Canada is not a true innovation nation, merchandise exports data show

TORONTO—Canada, we have a problem. The latest data on merchandise exports reinforces the point that Canada is not a true innovation nation. We have great innovators and entrepreneurs, but this is not translating into great companies that can be great exporters. This is the national challenge facing the Trudeau government: how do we create innovative businesses with high-paying jobs that can profitably produce products and services that the rest of the world wants to buy? Exports in March fell to the lowest level since January 2014. And we can’t blame it all on falling oil and natural gas prices. Excluding energy, exports were down nearly five per cent from a year ago. Canada is not competitive in world markets with high costs and weak productivity and too few products and services that find eager buyers. We are not paying our way in the world. A country that runs consistent trade deficits has to finance those deficits either by selling domestic assets to foreigners, or by increasing foreign debt, or by lowering the exchange rate and making people poorer. A country can also use returns from its overseas investments to help. At some point, these solutions are no longer sustainable—the cost of servicing foreign debt becomes too high, a country runs out of assets to sell, and talented people will leave a country that relies on a steadily falling exchange rate. Canada has insufficient foreign investment to make big difference. To pay its way in the world in the past, Canada relied first on promoting oil and other raw material exports while hoping prices would be high, and by looking to a low dollar and a growing U.S. economy to sustain manufactured exports. This has made Canada a derivative economy, dependent on the U.S. for growth, largely in commodities and semi-processed or intermediate products. There are, to be sure, exceptions. But, fundamentally, we are a mid-range supplier economy to the U.S. and free trade with the U.S. hasn’t changed that. But these days this is not enough. Oil and other commodity prices are low. In manufacturing, other countries, notably China and Mexico, are crowding Canada out of the U.S. market. In addition, the U.S. economy is not growing that fast. As Statistics Canada reports, Canada’s trade surplus with the U.S. in March was the lowest since December 1993. Overall, for the first three months of this year, Canada has a trade deficit of $6.6-billion, suggesting this could be another trade deficit year—Canada has run a merchandise trade deficit each year for the four previous years, aside from 2014. Canada is not at a crisis point though it could be in the next decade if we don’t change. Canada is at the point where it urgently needs to determine its longer-term future strategy. Can Canada sustain its economy by promoting oil exports and relying on a low dollar for manufactured products and services? We possibly could, but this would sustain a country stuck with few gains in incomes; it would not sustain a prosperous country. What we need to figure out is how we create a much more competitive tradable goods and services sector in our economy—this is the wealth-creating sector that is essential to sustain our standard of living and, in the process, enable us to meet the rising health care and other costs of an aging society. This is why the government’s innovation strategy will be so important. Simply signing free trade agreements won’t cut it. As Canada-U.S. free trade and NAFTA have shown, free trade does not make an economy more competitive. In the case of the U.S., Canada’s productivity gap has widened significantly since the free trade agreement was signed, the opposite of what proponents claimed would be the major benefit. In fact, proponents argued that the free trade agreement with the U.S. would significantly narrow the productivity gap and improve the competitiveness of Canadian companies, not only in the U.S. It would also turn Canadian companies into world traders, we were told. This has not happened. But it has made it easier for U.S. companies to close Canadian plants and serve the Canadian market from the U.S. or Mexico. In looking to future opportunities, the government’s innovation strategy will have to consider the transformative technological changes underway in the world today, the Fourth Industrial Revolution. We are at the start of a full-scale robotics revolution, machine-learning and artificial intelligence, a world of algorithms where more internet traffic will be machine-to-machine rather than today’s domination of the internet by human communication, the Internet of Things. The strategy will also need to recognize that global competition will become more intense as countries compete for exports, jobs, and investment, and as the U.S., Germany, China, and India, as well as Mexico and Brazil, invest to gain advantage in higher-value industries. The most recent trade figures show that Canada is not well prepared. We run trade deficits with most of the world, aside from the U.S. and Britain. Our businesses have not been investing for the future—business spending in research and development has fallen over the past decade while investment in machinery and equipment, aside from the oilsands, has been stagnant. This is not the profile of a business sector energized by the animal spirits of capitalism. Rather, it is the profile of a risk-averse business sector focused on cost-cutting instead. This is the challenge for the government’s promised innovation strategy. We don’t need boastful words about how great Canada is, but a credible and realistic strategy to realign the Canadian economy for a much more competitive world. David Crane can be reached at crane@interlog.com. The Hill Times