Canada in the World Economy

Why Should I Care?

The world you know is globalized. It was not quite that way before. What goes on in Asia affects you more than ever. For example, a strike in a Chinese manufacture in August, can affect the supply of toys in Montreal in December. Explain that to a 5-year-old. 

This Lecture Has 5 Parts

• Globalization and Free Trade
• Protectionism
• World Trade Governance
• The Open Economy
• The Quebec Economy

What about Canada in the World Economy?

The world is entering a phase of de-globalization. Or is it? What is going on with the world? The advent of pandemics, the re-emergence of a hot-war scenario with Russia, and questions about China's allegiances pose major threats to international trade as it has been developing since the 1990's.

Trade brings us goods we can’t produce here like coffee beans we can’t grow. But we also import things we could make here because it’s not really “worth it”. Unfortunately, open trade has taken away some jobs. Quebec has a very open economy, so trade issues directly affect our prosperity.

Trade is also a way to share ideas. Economists are now studying the knowledge spillovers associated with imports. When you import a good, you get to see what other people have crafted, you see their solutions, their innovation. And it inspires people to make goods as well. Trade has lots of ramifications.

• Globalization and Free Trade

In the past decades, we have seen political and technological changes that encouraged globalization, that is free trade between countries of the world. After World War II, European politicians believed free-trade would reduce the possibility of war. They have thus reduced trade barriers, such as quotas and tariffs.

At the same time, new technologies changed the transport costs of everything, including shipping, trucking, flying, and sending information. This allowed for a revolution to occur in international business, allowing flows of capital across national borders like never before.

Free Trade is a policy of eliminating barriers to trade such as import quotas, tariffs, and differences in regulations. Its opposite is called protectionism.

To analyze trade, economists categorize products into three categories, according to our competitive advantages in production.

Absolute Advantage:
Products for which our production costs are the lowest in the world. This is generally because we hold an abundance of the primary inputs, such as minerals (oil, gold) or labour. This also includes cultural goods which cannot be made abroad, such as traditional music.

No Advantage:
Products for which other countries produce at much lower costs. Usually this is because the product is impossible to produce here, such as coffee, or because the partner holds an abundance of resources (ex: cheap labour in China).

Comparative Advantage:
Products for which our costs may or may not be clearly lower than in other countries. However, these are what we do better. This category covers all sorts of manufactured goods and services. (Ex: Regional airplanes)

Economists agree we should export products for which we have an absolute advantage, if we are producing more than our needs.

Economists also agree we should not insist on producing things for which we hold no advantage. If our costs are much higher than in a foreign country, let it go. Clothing and toys are no longer produced in Canada, but in Asian countries, for that reason.

Two exceptions: Military goods such as tanks and ammunition will notmay be importedrestricted from foreign countries who are not considered allies, for national defense reasons. Also, each country willmay produce as much of its own agriculture as possible,it deems necessary, for food security reasons. Military and Food industries are thus excluded from almost every trade agreement.

Most economists also agree that trade grows competition between countries and thus improves both the quantity and quality of goods. There may be growing pains when an economy opens itself up, such as structural unemployment. This is when some industries cannot compete with new foreign competitors.

Debate: Diversity vs Specialization

Some economists argue we should specialize in goods even if we have only a relative or comparative advantage. Our opportunity cost is greater if we diversify. This is Ricardo’s Comparative Advantage Theory.

Other economists argue that over-specialization towards one export industry makes an economy vulnerable to variations in foreign demand. Also, local diversity of production is more than compatible with free trade, and that this generates higher rates of economic growth. Evidence of this is that the wealthiest economies tend to be both very open and highly diversified.

Canadian economist Dan Ciuriak from the Centre for International Governance Innovation, writes that "diversification should be seen as a basic principle guiding economic development policy, alongside (and arguably given much greater heed than) the traditional concept of comparative advantage." In a country that is heavily specialized in natural resource production, as we will see later, this advice may not be getting all the attention it deserves.

Dan Ciuriak, fellow, CIGI

Economists do not always agree, but they do agree that more trade grows competition and thus improves the quality and the quantity of goods. Few economists would argue for less trade, and heavily protectionist measures.

• Protectionism

More and more, some countries want to protect their local producers from cheap imports. There are a few ways to do this.

First, you can block the imports using regulations. A simple – and controversial – way to do this is to outlaw the imports. Another way is to find safety, or environmental reasons, to regulate the foreign competition out of your market. Yet another method is to impose ownership rules on producers, so that 51% of the stock is owned by nationals. This is done in Canada for telecommunications companies, and airlines.

Second, the protectionist government can impose a tariff: a tax on imports. This is probably the oldest kind of tax in the history of mankind.

Third, the state can fix a quota: a limit in the quantity of the good that can enter the country. Once the quota is attained, the market is closed.

Fourth, the state can use its tax revenues to subsidize its local producers. We do this in the milk industry, and the oil industry, amongst others.

Some economists have noted that most of our “free trade” agreements include so many exceptions, especially in the areas of military procurement, farming, and culture, that the trade is not actually “free”. However, these agreements do tend to reduce protectionism.

• World Trade Governance

Globalization has been criticized because opening up trade with poor countries can hurt some of our industries here in the West. Also, human rights and labour rights are not recognized in many poor countries of the world. However, trade can help to create wealth in poor countries. Our consumers also seem to have become more aware of the social impact of their spending. The question remains, should we govern trade?

The answer has been yes. Trade policy is set by each country, usually by the Minister of Trade and the civil servants of this department. In Canada, provinces such as Quebec may also have trade policies, but they don’t set import quotas and tariffs, which are a federal responsibility. Provinces can affect trade by using environmental and safety regulations, or by encouraging exporters through diplomatic trade missions abroad.

The political trend in the past decades has been to reduce trade barriers. But some barriers remain, and the largest countries of the world have agreed to create a set of international organization govern trade.

The World Trade Organization (WTO) prepares free-trade negotiations, and settles trade disputes between countries. Membership is voluntary, but the big countries are all members, China being a late addition. Canada has lost many of its disputes, notably between Bombardier, and Brazilian rival Embraer (now owned by Boeing).

The International Monetary Fund (IMF) is an economic policy research agency that is supposed to help countries regain macroeconomic growth, and pay back their international debts. The objective of the IMF is to maintain the stability of the international monetary system. It has been criticized for its poor track record, its intransigence and its preference for drastic austerity measures.

The World Bank is the money-lending sister organization of the IMF.  Much of the funds come from Wall Street and London’s City banks, which the World Bank coordinates as financial syndicates. The objective of the World Bank is to reduce global poverty.

The United Nations (UN) is not a trade governance institution per se, but its mandate to maintain world peace is seen as a very useful contribution to world trade.

Dr. Joseph Stiglitz on Trump and Protectionism

• The Open Economy

An economy that trades a lot is considered “open”. We measure this by a ratio of exports to GDP. Canada is very open. Almost half, or 38 %, of our GDP is exported. Only Germany, Norway and the Netherlands are more open than us. Our main export partners are the United States of America, China, Europe, Japan, and Mexico (top 5).

Canadian export trading partners

Partner Country	Exports M CA$	Percent	N. 1 Product	N. 2 Product	N. 3 Product
United States	414,750	75,9%	Oil (97 B$)	Automobiles	Aluminum
China	23,609	4,3%	Paper Pulp	Oilseeds	Automobiles
United Kingdom	17,695	3,2%	Gold	Non-Ferrous Metals	Aeroplanes
Japan	11,831	2,2%	Coal	Pork	Oilseeds
Mexico	7,853	1,4%	Oilseeds	Steel	Oil
Total All Countries	546,711	100,0%	Oil	Automobiles	Gold

All figures are for 2017 (Statistics Canada).

As you can see in the table above, the USA dominates trade with Canada. Their thirst for oil is very important, and we arguably have some of the world’s largest reserves of oil, in the form of tar sands. Our trade with Europe is dominated by the UK’s appetite for gold. The rest of the world is basically buying our other products such as farm production (oilseeds and pork), metals (iron, steel, aluminum and others), and airplanes (Bombardier CRJ and other models).

Canada’s wealth of natural resources implies a weakness in locally manufactured goods, such as automobiles and trucks, pharmaceuticals, computers, telecommunications equipment, as well as clothes, toys, machines, and aerospace parts.

This affects our dealings with our main import partners, which are the USA, China, Mexico, Germany, and Japan. Essentially, Canada has diversified it’s imports of automobiles, which used to mostly be imported from the Big-Three Detroit carmakers (GM, Ford, Chrysler). Canada now imports many cars made in Mexico (VW, Ford, GM), Germany (Audi, BMW, Mercedes), and Japan (Toyota, Honda, Nissan, Mazda).

Along with other trends, this means that our USA imports have been falling over time. We export 126 billion dollars more to the USA, than we import. In 2017, only half (51.3%) of our imports come from the USA. This has led to a trade dispute with US President Donald Trump’s administration.  

Canadian import trading partners

Partner Country	Imports M CA$	Percent	N. 1 Product	N. 2 Product	N. 3 Product
United States	288,028	51,3%	Automobiles	Oil	Aerospace
China	70,929	12,6%	Computers	Telecom. Equip.	Telephones
Mexico	35,492	6,3%	Automobiles	Trucks	Computers
Germany	17,940	3,2%	Automobiles	Pharmaceuticals	Aerospace Parts
Japan	17,521	3,1%	Automobiles	Turbines	Gold
Total All Countries	561,114	100,0%	Automobiles	Oil	Pharmaceuticals

Where does China fit in to all this? Before the year 2000, China was barely part of Canada’s top 10 trading partners. China’s position is growing every year. It now represents 12.6 percent of our imports. We are still importing toys and dolls from China, but that trade has expanded to cellphones, telecommunications and computers. This has shifted electronics production away from Japan and the USA, towards China.

Not only is China producing for Apple and Google, but its national cellphone brand Huawei is now being marketed directly in North America, it has even sponsored the NHL playoffs on Canadian television. Overall, Canada is in a trade deficit with China, but the low price production we get seems to be well worth the relationship.

What about Europe? Canada is obviously very close historically, politically and culturally to Europe. Air Canada flies multiple-daily to London and Paris, as do British Airways, and Air France, to Toronto and Montreal. Canada’s long been an importer of French wines and Scottish Whiskey, but these markets are still relatively small.

Historically, it’s worth pointing out that the aerospace industry is intimately tied to British corporations such as Thales, and Rolls Royce, as well as the now defunct AV Roe, and De Havilland airplane builders.

This being said, the needs of today are very particular. The UK massively buys gold from Northern Ontario, 12 billion dollars’ worth in 2017, out of the 17 billion exported by Canada that year. Other exports to Europe are mostly Aerospace products and parts, iron ore, non-ferrous metals, and pharmaceutical products.

In terms of imports, most of them come to Canada from Germany, in the form of pharmaceuticals, luxury cars, and aerospace products and parts. Note that Germany is home to large engineering-based corporations such as Bayer, Mercedes, and Airbus. You might not be surprised that Germany has a leg up on the UK and France in terms of high-quality manufacturing.

Is Canada being so open a good thing? It mostly is. Exports are often seen as a positive flow of money coming into the country. In simple terms, imports are viewed as a negative, they are subtracted from GDP. But notice most open economies have almost as many imports as they do exports. That is a good thing because an economy needs the best and most affordable imports to become a better producer, especially in the manufacturing sector. Imports often bring in better machinery, and better materials, which help your economy reduce its production costs.

On the down side, being open increases vulnerability to foreign demand shocks, and limits the impact of expansionary fiscal policy. When foreign buyers reduce their purchases, your economy is sent into a quick recession. It may be hard to get out of it, since your government intervention is not as effective. Lower taxes should help to increase consumer spending and this should create jobs. But, if the spending is on imports such as Chinese electronics or German cars, the jobs created won’t be located in our country.

• The Quebec Economy

Quebec is an active, open economy, but it is in fact very different from Canada. Here are a few numbers to think about. In 2017, Quebec’s GDP was 328.7 billion dollars. That represents 19 % of Canada’s GDP. In comparison, Quebec represents 23% of Canada’s population.

Most of Canada’s production is located in the provinces of Ontario, Quebec, Alberta, and British Columbia. The remaining six provinces and three territories only provide 12.6 percent of GDP.

GDP in Canadian Provinces, 2017

Province	M $	Share
Quebec	328 688	19,0%
Ontario	651 932	37,6%
Alberta	304 709	17,6%
British Columbia	228 195	13,2%
Rest of Canada	218 812	12,6%
Canada	1 732 335	100,0%

Source: Statistics Canada, CANSIM Table 36-10-0402-01

Although Quebec would be ranked 101^th in the world for its population (8.3 million), it would be ranked 33^rd for it’s economy (2016 PPP GDP per capita). At 37,888 $US, Quebec’s GDP per capita is lower than many countries such as Liechtenstein, USA, Japan, Germany, UK and France. But it is still greater than many industrialized countries such as Spain, Portugal, Greece, and Russia. As most industrial economies, Quebec produces mostly services. The goods producing sector is highly diversified.

Mining:
Aluminum, copper, gold, iron ore and titanium. Also many non-metals such as clay, lime, cement and asbestos.

Forest:
Major producer of timber, lumber, paper.

Energy:
Major producer of hydroelectricity. Burgeoning wind farms. No oil, gas, or coal.

Transportation:
Major producer of regional jets and private jets. Also producer of railroad and subway trains, and some shipbuilding.

Quebec’s economy is highly open, 51 percent of its GDP is exported. That would place it third most open in the world behind the Netherlands and Norway, and higher than both Canada and Germany. Less than half of Quebec’s exports are sold to other Canadian Provinces (39 %).  (Same for imports)

Export goods:
Airplanes, airplane engines, and airplane parts, Aluminum, Iron Ore, Electricity, Turbines, Paper and Newsprint, Copper, Circuit boards, Pork.

Quebec's export trading partners

Export Partners	Exports M $CA	Share	N. 1 Product	N. 2 Product	N. 3 Product
United States	60 160	70,5%	Aluminum	Aerospace	Non-Ferrous Metals
China	2 856	3,3%	Paper Pulp	Pork	Aerospace
Mexico	1 755	2,1%	Aluminum	Steel	Aerospace
France	1 693	2,0%	Iron Ore	Aerospace	Turbines
Japan	1 363	1,6%	Pork	Iron Ore	Aerospace
All Countries	85 296	100,0%	Aerospace	Aluminum	Non-Ferrous Metals

Source: http://www.stat.gouv.qc.ca/statistiques/economie/commerce-exterieur/exp1008.htm

Similarly to the rest of Canada, Quebec’s main trade partner is the United States (70.5 %), which buys mostly aluminum, aerospace products and parts, and non-ferrous metals such as copper and zinc. China is increasing its purchases from Quebec every year, mostly in Paper pulp, pork, and aerospace. Mexico, as it is developing it’s automobile industry, is buying more inputs from Quebec, such as aluminum and steel. They also buy Bombardier planes.

Import goods:
petrol, automobiles, airplanes and parts, trucks and frames, pharmaceuticals, bauxite and alumina minerals, clothing.

Again similarly to the rest of Canada, our main import partner is the USA. Just like Canada, Quebec is also running an important trade surplus with the USA. We export more than twice to the USA than we import from them. Our main imported goods are planes and aerospace parts from companies such as Boeing, and Lockheed Martin. We also import many refined petroleum products, and important quantities of crude oil.

Quebec's import trading partners

Import Partners	Imports M $CA	Share	N. 1 Product	N. 2 Product	N. 3 Product
United States	24 647	31,9%	Aerospace	Oil and Petroleum	Heavy-Duty Trucks
China	10 950	14,2%	Women's Clothing	Shoes	Furniture
Germany	3 596	4,6%	Pharmaceuticals	Aerospace Parts	Machines
UK	3 274	4,2%	Aerospace	Oil and Petroleum	Pharmaceuticals
France	2 802	3,6%	Aerospace	Wineries	Pharmaceuticals
All Countries	77 359	100,0%	Aerospace	Oil and Petroleum	Pharmaceuticals

China is an emerging provider of goods to Quebec, mostly women’s and girls’ clothing, shoes, and furniture. China now provides 14 percent of Quebec’s imports, a huge increase over the past two decades.

Germany comes in third with supply of pharmaceuticals, aerospace products and parts (Airbus planes), as well as all sorts of industrial machinery and electronics. The UK and France come in next, with usual interest in typical Quebec industry. Note that Quebec does import lots of French wine, more so than any other province in Canada.

JOBS IN QUEBEC

Quebec’s job market has historically been relatively weak but this trend has reversed recently. Participation rates were usually lower than the Ontario and Canada averages. In Quebec, the participation rate hovered between 60 and 65 % in the past 30 years, a full 5 points lower than its Ontario neighbour.

Unemployment rates were also usually high, between 7 and 11 percent. In the past decade, the unemployment rate has dropped steadily to 5 percent, a historic low.

In the past, economists blamed the higher rate of unemployment on a highly unionized workforce, somewhat generous government welfare programs and low geographic mobility of Quebec workers out-of-province. The sluggish economic growth of Quebec is also an important factor.

The good news is that in the last few years, the unemployment rate has dropped. Since 2010 it has regularly been inferior to Ontario. The unemployment rate is now at 4.2 percent in Quebec, vs. 5.5% in Ontario, and 5.1% in Canada (May 2022, Statistics Canada).  

Green Policy

One of the main reasons for pollution nowadays is international transportation, either by sea, air, or land. Lower transportation costs have allowed for increased trade between rich countries in the West, and poor countries in the South and the East. Developing countries know quite well that what they we are producing is generating pollution, either in mismanaged landfills or in the seas. However, these poor countries need the income and employment.

Trade is going to become an integral part of the solution to reduce pollution and improve the conservation of natural spaces on earth. It’s important that we set aside a large portion of our lands for conservation, so that we don’t over-exploit the planet. The value in these lands is greater than our balance of payments.

Climate Change Solution

Many economists are arguing that trade agreements should be tied into international negotiations on climate change. As it stands, countries who refuse to reduce their carbon production, including Canada, don’t have much to lose. Most of the countries who stall climate talks are major carbon producers, including Canada.

Trade could become an incentive to reduce carbon emissions. A country who refuses to meet the requirements of an international agreement would be penalized with broad trade barriers, such as protectionist import duties from its trading partners. Without an important cost associated to refusing agreements, studies show that environmental negotiations are doomed. For example, a study lead by Concordia University economists (Diamantoudi, Sartzetakis, & Strantza, 2018) run many types of game theory experiments, and negotiations always fail when one or more countries are carbon producers without any offsetting costs to leaving the negotiation table.

Effrosyni Diamantoudi, Dean of Graduate Studies, Concordia University

Economists are now realizing that the only way to make the GHG negotiations stick, is to create an opportunity cost that is greater than the income provided by carbon production. One way to do that, is to make GHG negotiations associated with international trade agreements. Countries who refuse to reduce their carbon production will see their exports blocked, either because of protectionist taxes or quotas. We can attach trade deals to GHG negotiations.

Democracy Booster

Regular consumers can feel overwhelmed by the task at hand. When you buy something, you might not feel like you are making a big impact, especially on something like GHGs. It is really important that regular consumers impose the idea of linking trade agreements to carbon regulations, so that no matter which party is elected, this issue goes forward. There should be carbon reduction advocates at the table, in every political party. Don’t leave it to one party to solve this because if they don’t get elected, the issue will be neglected.

 Wrap-Up

Better transportation and fear of war has pushed politicians to engage in free trade. This is what we call globalization.

Economists don’t agree on how much to trade, and what products to trade, especially when our production costs are slightly higher than our trade partners. Some economists argue for industrial specialization, others argue for diversity.

Canada and Quebec are very open economies. This is an advantage because our exports bring money into the country. However, our imports are also very important, and this limits the effectiveness of fiscal policy.

In the world, Quebec is an above-average economy, known for its hydro power, aluminum, minerals, and regional airplanes. Its GDP per capita is slightly higher than Spain. Quebec has been associated with under-performing statistics in past decades such has high unemployment, and low participation rates but its macro data have turned positive recently.

Cheat Sheet

Free Trade:
A policy of eliminating barriers to trade such as import quotas, tariffs, and differences in regulations.

Protectionism:
A policy of increasing barriers to trade such as import quotas, tariffs, and differences in regulations.

Open Economy:
An economy whose exports represent an important share of GDP.

References and Further Reading

Bournakis, I., Christopoulos, D. & Mallick, S. (2018). “Knowledge Spillovers and Output Per Worker: An Industry‐Level Analysis For OECD Countries.” Economic Inquiry. 56(2).