The yr is coming to an finish, and never a second too quickly. I’m certain most of us can’t wait to show the web page on 2020 and COVID-19. The pandemic has touched everybody, and the hardship has been extreme for a lot of. A few of you’ve misplaced family members. Others have misplaced jobs or companies. And all of us miss our household and associates, particularly right now of yr.
For months, we’ve questioned once we can get again to one thing approaching regular. I want I may very well be in Vancouver delivering this speech in individual and listening to about your issues straight. Sadly, the time for face-to-face conferences has not but come. However we may be collectively just about, and I thanks for the invitation to talk with you at present.
The current constructive information on vaccines gives some reassurance that extra regular actions can resume someday later subsequent yr. Nonetheless, the trail from right here to there appears tough. A second wave of COVID-19 is sweeping throughout a lot of the nation, resulting in renewed restrictions. These will weigh on financial development early subsequent yr and improve the pressure on Canadian households and companies.
I don’t need to downplay these difficulties. However at present, I need to look past this second wave and give attention to a essential piece of our financial restoration—commerce. Up to now, family spending has led the best way. However for the financial system to completely get well, it must be firing on a couple of cylinder. To be sustainable, the restoration should broaden to incorporate exports and, with this, enterprise funding.
As a result of all of us have to raise our spirits as we head into the vacation season, I need to finish the yr with some cautious optimism. My message is that exports and enterprise funding might bounce again from this recession extra rapidly than they did after the worldwide monetary disaster. However for this to occur, all of us have some work to do.
Permit me to start out by wanting again a decade to the restoration from the worldwide monetary disaster to match how commerce was evolving then with how it’s evolving now. I’ll present you what’s at stake with a strong export restoration. And I’ll shut with some ideas on how we will enhance the percentages of bringing this about.
The worldwide monetary disaster pummelled the world financial system again in 2008 and 2009. However Canada fared comparatively effectively due to our sturdy monetary system. Our recession was shorter and shallower than in most different economies. However our exports had been hit arduous—certainly, more durable than most. That’s due to our shut ties with the US, which was the epicentre of the disaster. Whereas international exports fell by lower than 20 %, Canadian exports fell by near 30 %.
As is often the case in recessions, demand for items was notably affected. Canada swung from having a big commerce surplus in items to a small deficit. (Chart 1).
Canadian exports started to get well instantly after the disaster, however the rebound stalled. Weak international demand, notably from the US, was holding exports again. However that wasn’t the entire story.
Financial institution of Canada researchers spent numerous time dissecting these disappointing exports and zeroed in on two basic points: geography and competitiveness. Two-thirds of Canada’s underperformance was blamed on geography—who we commerce with. Canadian export markets had been concentrated in mature economies with comparatively sluggish development, resembling the US, slightly than faster-growing emerging-market economies, largely in Asia. The rest of this poor efficiency was tied to an absence of competitiveness: unit labour prices in Canada had been larger than elsewhere due to sluggish productiveness development and the impression of a stronger forex. Canada’s regulatory regime and funding local weather had been additionally cited as impediments.
Now let’s have a look at how this previous expertise compares with at present. Whereas the interval main as much as the worldwide monetary disaster was constructive for commerce, the interval earlier than the pandemic was something however. Commerce disputes arose between the US and a number of other different economies, together with Canada, the European Union and notably China. These disputes led to escalating tariffs and pervasive uncertainty about international coverage. Financial institution researchers estimated that these components mixed would scale back international output by greater than 1 %—that’s greater than $1 trillion—by the top of 2021. On this setting, it’s no marvel corporations had been reluctant to take a position to develop their export capability.
One other distinction between these crises is that, this time, commerce in providers has been affected far more than commerce in items (Chart 2). The impression on providers was barely seen throughout the international monetary disaster, whereas providers fell together with items in 2020. And general, providers haven’t recovered, whilst items have rebounded.
Think about worldwide tourism exports, that are important to British Columbia. Tourism has mainly come to a full cease. Canadian schooling exports have additionally been hit by the pandemic. When a international scholar involves Canada to check, the schooling counts as an export of schooling providers. Earlier than the pandemic, this was a big and fast-growing exercise. In 2019, instructional providers exports had been virtually $14 billion, a rise of 67 % from 2015.
The disproportionate impression of the pandemic on commerce in providers has vital implications for Canada. Providers exports are solely a few quarter of the scale of products exports. However providers exports had been rising far more rapidly than items exports earlier than the pandemic (Chart 3).
Whereas many providers exporters will battle till a vaccine is extensively out there, some items exporters have been in a position to adapt security protocols and bounce again rapidly. Motorized vehicle and elements output, for instance, got here to an virtually full cease within the spring. Since then, the sector has regained practically the entire misplaced floor as factories tailored their worth chains and manufacturing processes.
The speedy rebound in items exports is actually encouraging. By October, the worth of products exports had recovered virtually 90 % of the loss seen within the spring. If struggling providers exporters can hold on till a vaccine is extensively out there, Canada’s export efficiency might keep away from the serial disappointment of the interval that adopted the worldwide monetary disaster and assist cement a sustainable restoration.
In fact, that is not at all assured. The rebound in items exports might fizzle out as corporations end rebuilding inventories, whereas extended hardship might pressure many providers exporters to shut their doorways. And the underlying competitiveness challenges which have restrained export development over the previous decade haven’t gone away. Extra just lately, the Canadian greenback has been appreciating, largely reflecting a broad-based depreciation of the US greenback. That is hurting the competitiveness of Canadian exporters in our largest market.
Two eventualities for commerce
The place does the commerce story go from right here? Let’s think about a few believable eventualities: one pessimistic, one optimistic.
Within the pessimistic state of affairs, the worldwide unfold of COVID-19 fuels anti-globalization sentiment and a continued rise in protectionism. This isn’t far-fetched. A current Ipsos ballot discovered vital assist amongst Canadians for measures that might make the nation much less reliant on worldwide commerce. The identical ballot discovered a lot much less assist for measures that might assist Canadian corporations export extra. That is troubling as a result of worldwide markets are important for Canadian corporations to realize aggressive scale of their operations and since Canada advantages from imports in lots of essential methods.
Within the pessimistic state of affairs, we additionally fail to diversify our commerce or enhance our competitiveness. Rivalry and mistrust between the US and China thwart our efforts to develop export markets in Asia. Funding stays weak, and our productiveness development continues to lag. What’s extra, new market entry for our power merchandise doesn’t come on stream, holding again Canada’s means to ship our primary export—oil. And with out that market entry, funding in cleaner oil-extraction applied sciences dries up. The underside line is that exports fail to rebound, and commerce doesn’t change into a dependable engine of development.
Within the optimistic state of affairs, many of those identical forces break the opposite means. The sturdy rebound in world commerce now we have seen up to now continues, and the protectionist forces which have dominated lately start to fade. Unprecedented worldwide cooperation to develop new vaccines and provide them throughout borders proves to be a potent demonstration of the advantages of globalization. That success shifts public opinion. Governments begin to knock down the tariff partitions they’d begun to construct, and uncertainty lifts as governments recommit to a rules-based buying and selling order.
Within the optimistic state of affairs, efforts to diversify markets for Canadian exports begin to bear fruit. Canada’s productiveness improves on account of elevated funding and the deployment of recent applied sciences, which boosts the financial system’s competitiveness. Canada and the brand new US administration cooperate on a North American method to power and local weather change. Canada’s oil and gasoline sector advantages from entry to markets. And we begin to see an built-in continental method to enterprise alternatives from low-carbon development. On this state of affairs, we see a resurgence of commerce and enterprise funding, which bolsters the financial restoration.
The stakes are excessive. Utilizing one of many Financial institution’s financial projection fashions, Financial institution economists estimated the impression of two eventualities which can be much less excessive than those I’ve simply described. Of their optimistic state of affairs, Canada’s commerce steadiness could be greater than $30 billion higher by the top of 2024 than it might be in any other case. This could roughly eradicate our present commerce deficit. However of their pessimistic state of affairs, exports would truly drift decrease slightly than get well, decreasing incomes, whereas our present commerce deficit would worsen by about 60 % (Chart 4).
In actuality, the end result will most likely fall someplace between the 2 extremes. Clearly, all of us hope that actual life seems nearer to the optimistic state of affairs than the pessimistic. However hope just isn’t a technique. We have to suppose strategically to extend the percentages of a powerful commerce restoration.
Markets for our merchandise
Enterprise leaders and policy-makers every have essential roles to play. They should work collectively to leverage, broaden and deepen international markets for Canadian merchandise.
Because of the signing of the Canada-US-Mexico Settlement, the Complete Financial and Commerce Settlement with the European Union, and the Complete and Progressive Settlement for Trans-Pacific Partnership, Canada already has a number of the greatest market entry on the earth. Additional, now we have quite a few bilateral commerce offers in place. The enterprise group and governments throughout Canada have to work collectively to leverage these market alternatives.
The enterprise group can capitalize on this market entry by investing in folks and in productive capability. We all know Canada has an extremely numerous workforce—folks have come from across the globe to dwell right here, bringing their international connections and data with them. And we’ve seen clear proof that shifting populations can drive commerce. Good corporations can leverage Canada’s workforce benefit to construct international markets for his or her merchandise.
Corporations may also look to international provide chains for development alternatives. Provide chains are trending towards extra regional networks round main international commerce hubs. World corporations put money into the resilience of their provide chains by way of diversification of suppliers or manufacturing places, and thru digitalization and automation. Canadian corporations have to seize these alternatives to be a part of the answer.
As policy-makers and enterprise leaders, now we have the accountability to elucidate the significance of rules-based commerce. We have to push for a renewal of the spirit of internationalism that served so many international locations effectively for many years. And we have to guarantee that the advantages of open commerce are shared pretty inside and throughout economies.
With COVID-19 accelerating the digital financial system, guidelines for digital commerce and competitors are extra essential than ever. This additionally highlights the pressing want for a concerted, internationally coordinated effort to enhance the power to measure the digital financial system. It is a precedence for Statistics Canada, however far more work stays, and success would require cooperation throughout international locations.
Merchandise for our markets
As a lot as geographic diversification stays essential, it’s not going to be straightforward or occur rapidly. So, let’s have a look at this one other means. We do have to develop new, fast-growing markets for our merchandise, however we additionally have to develop new, fast-growing merchandise for our markets. We’ve to develop and scale up manufacturing of high-value items and providers that we will export.
The BC financial system provides some main examples of how this method can work. On the providers aspect, there are many success tales in Vancouver—the place the world’s first business quantum laptop was constructed and now the house of one in all Canada’s most essential expertise hubs. Exercise in these hubs is driving sturdy development in exports which can be as straightforward to ship to South Africa as they’re to Seattle. Canadian exports of knowledge-intensive providers resembling analysis and growth, laptop and data providers, and mental property grew by near 12 % over the previous three years (Chart 5). It’s clear that digital providers—together with e-commerce, on-line schooling and software growth—will likely be an essential a part of the way forward for commerce. So will different BC specialties, resembling online game manufacturing and animation studios.
The pandemic can also be accelerating development in different expertise providers. Docs and hospitals are discovering new methods to make use of expertise to supply well being care just about. With the explosion of distant workplace work, there are super alternatives in areas resembling cyber safety, cloud computing and the event of digital workplaces. Given the worldwide nature of the pandemic, advances within the digital financial system can extra simply change into scalable, fast-growing exports.
We’ve additionally seen numerous BC corporations innovating by making use of new expertise in conventional items sectors. Suppose forestry. We all know the trade is underneath strain from long-term provide constraints. However corporations are adapting. As a substitute of losing bark, wooden chips and sawdust, corporations are turning these into bioenergy. Canada is now the world’s second-largest exporter of wooden pellets—a pretty gasoline alternative for coal in energy crops. The mass timber trade gives one other instance. The 18-storey Brock Commons Tallwood Home on the College of British Columbia’s campus, which makes use of structural wooden to exchange many of the metal and cement, is a shining instance of how Canadian innovation and know-how can create new high-value and sustainable merchandise from our pure sources. Yow will discover related examples throughout different sectors resembling mining and agriculture.
Lastly, I need to point out one other alternative that can also be a power for British Columbia—renewable power and different inexperienced applied sciences. This consists of clear power manufacturing, items resembling photo voltaic panels, and providers resembling design and building. Vancouver is residence to one-quarter of Canada’s clear expertise corporations, with revenues of about $3.5 billion final yr. The export potential of inexperienced expertise is apparent, given international issues about local weather change.
Profitable in international markets
That brings me to my last subject, which is Canada’s means to compete and win in international markets. We gained’t be capable to totally capitalize on our alternatives except we take steps to enhance our productiveness and competitiveness.
Companies have the main position to play right here. Funding in productivity-enhancing equipment and gear is significant. So is a dedication to analysis and growth and to always practice and re-skill staff.
A number of components contribute to enterprise funding choices. However proper now, the Financial institution of Canada has given ahead steering that borrowing prices are going to be low for a protracted whereas, and there’s mild on the finish of the tunnel as vaccines roll out. This appears an opportune time for corporations to have a look at how they choose the speed of return on potential investments—the so-called hurdle price. Taking a longer-term method to capital funding might unlock a myriad of viable development alternatives.
Coverage-makers, for his or her half, can assist by eradicating boundaries to enterprise funding and impediments to development of smaller corporations. Let me point out three areas of focus.
First is the continuing have to take away obstacles to interprovincial commerce. This comes up repeatedly within the Financial institution’s conversations with enterprise leaders. Over the previous 9 months, the provinces and the federal authorities have demonstrated super cooperation in coping with the pandemic. Suppose what we might obtain if that very same spirit of cooperation was utilized to eradicating boundaries to the motion of products, providers and professionals throughout provincial borders.
A second space of focus is infrastructure. Exporters will stay reluctant to take a position if the infrastructure to get their merchandise to market doesn’t exist. Canada has made some progress right here. The LNG plant being inbuilt Kitimat is one notable instance that may assist our power exports sooner or later. Nonetheless, extra must be performed. I met with leaders of a variety of logistics corporations final month. They shared their issues about bottlenecks, notably at ports. Quick-growing exports want dependable transportation infrastructure, together with environment friendly, high-capacity ports. And I do know that each the Port of Vancouver and Port of Prince Rupert are engaged on main capability expansions. That is encouraging. Boosting our export capability additionally requires constructing the data and knowledge infrastructure wanted to compete in a digital world.
A 3rd space of focus is folks. Our greatest asset is a well-educated and numerous workforce. For the previous 4 years, the insurance policies and attitudes of the US administration helped make Canada look extra engaging to college students and employees, giving us a bonus. With the incoming US administration, Canadian colleges and firms could must battle more durable to draw and retain expertise. However being a welcoming nation stays an essential benefit, and immigration creates financial capability. We have to give attention to guaranteeing that Canada maintains a well-educated, multinational workforce to draw international funding, resulting in elevated exports.
It’s time for me to conclude.
The financial restoration from the pandemic is at a really tough stage. Close to time period, rising COVID-19 infections will dampen development and will even deepen our financial gap. Uncertainty is elevated, and the restoration goes to be lengthy and uneven.
Nonetheless, there may be room for cautious optimism that worldwide commerce will get well extra rapidly from the pandemic than it did from the worldwide monetary disaster, and Canadian companies should be prepared. For the reason that preliminary shutdowns final spring, commerce has bounced again sooner than many economists had predicted. Latest worldwide surveys counsel executives count on commerce to be sturdy in 2021. And the information of efficient new vaccines places a extra sure timeline on the resurgence of world demand.
There isn’t any single path to stronger exports, and as enterprise leaders, that you must resolve on the perfect methods to maneuver your organization ahead. These embrace investing in new markets and merchandise and enhancing your aggressive place. As a rustic, we have to leverage the broad commerce entry now we have and work with like-minded international locations to foster a renewed spirit of open, rules-based commerce that works for the 21st century. We additionally have to take away boundaries to funding and different obstacles that preserve Canada punching under its weight in international markets.
Take into consideration the alternatives and picture the chances. Canada has dynamic enterprise leaders with good concepts, and Canadian companies have responded to the pandemic with ingenuity. We even have a various, well-educated workforce and vital international market entry. The Financial institution of Canada has pledged to assist the funding local weather by conserving borrowing prices low till financial slack is gone. Collectively, we will safe a resurgence in exports, broaden the restoration and put the financial system on a sound, sustainable path.
I want to thank Patrick Alexander, Calista Cheung, Daniel de Munnik, Lena Suchanek and Ben Tomlin for his or her assist in making ready this speech.