Diversification: In Vogue Again

We never learn, do we? When that big basket of ours seems like the best thing going, what do we do? We put all of our eggs into it – or most of them, anyway. Seems like it happens over and over again: when things are going well with our top client, we put our full weight into serving them. When it’s the big thing we do in our economy – like energy, other resources, a key manufacturer – we really love the good times, and they distract us from the other things we do, or could be doing. And there’s always that critical international client, which in the case of the Canadian economy is the US market. Then when something goes wrong, invariably we say, “We should have diversified!”

Well, the ‘D’ word is back in vogue. US anti-trade talk has turned into action, and has a lot of Canadian exporters worried. The Trans-Pacific Partnership was one of the Administration’s earliest casualties, and NAFTA renegotiation is now on the August 2017 docket. Individual industries have alternately been in the crosshairs: the new President took early aim at the auto sector. Expiry of the Softwood Lumber Agreement fell into the Administration’s lap, and it hasn’t missed an opportunity to talk tough. Canada’s dairy industry has also been singled out as a target. Attacks on trade may become a tax on trade that is perhaps the most damaging overall proposal to date. Without concrete policies to react to, business on both sides of the border is in a quandary, not quite sure how to strategize.

Ideas are flying fast, and one of them is the old stand-by, diversification. Canada remains highly exposed to the US market, which under normal conditions would be a great thing. Growth stateside is setting the pace for the developed world, and new and exciting developments suggest an upswing that can be sustained for a number of years. Current Canadian export activity reflects this – growth in international shipments of our merchandise has risen at an annual rate of over 18 per cent since June of 2016, and the US market is a key driver of the activity. With that now at risk, exporters are looking at other markets as a form of sales insurance. What are the prospects?

Just in time, Canada is inking the CETA agreement with Western Europe. Sure, Brexit has raised a key existential question for the EU, but it seems that nobody over there is actually giving up on trade mechanisms. First, the dependency is so high. Second, anti-trade parties seem more recently to be losing elections. And third, Britain is doing all it can to secure the trade relationships it already has, and to ink even more agreements. Key Canadian exporters, like the agri-food and auto industries and others besides, stand to gain from the deal, which seems bound to diversify Canada’s trade among developed economies.

What about fast-growing emerging markets? Here, Canada is already on the move. In 2000, we shipped just 5 per cent of our goods to emerging markets. By 2008, it was 12 per cent, an extraordinary increase over such a short span. Emerging market woes in recent years haven’t rolled this back: the share hit 13 per cent in 2013, and has held steady since. The bulk of this – 86 per cent – is in three markets, China, Mexico and India, respectively, but others are also rising at a torrid pace.

The diversification runs deep. All of Canada’s provinces are participating. Saskatchewan is a standout, head and shoulders above the rest. British Columbia is also impressive, with 25 per cent of its goods headed for the emerging world. It has also seen the most progress since 2000, rising from an initial share of just 8 per cent. Ontario was the least active in emerging markets in 2000, and has only moved up one spot since. In contrast, Quebec went from being below the national average to slightly above by 2016.

All industries are also more into the emerging world than they were back in 2000. Top of the heap is the agri-food sector, while the auto industry is a notable laggard. The most improved? It’s actually hard to pin down. Resource exports show well, but higher-valued exports are generally keeping up.

The bottom line?

Diversification is not just a good idea; it’s alive and well in Canada. Increased emphasis on this in the coming months and years may well see the rate climb. Given superior emerging market growth, it’s also likely to happen organically. It should boost the bottom line, and the predictability of sales.

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