Is Canada’s Economy Really Dependent on Trade?

“Canada is  one of the most trade dependent countries in the world.” It’s a refrain that we hear many times over from the political and business establishment in Canada. But is it true?  A little known article from the Globe and Mail explored this issue back in 2012 with surprising results:

It is relatively early days, but some economists are trying to develop a more useful measure of international trade. Among them is the Conference Board of Canada, which Thursday released the first of three reports based on what it calls “value-added trade.” The report should be required reading in Ottawa. Its conclusions challenge much of what we think we know about the nature of Canada’s economy.

Conference Board economist Maxim Armstrong explains the concept this way: “Conventional trade measures record the value of a good or service when it crosses the border. In contrast, value-added trade measures would record only the amount by which a good or service has increased in value while passing through a specific country.”

Canada is often described as a “small open economy” that is highly dependent on the vagaries of international trade. According to the Conference Board’s value-added analysis, that may not be so.

The value of trade shrinks for all countries when measured in value-added terms. But for Canada, the difference is more pronounced because it is one of the world’s bigger users of supply chains. Measured conventionally, trade represents 35 per cent of Canada’s gross domestic product, 17th among the world’s 30 largest trading nations, according to the Conference Board. Measured on a value-added basis, that figure drop to 24 per cent of GDP, which drops Canada’s rank to 20th. That’s hardly the measure of an economy dependent on trade. Mr. Armstrong offers that as an explanation for why Canada withstood the global recession better than many expected it would.

Canada’s reliance on trade with the U.S. is diminished in the Conference Board study. The U.S. remains Canada’s biggest trade partner, but it accounts for 62 per cent of exports, compared with 69 per cent when using conventional data.

The value-added method also puts a stronger emphasis on services because it attempts to break out what went into the unit value captured in customs data. The Conference Board report estimates that services account for 40 per cent of Canadian trade when measured on a value-added basis, compared with 16 per cent when calculated using traditional methods.