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The Progressive Economics Forum

Hewers of Minerals, Drawers of Oil and Gas

Yesterday’s International Merchandise Trade Annual Review from StatsCan confirms the Mel Watkins thesis that Canada is rapidly reverting to its historical role as a commodity producer for the global economy.

From 2002, the Canadian dollar began to appreciate rapidly against the US dollar (and Asian currencies tied to the US dollar) in response to a commodity price boom, itself mainly driven by demand from the new growth pole of global capitalism in developing Asia.

Between 2002 and 2006:

– The share of resources in Canadian exports (industrial goods and materials, agricutural and fishery products, energy and forest products combined) jumped from 45.3% to 53.7% – with all of this gain accounted for by higher exports of energy (mainly oil) and industrial materials (mainly minerals and mineral products.) (Forestry is in such a dismal state that the phrase hewers of wood has become a poor way to describe our state of staples dependency.) Correspondingly, there was a decline in the share of machinery and equipment products in Canadian exports , from 23.4% to 20.9% of the total (despite a fairly healthy aerospace sector) and auto’s export share plummeted from 23.3% to 18.0%. Consumer goods make up a negligible 4.0% of our exports.

– Our traditional deficit in the trade of manufactured goods (defined as machinery and equipment, auto and consumer goods combined) has exploded, from $22 Billion in 2002 to $49.5 Billion (in current dollars.) The ratio of manufactured imports to manufactured exports has jumped from 1.1 to 1.25 – meaning that we now import $1.25 worth of manufactured goods for every $1 of manufactured exports. Given that we are negligible producers of consumer goods, the future evolution of that ratio will depend critically on maintaining a strong aersopace and telecom sector, and halting further deterioration of the fast-worsening auto trade balance.

– The surge in the manufacturing trade deficit corresponds very closely to an explosion in Canada’s trade deficit with developing countries, especially in Asia. Between 2002 and 2005, the US share of Canadian imports fell sharply, from 72% to just 65% of the total. We currently (2006) run a $27 Billion trade deficit with China (imports of $34.5 Billion minus just $7.7 Billion of – mainly commodity – exports) and a $12 Billion trade deficit with Mexico (imports of $16 Billion minus just $4.4 Billion of exports) . (As an aside, it’s time to re-think the whole “North American economy” metaphor of Canada as a US economic appendage when our economy is in fact dis-integrating from the US in two senses – we are less trade- dependent than in 2002 as nominal exports and imports have both fallen as a percentage of GDP, and our trade has shifted sharply away from bilateral to multilateral trade.)

So, what’s wrong with all of this? Well, the explosion of the manufacturing trade deficit is clearly the major driving force behind the loss of about 250,000 above average pay and productivity jobs, while the commodity boom is failing to replace them with jobs of comparable quality. As shown in the latest CIBC report on Canadian Employment Quality, job growth in low pay industries has been far outstripping job growth in high pay industries since 2002. And then there is the modest matter of exploding regional differences, with the new growth pole largely confined to BC and Alberta as industrial Ontario and Quebec languish. And some of us are inclined to worry about putting so many of our economic eggs in the the inherently unstable and environmentally destructive primary oil and gas sector.

Meanwhile, the dominant economic wisdom seems to be that the Canadian economy is booming and that there is nothing to worry about. The challenge is to make the case for a Canadian industrial and trade policy to actually shape how we participate in a changed global economic order.

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Comment from <![CDATA[Dr. Pangloss]]>
Time: May 9, 2007, 7:52 am

It is a bit unnerving isn’t it? I had suspected, as others, that the cheap $ Canadian following on free trade might have simply provided an artifical boost to central Canada’s manufacturing sector and once gone we’d reverted to our “historic” role of resource harvesters. We seem to have. With Ontario & Quebec becoming hallowed out it should be interesting to watch federal tax revenues start level out and then fall.

Comment from Nonny Moos
Time: July 10, 2007, 9:14 pm

Going back to resource selling? Isn’t that what Trudeau and some before him tried to reverse? Somehow the name of that great classic on Canada “From Colony to Nation” keeps coming back to me hauntingly renamed “From Colony to Nation back to Colony”.
The advantage of the former colonial master was that mother England was far across the sea and not just right next door.

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