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Canada's State of Trade: Trade and Investment Update 2011

Executive Summary

In 2010, global economic activity continued to recover from the severe recession recorded in the wake of the global financial crisis. The economic upturn was sustained by monetary and fiscal policy stimulus measures. A prolonged inventory cycle supported the global economic recovery, as firms rebuilt their stocks in response to a more favourable global economic outlook. In addition, further normalization of global financing conditions and improvements in consumer and business confidence aided the recovery. Employment conditions gradually improved over the course of the year, following widespread job losses throughout the preceding two years. The overall improvement in the economic situation and the rebound in activity was accompanied by a strong recovery in world trade, particularly in the first half of the year.

In the second half of the year, the global recovery lost somemomentumin the light of waning support from the global inventory cycle along with the retrenchment of fiscal stimuli. Several countries also announced consolidation measures to address their precarious fiscal situations. As a result, global trade dynamics also slowed in the second half of 2010, with trade expanding at a slower pace than in the first six months.

However, the pace of the recovery was rather unbalanced across regions. In advanced economies, the pickup remained fairly modest. At the same time, the emerging economies experienced continued buoyant economic growth, particularly in Asia and South America, to lead the global recovery. This has accelerated the longer-term structural realignment in global economic activity in favour of Asia, notably toward the emerging economies of China and India.

For the year as a whole, world real GDP grew by 5.0 percent in 2010, up from a 0.5-percent contraction in 2009. The advanced economies posted economic growth of 3.0 percent in 2010, after having registered a decline of 3.4 percent the previous year. In contrast, the expansion was more robust in the developing economies, as growth accelerated to 7.3 percent last year, following a 2.7-percent increase in 2009.

Within the developed economies, the advanced economies of Asia fared the best as the Newly Industrialized Economies of Asia advanced by 8.4 percent, while Japan posted the fastest growth among the major advanced economies at 3.9 percent. The United States posted its strongest growth since 2005, up 2.9 percent in 2010 following a 2.6-percent decline in 2009. At the same time, the recovery across most advanced European nations was more subdued, with euro zone growth registered at 1.8 percent after a 4.1-percent decline in 2009. In the United Kingdom, growth in 2010 was even weaker, at 1.3 percent following a 4.9-percent contraction the previous year. However, Germany posted a stronger increase of 3.5 percent last year.

Growth in emerging Asia outpaced all other regions in 2010, led by China and India at 10.3 percent and 10.4 percent, respectively. The next fastest-growing region among the emerging economies was Latin America and the Caribbean. Growth in that region, which posted a 6.1-percent expansion in real output last year, was led by Brazil, which advanced by 7.5 percent. Sub- Saharan Africa avoided a contraction during the global recession of 2009 and grew rapidly last year, up 5.0 percent. The economic performance of the Commonwealth of Independent States region and that of emerging Europe were similar in 2010, with the former growing by 4.6 percent and the latter by 4.2 percent, while growth in the Middle East trailed all other regions, coming in at 3.8 percent for 2010.

In line with the recovering global economic situation, the pace of Canadian real economic activity rebounded in 2010, up by 3.1 percent after having suffered a 2.5-percent decline a year earlier. The economy began expanding in the second half of 2009 and posted growth in all four quarters of 2010. Output expanded in all provinces and territories in 2010. All major expenditure categories advanced, with the exception of net trade. Inflation remained subdued, at 1.8 percent for the year. Job growth resumed in 2010 after a setback in 2009. Job gains were widespread both regionally and sectorally, although not all regions or sectors posted gains. The national unemployment rate fell from 8.3 percent in January to 7.6 percent in December, averaging 8.0 percent for the entire year. Largely as a result of rising commodity prices, the Canadian dollar appreciated against all major currencies and ended the year above parity with the U.S. dollar.

After the sharpest recorded contraction in 2009, the volume of world trade rebounded in 2010 with the greatest recorded expansion, returning to its prerecessionary level. However, because of lower commodity prices in 2010 than in 2008 (e.g., crude oil), world merchandise exports remained 5.4 percent below their 2008 peak level, in U.S. dollar terms. Expressed in U.S. dollars, Canadianmerchandise exports to the world grew at the same pace as overall world exports, or by 22 percent in 2010. At the same time, Canadian exports of services grew at nearly double the pace of world services exports—15 percent versus 8 percent. However, these metrics are based on data converted into U.S. dollars and they include the effect of the appreciation of the Canadian dollar against its U.S. counterpart.

In Canadian dollar terms, Canadian exports of goods and services to the world rebounded by 8.7 percent in 2010, with goods exports ahead by 9.5 percent and services exports up by 4.4 percent. On the imports side, imports of goods and services rose by 9.2 percent, as goods imports advanced by 10.4 percent and services imports were up by 4.0 percent.

Overall, Canadian exports and imports of goods and services to and from all major markets increased in 2010. Gains in goods and services exports were led by Japan, the EU, and the United States, with advances of 10.5 percent, 10.4 percent and 8.8 percent, respectively. For imports of goods and services, the advances were led by the rest of the world and Japan, with imports up 12.8 percent and 9.4 percent, respectively.

By sector, most of the advances in goods exports were recorded for industrial goods and materials, automotive products, and energy, while exports ofmachinery and equipment, other consumer products, and agricultural and fishing products fell. In contrast, imports were up across the board. Services exports and imports were up in all major categories, except for exports of government services and imports of commercial services. Canada traditionally runs services trade deficits for travel, transportation, and commercial services and a surplus for government services; however, in 2010, the country posted its first trade surplus for commercial services.

The appreciation of the Canadian dollar against the othermajor currencies caused substantial downward revaluations of Canadian direct investment abroad in 2010, lowering the value of direct investment holdings abroad by $35.5 billion. Thus, despite the net acquisitions and the strong investment in existing affiliates during the year, there was an overall 0.7-percent decrease in the value of Canadian direct investment abroad last year. At the same time, foreign direct investment inflows into Canada picked up in 2010, and increased the stock of inward direct investment in Canada by 2.6 percent. Notwithstanding these movements, the stock of Canadian direct investment abroad still exceeded that of foreign direct investment in Canada.

Special Feature: The Evolution of Global Value Chains

A key structural change in the global economy in recent decades has been the rising importance of global value chains (GVCs). It is increasingly rare that a good or service is completely produced in one location and then the final good exported to the end consumer in another. Rather, value chains are fragmenting with different stages being performed in different jurisdictions based on cost competitiveness. For example, design and research could be conducted in one place, the assembly done in another with parts coming in fromaround the world, and the entire process managed from a third, all to serve a global market. This implies growing trade, particularly in parts, but also in services, as well as increased flows of people, ideas, and investment.

The factors driving the growth in GVCs are not completely understood, hence it remains unclear whether or not the impact of GVCs will continue to grow, or stagnate— or even decline. Claims that GVCs have arisen due to declining transportation costs and improving information and telecommunications technologies (ICTs) have not yet been substantiated. Indeed, recent research indicates that the current rise of the GVC may be less influenced by the costs of transportation in a traditional sense, andmore by the increased speed of transportation. This argument is supported by evidence showing that a growing share of trade, particularly in intermediate inputs, occurs by air—a fast, yet relatively expensivemode of transportation. Likewise, the role of enhanced ICTs in trade remains unconfirmed. Other key factors, which include declining tariff rates and the opening to trade of a large portion of the global economy, may be more significant and, more importantly, under the control of policymakers.

Three trends are increasingly associated with the rise of the GVC: outsourcing, offshoring, and inshoring involve the movement of production activities out of a firm, out of a country, and into a country, respectively. Despite the prominence that they receive in themedia, according to recent evidence, offshoring and inshoring are relatively rare occurrences. Furthermore, they tend to balance each other out when they are used. Offshoring of low-skill activities benefits Canadian companies and workers by increasing their productivity and competitiveness, which in turn translates intomore and better-paying jobs for Canadians. Evidence also suggests a corresponding net movement into Canada of a number of key high skill activities. The extent to which Canada can prosper within the rapidly changing global economic landscape will depend on Canada’s ability to create an economic environment that attracts and retains high value-added activities aimed at improving the standard of living for all Canadians.