The barrage of new technologies that are introduced to the market, each with the promise of altering (or at least affecting) the corporate world, can easily make one numb. However, our examination of a few of the more important IT trends makes a strong argument for the fact that something important is taking place. Granularity, speed, and scale—the three key elements that have characterized the digital era—are typically being accelerated by these technological advancements. However, the extent of these shifts in bandwidth, computer power, and analytical complexity is what's creating new opportunities for organizations, inventions, and business models. Greater innovation may be made possible by the exponential gains in processing power and network speeds brought about by the cloud and 5G, for instance. Advances in the metaverse of augmented and virtual reality provide opportunities for immersive learning and virtual R&D using digital twins, for example. Technological development...
This chapter examines the causes of Canada's mediocre export growth over the last decade, as well as the effect of commodity prices (via the exchange rate). This is especially important considering not only the commodities boom of the 2000s, but also the possibility that petroleum exports may more than treble over the next few decades.
We examine Canada's export share in the United States market
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which accounts for the great majority of its exports, and how variables have influenced Canadian enterprises' ability to compete there. The goal is to determine how much of the loss in nonenergy, particularly manufacturing, exports can be attributed to the rise in commodity prices, which has an impact on the exchange rate, and the development of new, formidable competitors such as China. We then look at trade patterns over the last few decades, evaluating the relationship between commodity prices and the exchange rate, and how poorer Canadian exports to the United States reflect the greater Canadian dollar and commodity prices.
Canadian Export Trends in Recent Decades
After a rise in the 1990s, Canadian exports slowed significantly in the 2000s. In the 1990s, export volumes increased by an average of 8.5 percent per year, driven by increasing demand in the United States. The free trade agreements with the United States—the Canada-United States Free Trade Agreement (CUSFTA) in 1989 and the North American Free Trade Agreement (NAFTA) in 1994—likely helped Canada maintain its position as the leading exporter to its southern neighbor during the 1990s (Romalis 2005).3 However, performance declined significantly after 2000, with export growth stagnating until 2007 and dropping drastically amid the global financial crisis. Nonenergy exports were the most affected, lingering below 2000 volume levels at the end of 2011, whereas energy exports expanded (Figures 6.2 and 6.3).
Figure 6.2 (View Full Size)
Figure 6.2: Canadian Non-energy Exports.
(Real volumes, 1981: Q1 = 100)
Sources include Haver Analytics and IMF staff estimates.
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Figure 6.3: View Full Size.
Figure 6.3: Canadian Energy Exports
(Real volumes, 1981: Q1 = 100)
Sources include Haver Analytics and IMF staff estimates
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Manufacturing exports have been among the most hit, accounting for about 85 percent of the decline in total exports as a fraction of GDP in the 2000s. The two main Canadian export sectors, automotive and machinery and equipment, have never fully recovered from the 2001 US recession. Exports were stagnant until 2006-07, when they experienced another blow during the global financial crisis (Figure 6.4). The forestry business also fell, reflecting the housing crisis in the United States, with export volumes still 35 percent lower in 2011 than in 2000. In contrast, commodity exports grew to account for almost 40% of overall exports by 2011, more than doubling from the early 2000s. During the same period, energy exports increased by 25%, resulting in a surplus of nearly 3¼ percent of GDP. This offset the steep growth in the nonenergy trade deficit, which was likewise 3¼ percent of GDP.
Figure 6.4 (View Full Size)
Figure 6.4 shows Canada's main manufacturing exports.
(Volumes, 2000; Q1 = 100)
Source: Haver Analytics.
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Canadian exporters' fortunes have changed dramatically as a result of developments in US markets. The United States is by far the largest market for Canadian products, taking more than three-quarters of Canadian exports in recent decades. As a result, falling US demand contributed to the difficulties that Canadian exporters encountered (Munnik, Jacob, and Sze 2012). In instance, the growth of U.S. import volumes decelerated from around 10% a year in the 1990s to 4.5 percent a year from 2000-07. During this time, Canada's non-energy export growth averaged only 1½ percent each year. More recently, the global financial crisis impacted Canadian exporters, worsening the loss in foreign markets, with nonenergy export volumes in 2011 falling 12 percent below 2000 levels.
Canadian enterprises also saw a considerable loss of market share in US markets
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Between 1999 and 2011, its market share decreased by 5 percentage points to 14⅓ percent of all U.S. imports, a loss equivalent to 6¼ percent of Canada’s GDP. During the same period, China surpassed Canada as the leading exporter to the United States (Figure 6.5). In 1999, Canadian exports made up 20% of total U.S. imports of machinery and transport equipment. However, by 2011, this percentage had decreased to 10%.4 During the same period, China's share in the US manufacturing market increased by 10 percentage points to 25½ percent.
Figure 6.5: View Full Size.
Figure 6.5 shows U.S. import shares by major trading partners.
(Percent)
Source: Haver Analytics.
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Canada's diminishing external competitiveness was most likely caused by a combination of reasons. One factor is dramatically increased commodity costs, which most likely fuelled the significant rise of the Canadian dollar, reducing manufacturing exports. This effect was likely more significant after 2000, given increased energy export volumes and prices (together with metals). Other potential drivers include a widening productivity gap compared to significant competitors (Figure 6.6; Baldwin and Gu 2009; Lascelles 2012), as well as increased rivalry from emerging market economies, particularly China.
Figure 6.6: View Full Size.
Figure 6.6: Labour Productivity
(Index: 1969 = 100)
Source: The Conference Board.
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Exchange Rate and Commodity Prices
We now look at the sensitivity of the Canadian currency rate to commodity prices, specifically the long-term link between the two (Box 6.1). Canada's REER appears to be strongly connected with fluctuations in metal and energy real prices, with the degree of association increasing over the last decade (Figure 6.7). Amano and van Norden's landmark article (1995) demonstrates a negative association between energy costs and the relative strength of the Canadian currency from 1973-93.5. However, current research suggests that this unfavorable link has reversed. For example, Issa, Lafrance, and Murray (2006) establish a positive link between energy prices and exchange rates since the 1990s. The Bank of Canada has stated that the rise in commodity prices accounted for almost half of the appreciation vis-à-vis the US currency over the last decade, with the other 40% due to the multilateral depreciation of the US dollar. Other studies have found a favorable association between energy and metal prices and the exchange rate (Bayoumi and Muhleisen 2006; Bailliu and King 2005).
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