The Diversification Dividend

(Export Development Canada – Peter G. Hall)

Everybody knows that Canada is a trading nation. Compare the share of trade to total economic output, and Canada ranks close to the top among large industrialized economies. But take away trade with our number one customer, the U.S. economy, and we’re not much of a trading nation at all. In fact, we are really a North American economy, with a limited stake in the rest of the world. What would Canadian trade activity look like if we were truly a diversified trading nation?

Canada’s trade intensity – exports and imports as a share of the total economy – was 70% in 2007. This compares with 29% in the U.S., 34% in Japan and 56% in the U.K. Trade is a larger share of output in continental Europe, where Germany is a standout at 87%. But while intensity in other locales is rising, Canada has steadily slipped in recent years, from 85% in 2000. The reason? Growth in exports to the U.S. wilted as the Canadian dollar surged. In contrast, growth in non-U.S. exports was sustained, and hit a double-digit pace last year – diversification did happen – but it was still too small a share of overall activity to significantly impact total performance.

Imagine a radically different trade profile – a scenario where the U.S. market was still dominant, but a smaller share of the pie, where large, industrialized countries had moderately less share, and where key emerging markets took up a reasonably larger share of the remaining space. Conservative growth assumptions – allowing for economic growth plus modest market share gains – produce an eye-opening overall result. In place of the 2.8% average growth seen in the last 5 years, Canadian merchandise exports would have expanded by over 7% annually. While actual growth slowed to 2.1% in 2007, diversification would have stayed the above-7% pace.

Canada’s provinces would likewise have cashed in on the bonanza. Those with the most to gain are Ontario and Nova Scotia, where growth averaged -0.4% and 0.5% in the past 5 years, respectively. With the altered shares, Ontario would have expanded by 6.6%, and Nova Scotia by 5.3%. Even those with less to gain would have fared well. Saskatchewan would have grown by 14%, as opposed to the 12% that actually occurred.

The results by industry are also inspiring. Take beleaguered auto sector exports, down 6.7% in 2007, and weathering a 24% drop thus far this year. Spread our products around the world, and the picture is radically different. Exports would have increased by 1.4% last year, and would be on track for a smaller drop of 17% this year. The same goes for machinery and equipment, which would cash in on torrid rates of investment in key emerging markets. Instead of tepid 2.4% growth last year, the sector would have seen 8%, and this year, -2.6% would shift to 2%. And given the voracious appetite of emerging markets, primary goods producers would also have fared better.

All good in theory, but is it achievable? For the Canadian economy, not overnight. But certain individual businesses are already there. Those with a globally diversified sales model are today experiencing growth well ahead of industry averages, even in very stressed parts of the economy.

The bottom line? Diversification is paying its practitioners handsome dividends, even in today’s slowing global market. And given longer-term growth prospects, the dividends won’t be fleeting.