2008 2010 2012 2014
Canada Mexico China Other countries
Last observation: 2015
Sources: US Census Bureau, Haver Analytics and Bank of Canada calculations
These significant losses in US market share and the resulting decline in
productive capacity are compelling explanations for why the recovery in
noncommodity goods exports has been weaker relative to historical experience. In
particular, such losses have likely generated hysteretic, or very persistent,
adverse effects. In such circumstances, Canadian firms would have the incentive
to re-enter these export markets and incur the sunk-cost investments associated
with expanding productive capacity only when the outlooks for global and US
demand are much stronger than they are currently.20
With respect to commodity exports, commodity prices and our dollar declined
sharply during the Great Recession, but they both bounced back relatively
quickly, supported by the strong recovery in Chinese demand. This rebound in
commodity production and exports helped buffer the Canadian economy from the
worst of the recession.
However, this strong post-crisis recovery in commodity prices and exports helped
mask the effects on the Canadian economy of the slowing in global trade and the
losses in export capacity and export market share in the non-commodity sector.
The commodity price collapse in 2014 exposed these structural weaknesses,
which are now weighing heavily on the recovery of our exports.
The Commodity Price Shock and Prospects for Canadian
Exports
The drop in commodity prices and the associated depreciation of the Canadian
dollar ushered in a complex adjustment within the Canadian economy. As a
Canada's resource
result, the exporting landscape is transitioning once again.
sector is shrinking in economic importance as investment and employment shift
toward the non-resource sector. Our simulations suggest that commodity exports
could decline from the 2014 level of 50 per cent to roughly 40 per cent of total
exports by 2020.21
At the same time, the depreciation of the dollar (Chart 11) has helped the
adjustment process by boosting demand for Canadian non-commodity exports
and some domestically produced import-competing substitutes (Chart 15). For
example, exports of pharmaceuticals and medicinal products, furniture and
fixtures, and industrial machinery and equipment have grown strongly since the
depreciation began.
Chart 15: Real exports are expected to continue increasing
Billions of chained 2007 dollars, quarterly data
$ billions
$ billions
100 400
80 300
60 200
40 100
20 0
Services exports (left scale)
Commodity exports (right scale)
Non-commodity goods exports (right scale)
Sources: Statistics Canada and Bank of Canada calculations and projections
Last observation: 2016Q2
Prospects for Canadian exports
Looking ahead, Canadian exports will be underpinned by a US economy that is
gaining momentum. US growth will be driven by rising employment, household
income and private demand, although the composition of US demand is
projected to be somewhat less favourable for Canadian exports. Taking this into
consideration, the Bank revised downward, in its October Monetary Policy
Report, its growth projections, particularly for goods exports. We expect US
business and residential investment to grow more slowly than we had projected
earlier in the year. In addition, because goods exports have been soft-their level
is essentially unchanged over the past year-it is likely that structural factors,
including lost export capacity and competitiveness challenges, are having a more
pronounced impact. Our research on this issue is ongoing. Another relevant
factor is that although the dollar has depreciated against the US dollar in recent
Canada's export competitiveness
years, the improvement in is less than
expected because the currencies of competitors for US market share have also
experienced sizable depreciations, in some cases by more than that of the
Canadian dollar.22
We also know from past experience that our economy is flexible and can pivot in
new directions to enhance and diversify our export performance. So while we
have revised our projections for goods exports, we still see significant growth
prospects for the production and export of services. This is an important element
of our economic outlook. Financial, management, engineering, computer and
information, and travel and transportation services currently constitute about
15 per cent of our exports (Chart 16). Most notably, while the share of
manufactured goods in Canada's exports has been falling since
2000, the
services share has been rising.23 In particular, firms in the information technology
service sector, which sells business solutions, software and entertainment
services, are benefiting from strong foreign demand.24
The expansion of the production and export of services in Canada and other
advanced economies is driven by a number of developments, including the trend
toward outsourcing the provision of standardized services.25 Other contributions
22
This is reflected in the Canadian effective exchange rate index. See R. Barnett,
K. Charbonneau and G. Poulin-Bellisle, "A New Measure of the Canadian Effective Exchange
Rate," Bank of Canada Staff Discussion Paper No.
2016-1, January 2016.
23
This share is likely underestimated because of the difficulty in measuring services. For
example, official trade statistics do not count the services content embodied in manufactured
goods as services. See J. Palladini, "Good Service Is Good Business: How Services Add Value to
Goods Exports," Conference Board of Canada, September 2015.
Canadian
24
The results of the Bank's recent survey of firms in this sector can be found on our website. See
Fudurich and L. Suchanek, "The Digital
W. Dong, J. Economy-Insight from a Special Survey
with IT Service Exporters," Bank of Canada Staff Discussion Paper No. 2016-21, November
2016.
25
Outsourcing the provision of services is intrinsic to the nature of economic progress: as
economies and businesses grow and become more sophisticated, there are strong incentives for
firms to become more specialized in their core business lines. Services that were once produced
in-house are contracted out to companies that specialize in their production and can thus produce
them more efficiently. Good examples of services that can be out-sourced are payroll, accounting
and information technology.
to service exports include technological breakthroughs, especially those related
to the development of the web and the digital economy, and shifting tastes
toward services consumption as households become more affluent and spend a
larger proportion of their incomes on education, health and travel servic