December 2, 2013

18 straight months of Canadian trade deficits cry out for a solution

In September, the month-to-month pace of goods exports from Canada at +1.8% was faster than good imports, +0.2%, according to Statistics Canada. The net effect was to reduce the nation’s trade deficit with the world to $5.2 billion from $13.0 billion in August (both figures annualized).

The most recent recession brought about a dramatic change in Canada’s merchandise trade position. Prior to December 2008, the country recorded nothing but positive balances going way back.

In the 58 months since then, there have been 13 months with a surplus and 45 with a deficit. The most serious shortfall occurred in July 2012 at -$34.8 billion.

For the past 18 straight months, Canada has recorded only deficits.

Canada’s problem has been with countries other than the U.S. We have been continuing to run a surplus in the trade of goods with our closest neighbour, the destination for three-quarters of our exports and the source of two-thirds of our imports.

Most analysts believe that as the U.S. economy continues to improve, it will lift Canada’s overall trade position above zero again. But be aware that American customers are not as locked in as they might once have been.

The President’s press secretary, Jay Carney, in an effort to deflect attention from the woeful level of enrollments so far in Obamacare — due primarily to “programming” glitches, one hopes — was recently filmed in front of a chart showing that for the first time in two decades, U.S. domestic oil production has risen to meet net imports.

That means the U.S. is still importing about half of its overall crude requirements. But it’s a far cry from the kind of energy deficit that was prevalent not so long ago.

Two factors are contributing to the American improvement, a lowering in demand due to greater conservation (e.g., partly brought on by tougher controls on auto fuel emissions) and an increase in supply achieved by wide-spread adoption of “fracking” technology.

While Canada’s trade of goods is a larger component of gross domestic product (GDP) than our trade in services, a new report from Deloitte Consultants, >Passport to Growth, suggests that the latter warrants a look based on the positive impact it can have on the former.

The document is sub-titled: How international arrivals stimulate Canadian exports.

A major sub-component of the trade in services is international travel. Travel by Canadians out of the country has been rising faster than travel to Canada by foreigners.

(As a sidebar, it may seem counter-intuitive, but dollars spent by foreigners sojourning in Canada are treated as export sales. Funds spent by Canadians who are journeying abroad are tallied in the national accounts as imports.)

According to Deloitte, Canada as a destination spot has fallen from second place internationally (behind Italy) in 1970 to a current ranking of 18th among all nations. We’re particularly failing to tap into the enormous tourism potential from emerging nations.

Deloitte makes the case that Canada needs to “up its game” to attract more foreign visitors. Not only will this improve our net travel position in the services trade account, but it will also provide significant residual — or, as more modern terminology would have it, “knock on” — benefits in the sale of goods, with a lag period that can extend forever.

It has been found that tourists or business travelers to Canada return to their homes with a greater interest in our country and a desire to acquire tangible products.

Furthermore, when businessmen travel here, they are likely to meet our home grown talent and strike up a business relationship that is beneficial to both parties.

Therefore, the recent free-trade pact — The Comprehensive Economic and Trade Agreement (CETA) — that Ottawa signed with the 28-member European Union will have an important side benefit besides lowering tariffs across the board and raising quotas in some key areas.

It will also bring more European executives to our side of the Atlantic, where they will come under the spell of the “Canadian brand”, which isn’t — contrary to all suggestions by U.S. talk show hosts and American sitcoms — that we’re always polite. (Mayor Rob Ford, for one, is putting to rest the notion of Toronto the Good.)

Earlier in our history, encamped behind a wall of tariffs, Canada was often insular in its approach to the rest of the world.

Now, with both NAFTA and CETA, our producers have nearly 100% duty-free access to a consumer base of close to one billion people.

That’s quite a shift in philosophy. As far as official trade agreements go, Canada has become the most open nation in the industrialized world. The U.S. and Europe are only just beginning to negotiate trade liberalization measures.

How else might we attract more foreigner visitors? Deloitte advocates the following: spend more money in foreign markets on advertising and other means of promotion; appeal to a wider ethnic audience globally; and take steps to ensure that are international arrival terminals provide a smooth and welcoming experience.

There’s also one obvious change in government policy that is being promoted by a number of pundits in the media.

For a long time, Canada was too quick to grant refugee status to anyone who managed to cross our borders and chose to announce they were seeking asylum. This led to frequent instances of abuse.

The response by the governing Conservatives was to bring in a measure requiring that new arrivals from certain countries — targeting Latin America foremost — would henceforth need to undergo a fairly arduous visa application and submission process.

Politicians in Mexico, our other “buddy” in NAFTA, have been particularly incensed with this new approach.

Most recently, Ottawa’s identification and monitoring of true refugees has been greatly improved.

It’s time to listen to our Spanish-speaking (and Portuguese-speaking) friends and again ease their way to more numerous and less hassle-free visits.

For more articles by Alex Carrick on the Canadian and U.S. economies, please see his market insights. Mr. Carrick also has an economics blog.

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