Tuesday, February 19, 2008

Tracking Value-Added Trade: Examining Global Inputs to Exports

(Statistics Canada)

Canadian industries have sharply lowered their use of imported inputs to produce exports, according to a new study published today in Canadian Economic Observer.

The lower use of imported inputs sheds light on several widely discussed trends. It contradicts fears of a widespread offshoring of domestic production as firms adopt global supply chains.

It also suggests that firms in Canada have ample room to import more inputs as the soaring loonie increases competitive pressures, something they began to do in 2004.

Finally, removing the import content from exports reveals Canada's true exposure to export demand. This is an important piece of knowledge as analysts debate whether other countries can "decouple" from the current slowdown in the US economy. Since 2000, changes in exports have had less of an influence on the course of gross domestic product (GDP).

Comparing gross exports to GDP has always resulted in misleading analysis. Exports are the equivalent of gross sales, while GDP is measured on a value-added basis. Removing the import content of exports puts them on the same value-added basis, revealing the true exposure of GDP to external demand.

This paper shows that 27.9% of GDP came from value-added exports in 2004. This was down from its peak of 31.4% in 2000, and close to its recent low in 1997. It is well below the often-quoted but misleading share of gross exports in GDP, which peaked at 46% in 2000 before settling at about 38% in 2003 and 2004.

With exports to the United States currently accounting for 75% of all Canada's exports, this implies that just over 20% of Canada's output is exposed to the risk from the slowdown in US growth. The share of jobs exposed to exports would be even lower, as exports remain a sector with above-average output-per-worker. Complete press release here.