The Diversification Solution

(Export Development Canada – Peter G. Hall)

“Don’t put all your eggs in one basket.” Good investment advice, but easy to ignore when the return on a certain asset is particularly good. Canadian international trade faces the same dilemma. We know that more diverse trade would be a good thing, but over the years, the yield on trade with the US has been too tempting. But do we ignore trade diversification at our own peril?

Canada’s trade is staggeringly skewed. In 2009, the U.S. accounted for 75% of merchandise exports. The next-largest destination, the UK, even after increasing its share significantly in 2009 accounted for just 3.4% of total exports. A handful of large industrialized countries account for 84% of exports, and the remainder is carved up into very small, widely-distributed segments. That sounds concentrated enough, but it is actually an improvement – just seven years ago, the U.S. accounted for 87% of merchandise exports, and the large countries, 93%. This does suggest that a certain amount of diversification is underway, a positive development – but is it enough?

Imagine a radically different trade profile – a scenario where the large industrialized markets accounted for just over half of the export pie, and where emerging markets took up the remaining space. Conservative assumptions based on recent export growth trends produce an eye-opening overall result. In place of the 6.5% average growth seen in the 2004-08 period, Canadian merchandise exports could easily have expanded by 10% annually. Calculated this way, diversification would have partially cushioned the recessionary blow that exports suffered last year.

Read more or watch the video here.