Remarks by Tiff Macklem
Governor of the Bank of Canada
Canada-UK Chamber of Commerce
September 10, 2024
London, UK
Rewired, recast and redirected: Global trade
and implications for Canada
Introduction
The last time a Bank of Canada governor spoke to the Canada-UK Chamber of
Commerce it was 2018. My predecessor, Stephen Poloz, spoke to you about low global
interest rates, the steady reduction of inflation risks and the successful conclusion of the
North American trade negotiations. Brexit was in motion but not yet a reality.
How the world has changed in just six years.
pandemic, Russia's unprovoked invasion of Ukraine, and
The a global battle against
inflation have altered the economic landscape. Concerns about national and economic
security are changing trade, investment, and business decisions. Accelerating
digitalization, particularly artificial intelligence (AI), is creating new competition for
economic power. Geopolitical tensions are shifting economic relationships, and
industrial policy is making a comeback.
In my time with you today, I'll talk about how trade is changing in response to these
I'll
forces, both globally and for Canada. also discuss what international financial
institutions and the Bank of Canada can do to safeguard stability and prosperity as the
global economy shifts beneath our feet. While there are many uncertainties, one thing
looks clear: international trade will be different in the years ahead. Canada needs to be
ready for the opportunities and the disruptions.
The benefits of open trade
As World War II was ending, allied nations created the Bretton Woods institutions-the
International Monetary Fund (IMF), the World Bank and what would eventually become
the World Trade Organization (WTO). They wanted to avoid the protectionism and
instability of the Great Depression. And they believed economic cooperation, including
open trade, was the best way to sustain peace and build prosperity.
For roughly the next 65 years, rising global trade and economic growth went hand in
hand. Open trade brought specialization, innovation and economies of scale. It drove
investment, efficiency and productivity. For consumers, open trade increased selection
and lowered prices. Trade spurred income growth across countries, lowered global
poverty and raised standards of living.
Trade grew faster than GDP until about the global financial crisis in 2008-09.1 Now,
some think we've entered a new period of "deglobalization." Others see it as a
slowdown in globalization-a "slowbalization." The enormous disruptions caused by the
pandemic make the recent trend hard to discern, but there's no question global trade
growth has at least slowed (Chart 1).
That's
a big concern, especially for open economies like Canada and the United
Kingdom.
To some extent, a slowdown in global trade growth was inevitable. Once tariffs were
substantially reduced and most economies were participating in global markets, the
potential to expand trade by lowering tariffs further and including more countries
became more limited.
But recent events have exacerbated this slowdown. New global tensions have added
trade frictions between competing countries. Public and political support for open trade
is also waning, in part because the benefits have not been evenly shared. We've all
benefited from a wider selection of goods and services at lower prices. But when
lowcost importers undercut domestic producers, workers who lost their jobs lost more than
they gained. With changing economics, new security threats, and waning support,
global trade is being rewired, recast and redirected.
Trade is being rewired by shifting international economics. China is no longer the
lowest-cost global supplier of consumer goods. Production of many manufactured
goods is moving elsewhere. As China moves up the value chain, it's competing more
invasion
directly with advanced economies. At the same time, the pandemic, Russia's of
Ukraine, geopolitical conflict and climate change have all made supply chain resilience
a greater priority, even at the cost of efficiency.
Trade policy is being recast to encompass national and economic security and to foster
leadership in strategically important industries. Trade and industrial policy are being
used to make the supply of critical inputs more secure and protect and promote
domestic production in key industries.
Globally, trade is being redirected by import and export restrictions, tariffs and conflict.
Trade in high tech is constricted by geopolitical concerns. The shift to cleaner growth is
accelerating trade restrictions on raw materials needed for green energy. Climate
change and conflicts threaten food security, prompting export restrictions on key
invasion of
staples. And Russia's Ukraine has led to a multilateral expansion of the
scope and reach of economic sanctions.
How does an open economy like Canada best navigate this changing trade landscape?
That's a big question, so let me break it down into some manageable bites.
Trends in global trade
There are three global trends to highlight. First, global trade growth has slowed, and this
slowdown is concentrated in advanced economies. Second, the growth we are seeing in
trade is fragmenting as China's
trade is shifting from goods to services. And third, role
changes. In sum, trade routes and trade partners are shifting, and the implications for
our prosperity could be significant.
Let me take each of those in turn.
Advanced economies are driving the slowdown in global trade
First, trade growth in advanced economies has slowed in the last decade, and this has
pulled down global trade growth. But trade by and between emerging and developing
countries has continued to grow (Chart 2).
"more
WTO Director-General Ngozi Okonjo-Iweala believes trade has entered a new,
inclusive" which she calls
phase, "reglobalization." Over 25 years, the share of global
trade among developed countries has declined, while the share among developing
economies has more than doubled.2 As Dr. Okonjo-Iweala has stressed, preserving
open trade is critical to raising incomes in developing economies and narrowing the gap
with more advanced countries.
Services trade is picking up as goods trade slows
The second trend is that trade in services is picking up, even as goods trade is slowing.
Globally, goods trade is a much bigger piece of the pie-more than three times larger
doesn't fully
than trade in services. So strong growth in services offset weak growth in
goods. But trade in services is gaining share.
Since about 2000, growth in services trade has outpaced goods, though the impact of
the pandemic skewed both (Chart 3). Global demand for goods soared early in the
pandemic when we were all stuck at home. Then when economies reopened,
consumers turned to services, particularly all the ones we'd missed during
lockdowns.
But the pandemic may have also provided a more durable boost to trade in services.
Because customers had to be served digitally during lockdowns, businesses invested in
digital delivery, adding to supply along with demand. Increasingly, exporters deliver
services through computer networks-via the internet, apps, emails, voice and video
calls, and digital intermediation platforms. Trade volumes for commercial services have
risen about 20% since 2019. Remote training, teaching and management services have
risen sharply, as have financial and travel services.
And digitalization continues-especially as AI creates new services and changes the
they're
way delivered. Whether growth will continue at this rapid pace is an open
question, but the seemingly vast potential of digitalization suggests future growth in
trade will tilt to services.
Global relationships are shifting
The final global trend is the shift in global relationships. China is a big part of that story.
Its exports have moved up the global value chain, and geopolitical tensions are altering
key relationships.
Rising wages, increased expertise and deliberate government policy have all pushed
China is now the world's
China into higher-tech electronics and advanced products.
biggest exporter of broadcasting equipment, computers, solar power and electric
batteries. Its electric vehicle (EV) industry is the largest in the world, with over half of
global production.3
These advances have sparked concern that Chinese technology could both displace
local industry and compromise national and economic security. The United States has
banned the use of some Chinese products and restricted the exports of leading
technologies to China. Other countries, including Canada and the United Kingdom,
have taken similar actions. In May, the United States announced it will quadruple its
tariffs on Chinese EVs to 100%. Canada is following suit. The European Union is also
applying higher tariffs on EVs.
But the increased use of trade restrictions is much broader than China (Chart 4).
Trade restrictions increased sharply around the world starting in about 2018. So did
industrial policy to bolster domestic players against imports and respond to security
concerns. Security risks are real and need to be addressed, but it is important they not
become a pretext for inefficient protectionism.
Trade is also being rerouted as businesses try to diversify supply chains and find
friendlier partnerships.4 But the combination of more trade restrictions and shifting trade
routes means supply chains have actually gotten longer-with products detouring
through other countries such as Vietnam instead of going directly from China to the
United States.5
Fragmentation has economic costs. Businesses have to focus on national security and
geopolitical uncertainties, not just efficiencies and productive partnerships. The IMF
estimates that costs of trade fragmentation could range from 0.2% to 7% of global
GDP.6 But costs go beyond trade-and the losses are unlikely to be distributed evenly.
The loss of knowledge spillovers, high-tech partnerships, critical imports and capital
flows affect low-income economies in particular. The potential for trade and innovation
to continue to lower global poverty will decline.7
in Canada's trade
Trends
So those are the global trends. In many ways, Canada is a microcosm of these global
shifts. Our overall trade growth has slowed in recent years. Our export growth has been
coming increasingly from services. And global fragmentation is presenting new
challenges and opportunities.
Slowing trade growth
Canada is a very open economy. Over the last decade, trade as a share of GDP has
been about two-thirds-the second highest in the G7 and the fourth highest in the G20.
We rely on exports for roughly one-third of our income. Imported components feed our
industry, and imported final goods and services improve the lives of Canadians.
The United States is, by far, Canada's biggest trading
partner-accounting for roughly
75% of Canada's
exports. Thanks in part to the Canada-US Free Trade Agreement in
1989, and updates in the years following, Canada and the United States benefit from
the largest bilateral trade relationship in the world Our biggest exports to the
(Chart 5).
United States are oil and gas, and motor vehicles and parts.
4
L. Alfaro and D. Chor, The Looming 'Great Reallocation',"
See "Global Supply Chains: paper prepared
for the Jackson Hole Economic Policy Symposium: Structural Shifts in the Global Economy, August 24-
26, 2023. Jackson Hole, Wyoming: Federal Reserve Bank of Kansas City.
5
"Mapping the realignment of global value
H. Qiu, H. S. Shin and L. S. Y. Zhang, chains," Bank for
International Settlements Bulletin No. 78 (October 3, 2023).
6
These are long-term costs estimates. See G. Gopinath, "Geopolitics and its Impact on Global Trade and
the Dollar," (speech delivered to the Stanford Institute for Economic Policy Research, Stanford, California,
May 7, 2024) and Aiyar et al. (2023).
7
See Aiyar et al. (2023).
- 8 -
But our trade agreements go well beyond the United States: in total, Canada has 15
trade agreements covering 51 countries and about two-thirds of world GDP.8 Together,
these agreements cover 1.5 billion consumers worldwide.
Canada's
But even with this broad market access, growth in exports has slowed over
it's
the past 10 years. The pandemic obscures the overall trend, but clear that goods
Canada's
exports have not kept up with economic growth in two biggest markets-the
United States and the European Union (Chart 6).
8
The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) is a free trade
agreement in place between Canada and 10 other countries in the Indo-Pacific region: Australia, Brunei,
Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam. On July 16, 2023, CPTPP
members signed an Accession Protocol with the United Kingdom. The Canada-European Union
Comprehensive Economic and Trade Agreement is a bilateral agreement between Canada and the
European Union. The agreement covers virtually all sectors and aspects of Canada-EU trade with the
goal of eliminating or reducing barriers.
- 9 -
The slowdown is fairly widespread. Production and exports of machinery and
equipment, motor vehicles and other non-energy goods have not expanded in more
than a decade.
Increasing strength in services
we've seen
Just as globally, where we have seen growth in Canada is in exports of
services. As goods growth began to stall around the time of the global financial crisis,
growth in services exports picked up (Chart 7).
Canada's
As in other countries, digital delivery has helped drive services exports-
particularly computer, management and financial services, as well as research and
development (Chart 8).
That plays to Canada's strengths, including our
highly educated work force. Since 2019,
real exports of commercial services have grown 17%, adding more than $15 billion to
real Canadian GDP.
Global fragmentation
Canada is somewhat insulated from the third global trend-fragmentation-because so
much of our trade is with the United States. But shifting supply chains present risks as
well as opportunities for Canadian business.
At the start of the millennium, Canada had the biggest share of US goods imports, at
about 20%. By 2017, China had the largest share, and Canada had fallen to third place.
As the United States finds new partners to supply the goods it once got from China,
Canada is starting to reassert itself. In the first quarter of 2024, Canada was the
second-largest source of US goods imports after Mexico, and exports were ticking up.
Navigating the future
That brings me to the challenge ahead. The trade landscape is shifting. How should
Canada respond?
We need to seize opportunities to secure our place in a rewired trade system. We need
to be effective at the international table to influence how trade is recast and redirected.
And we have to manage the shocks that are bound to come.
Smart regional trade
Fortunately, geography and history have given Canada significant advantages in global
trade. With the Canada-United States-Mexico Agreement, we have a strong relationship
with the biggest and richest market in the world-which sits right next door. Despite the
shifting trade winds, 77% of Canadian goods exports still flow to the United States. And
Canada is also the number one export destination for the United States, and the largest
destination partner for 32 of its 50 states. The continued success of this trade
relationship is in the interest of both countries.
Beyond the United States, Canada has strong market access around the world, thanks
won't
to the trade agreements I mentioned earlier. But holding our ground be enough.
We need to build better relationships, produce the products people want to buy, build
and maintain the infrastructure to get those products to market, and boost our
productivity to compete globally.
is Canada's
The Canada-UK relationship is an important one. The United Kingdom
We've made
third-largest trading partner, with two-way trade of more than $50 billion.
progress toward a bilateral trade agreement. But sticking points remain-and until they
are resolved, too many goods and services will remain outside the competitive,
tarifffree supply chains we've established with other economies.
There are benefits to
getting this done for both our countries.
Canada needs to be able to sell the products people want. We are a stable, responsible
and technologically advanced energy producer. Our auto sector is globally competitive.
And we have new and emerging areas of strength, including in green technology and
electricity.
To leverage these strengths, we need to invest in trade infrastructure and reduce trade
barriers so that integrating Canada into the North American value chain is more
attractive for businesses. This includes investing in our electricity grid and transportation
infrastructure. And businesses need to invest in new equipment and innovation to be
globally competitive.
As trade is recast for security or strategic reasons, Canada is a trusted and reliable
trading partner. Canada is not going to be the cheapest alternative. But we have a
highly skilled labour force, reliable energy and transportation networks and solid
financial institutions. Moreover, Canada has a stable democracy and strong rule of law.
And we provide a reliable and important voice at the global table.
Effective multilateral institutions
That brings me to our second priority. We need to invest in effective multilateral
institutions-they are more important than ever in this fragmented world. And they will
be only as effective as members want them to be.
It has never been easy to attain international economic cooperation, and open trade has
the trends I've just outlined increase the
come under particular pressure. But urgency.
Our common interest is shared prosperity. We all benefit from a stable, open,
rulesbased global order. We need to build it, protect it, adapt it and ensure the benefits are
shared.
don't just happen. They need good
Effective and legitimate multilateral institutions
governance, adequate resources, talent and inspired management. Canada has long
invested in the Bretton Woods institutions. We have a strong voice at the IMF and
Financial Stability Board (FSB). We know the value of an effective WTO that can serve
as a forum for negotiations, act as an arbiter of disputes and monitor the implementation
of trade agreements. As Canada assumes the G7 presidency in 2025, we have a
responsibility to lead difficult discussions. That includes trade, global financial stability
and mitigating climate change.
As central bankers, our particular focus is the IMF, the FSB and the international
monetary order. We need to be sure that the international monetary and financial
system is up to the task and is integrated with the other parts. The fundamentals of
economics have not changed, but the need for resilience and agility has increased with
changing economic circumstances.
Managing disruption
Finally, Canada needs to be ready for the trade disruptions that seem inevitable amid a
doesn't set trade policy. But we need to
changing trade landscape. The Bank of Canada
understand shifts in global trade because they affect lives and livelihoods, and they
drive costs and inflation.
Conclusion
So let me conclude with the implications for monetary policy.
The rapid globalization through the 1990s to around the global financial crisis
significantly reduced the prices for many globally traded goods. This contributed to a
lower cost of living for many households. Going forward, with globalization slowing, the
cost of global goods may not decline to the same degree. All things equal, this could put
more upward pressure on inflation.
Trade disruptions may also increase the variability of inflation. The pandemic taught us
a lot about supply shocks and how they can affect the volatility of prices. Supply chains
are complicated, and shocks affect inputs and outputs in different ways. And while
supply shocks are historically transitory, they can persist-and accumulate. We also
learned that when the economy is already overheated, disruptions to supply can have
an outsized effect on inflation.
doing to ensure we're prepared for
So what is the Bank of Canada the supply shocks
that come with trade disruptions? We're investing in data and analysis to better
We're
understand supply chains, especially at the global level. updating our models to
use scenarios when periods of uncertainty make central forecasts less reliable. And
we're
using more microdata to track and understand the consequences of trade and
industrial policy.
But even with a better understanding and better information, trade disruptions may
mean larger deviations of inflation from the 2% target. Supply shocks present central
banks with a difficult trade-off-monetary policy can't stabilize growth and inflation at the
same time. That means we have to focus on risk management, balancing the upside
risks to inflation with the downside risks to economic growth.
Most importantly, we must avoid adding uncertainty to an already uncertain
environment. That means ensuring inflation is low, stable and predictable even as
global trade is being rewired, recast and redirected.
Thank you.