Canada has one kind of trading relationship with the United States and a different one with the rest of its trade partners, concludes a new Conference Board of Canada report that measures Canada’s trade by the value added at each stage of the production process.
Adding Value to Trade Measures: Understanding Canada’s Role in Global Value Chains reveals that the high level of Canada-U.S. trade integration means Canada’s overall share of its trade with the United States is smaller when using value-added measures than with conventional trade statistics. Nevertheless, the trade relationship with the United States is crucial to Canada – the integration of bilateral trade gives this country its only significant link to global value chains.
In contrast to the integrated relationship with the United States, Canada plays a more traditional role in its trade with the rest of the world: it exports raw materials, imports finished products, and has only limited involvement in global value chains through other countries.
“Canada’s trade profile when measured by value-added trade is something of a paradox. Compared to other countries, Canada is globally integrated. But its proximity to and dependence on the U.S. market skews the overall picture. Almost all Canadian linkages with global value chains are through the United States,” said Michael Burt, Director, Industrial Economic Trends.
Value-added trade refers to the increase in the worth of a good or service while moving through a specified country. International trade patterns have changed in recent decades for one main reason: the prevalence of vertical trade – which is the production of a good or service that involves at least two countries and for which country imports some of the inputs and exports some of the outputs.
This report describes how conventional trade data – namely imports and exports – have become less representative of trade patterns. Rather than replace conventional trade measures, the concept of value-added trade offers a complementary set of insights for trade policy-makers and corporate leaders.
The importance of Canada’s trade relationship with U.S. is irrefutable. Every day, $1.8 billion in goods and services crosses the border. Moreover, 85% of Canada’s vertical trade takes place with the United States, making the U.S. Canada’s only significant link to global value chains. By comparison, Canada has relatively little vertical trade with other large partners, such as Japan, France, Germany, Mexico, Italy and China.
Canada also stands out among its global counterparts. Like China, Canada has both a high degree of returning exports – raw materials and intermediate inputs that are subsequently re-imported back into the country – and substantial import content in its own exports. In contrast, most of Canada’s G8 peers serve as “end markets” for global goods and services. Countries such as the United States, Japan and Germany have a high share of returning exports but limited import content in their exports.
The report, the second of three published by the Conference Board’s International Trade and Investment Centre on the subject of value-added trade, identifies actions and implications for both businesses and governments.
• Businesses should: look beyond the U.S.; know who they are trading with in global value chains; and make global value chains work for them.
• Governments should: recognize the multi-country nature of trade; recognize that trade is a multi-industry effort; devote attention and resources to trade-dependent industries; strengthen linkages to global value chains beyond the U.S.; and continue to pursue free trade agreements.
The first publication in this series, Adding Value to Trade Measures: An Introduction to Value-Added Trade challenged the conventional wisdom about Canada’s overall trade profile in three areas:
• Canada is less trade-dependent – using value-added trade measures, Canada’s share of global trade falls to 2.9% (from 3.1% using conventional statistics.)
• Canada has a smaller trade relationship with the United States – U.S. share of Canada’s overall trade falls from 69% in conventional terms to less than 62% through value-added measures.
• Canada relies on the services sector for a much larger share of its trade – services grow from 16% of trade using conventional measures to 40% under value-added trade; manufacturing shifts from 71% (conventional) to 44% (value-added).
The Conference Board’s International Trade and Investment Centre helps Canadian leaders better understand what global economic dynamics – such as global and regional supply chains, barriers to trade, U.S. policies, or tighter border security – could mean for public policies and business strategies.
Source: Conference Board of Canada