Climbing Down the Value Ladder

There’s a shockingly honest and accurate article about Canada’s deteriorating trade performance in today’s Globe and Mail by Barrie McKenna.

It notes that Canada’s trade balance improved dramatically in November (almost completely closing October’s $1.5 billion).  However, it cited some Bay Street economists lamenting that this was for the “wrong reasons”: namely, a sharp slowdown in Canadian spending and hence imports as 2010 drew to a close (more evidence that the “recovery” hit a brick wall).  [It should be noted also that even with a smaller merchandise trade imbalance, Canada maintains a huge current account deficit due to a large services trade deficit and outpayments of profits on foreign investments here.]

More interesting was the fact that the mainstream economists cited in the article are now publicly recognizing what we on the left have been arguing for at least five years: there is a strong trend toward the deinudstrialization of Canadian exports, with a growing reliance on unprocessed or barely processed resources (especially petroleum), and a decline in exports of higher-tech value-added products (like automotive products, machinery, and others).

As TD Bank economist Diana Petramala put it, “We’re not diversifying [trade] with value-added goods, which isn’t the way to achieve long-term success in trade.”  Couldn’t have put it better myself.

This climb back down the value-added ladder is no coincidence.  It directly reflects the impact of free trade agreements and a laissez-faire approach to industrial policy (or, in more modern terms, “sector development policy”) on the part of Canadian governments over the past two decades.  Clearly, Canada’s “comparative advantage” (in static, market language) rests in digging stuff out of the ground and shipping it to others for value-added processing.  So if we leave all the decisions about investment and development to those market forces, that’s exactly what we’ll get more of.  And if we’re not satisfied with that particular pigeon-hole (for obvious reasons), then we’d better be prepared to intervene powerfully.

For detailed arguments from the left about the renewed resource-dependence of Canada’s trade and its dangers, see the Sector Development chapter of last year’s Alternative Federal Budget, or my article in #82 (2008) of Studies in Political Economy (titled “Staples, Deindustrialization, and Foreign Investment: Canada’s Economic Journey Back to the Future”), or my chapter in the CCPA book edited in 2008 by Teresa Healey, titled The Harper Record.