Global Affairs Canada recently released its report Canada’s State of Trade 2019. Authored by the Office of the Chief Economist (OCE), the report overviews the major developments in Canada’s imports and exports in 2018. In Part 1 of my blog on this report, I described the report’s most relevant points about domestic and foreign economies for Canadian exporters. In this second part, I explain the report’s key research and recommendations on trade diversification for businesses.
The Government of Canada has recognized the need to diversify exports in order to protect the economy from financial and political upsets in other countries, as well as to enable Canadian businesses to benefit from opportunities in new markets. In its Fall Economic Statement 2018, the government proposed an Export Diversification Strategy that would increase Canada’s exports, particularly those to Europe and the Asia-Pacific region, by 50% over six years.
The federal government will invest $1.1 billion in its Export Diversification Strategy to help Canadian businesses access new markets.
Geographic Diversification: Canada Relies Heavily on the US
Unsurprisingly, the Office of the Chief Economist found that Canadian exports are highly concentrated in the US. In 2018, the percentage of Canadian exports going to the US was 75%.
Almost 70% of new exporters each year choose the United States as their first export destination. Survival rates for these exporters are low: half stop exporting after their first year.
Greater geographic diversification would help new businesses thrive, and shield Canada from risks such as trade policies, economic shifts, and fluctuations in exchange rates.
Geographic diversification of exports would also help ensure that Canadian firms do not solely focus on developed economies, which tend to be slower growing. For example, the US grew at an average GDP growth rate of only 1.9% between 2000 and 2018, compared to 9.1% in China and 7.3% in India. Canada’s early access to these faster-growing markets, according to the OCE, can aid business expansion.
Product Diversification: Beyond Energy & Automotive
Exporting a wide range of products limits Canada’s exposure to risks from changes in prices, demand, or supply. Product diversification also allows Canada to take advantage of faster-growing product sectors, such as information and communication technology, rather than relying only on markets with slower or less predictable growth, such as construction.
Currently, Canada’s product diversity is strong. While Canada is well-known for its energy and automotive parts, these products together only represent 36% of Canadian exports, indicating that the country has enough other exports for economic health, and needs to maintain this diversity.
Exporting Firms: Women and Indigenous Owners are Crucial
The report finds that the percentage of women-owned exporting SMEs in Canada doubled from 7.4% in 2011 to 15% in 2017. Furthermore, women-owned SMEs in Canada are just as likely to export as men-owned or joint-owned SMEs, and a significantly higher proportion of women-owned SMEs export to Europe, India, and the rest of the world, compared to men-owned SMEs and SMEs owned by both women and men.
By selling in non-US markets, women-owned SMEs make a strong contribution to geographic diversification of Canadian exports.
Indigenous-owned exporters are also essential to Canada’s economy. In 2014, the percentage of Indigenous-owned SMEs that exported was twice that of other Canadian SMEs. Indigenous-owned SMEs also show a stronger ability to access broader markets. Because many Indigenous communities are small (less than 1,000 people), OCE explains, Indigenous business owners may find creative means of reaching non-local markets earlier on, compared to non-indigenous business owners.
Government Support for Exporting SMEs
In order to reach its export target for 2025, the Government of Canada plans to deliver several strategies to encourage export diversification among Canadian businesses, especially SMEs. SMEs represent 99% of all employer businesses in Canada and account for approximately 50% of GDP; however, only 12% of SMEs export. Increasing this percentage would create deeply positive impacts for the country’s economy.
The government therefore encourages Canadian SMEs to enter fast-growing markets such as China and India. As well, the OCE’s report recommends encouraging new businesses to first export to the US since, statistically, small businesses that can succeed in this market usually then expand to other markets.
Businesses with plans to export may be able to have a portion of their international marketing costs covered by Canadian government funding, through the CanExport SMEs program.
The Global Affairs report also suggests that, since women-owned businesses are more likely to face administrative barriers outside of Canada in exporting, federal programs could address the border export requirements of women-owned businesses and offer additional support with logistical issues. The federal government has already provided some support for women-owned businesses through the Women Entrepreneurship Strategy.
Indigenous-owned businesses may benefit from programs that help address access to financing and connectivity issues, the report indicates. Moreover, Indigenous-owned firms have a high propensity to export, but their exports are focused on the US; they may need services to support greater geographic diversification. Indigenous business owners may wish to learn about the Indigenous Growth Fund to help finance business costs.
Make sure you’re subscribed to Mentor Works’ Weekly E-Newsletter, so you don’t miss it any Canadian business updates! The latest news, right to your inbox.