2014

Canada's exporters stuck in neutral by not tapping into vast emerging market potential: CIBC

Chinese experience shows Canadian companies can compete and win

TORONTO, April 16, 2013 /CNW/ - Canadian exporters have shown they can compete and win in the highly competitive Chinese market but too few companies are tapping into broader emerging market opportunities, limiting the ability of the economy to grow, finds a new report from CIBC World Markets Inc.

The report notes that despite the fact that Canada has nine free trade agreements beyond the U.S., we have largely failed to tap into a global trade market that has grown some 70 per cent since 2002.

"The volume of Canadian exports today is at the same level it was a decade ago," says Benjamin Tal, Deputy Chief Economist at CIBC, who co-authored the report with CIBC Economist Andrew Grantham. "Regardless of how you look at it, this was a lost decade for Canadian exports. The lone bright spot has been in the very competitive Chinese market."

"Although the share of Chinese imports stemming from Canada remains at just a little over one per cent, it has at least edged up over the last 10 years. In contrast, most other developed countries have seen their share of Chinese imports fall over that same period. And it is not an oil story, with petroleum only a small proportion of Canadian shipments destined for China."

Mr. Tal notes that Canadian companies have shown strength in performance against their southern neighbours. Of the top 15 Canadian exports to China, 10 face U.S. competition. "But even with a strengthening Canadian dollar that is a battle some sectors have been winning. Improvements in market share within areas such as oil seeds, grain and fruit, along with pulp and aircraft, are proof of that fact."

He also says Canadian exporters are holding their own against Chinese manufacturers seeking to further expand exports to Canada's top trading partner.

This success demonstrates that Canada can and should compete in other emerging markets says Mr. Tal. He notes that Canada has had some success diversifying. The share of non-U.S. exports in total Canadian exports rose from 13 per cent at the start of the decade to 25 per cent today. But we've been stuck at 25 per cent for more than four years. And almost all of the improvement has come from two sources: the UK and developing countries.

"A closer look at the trade flows to the UK reveals that virtually all of that gain was due to the 300 per cent increase in the price of gold—hardly an inspiring diversification story. So we are left with developing countries as the key source of Canada's export diversification of the past decade. And this diversification story is also very concentrated, and becoming more so.

"Since 2003, China has accounted for more than half of the growth in developing market exports. But in the past five years, it has accounted for all of the growth. Exports to all other developing countries (with the exception of tiny Bulgaria) have actually seen declining shares of our emerging markets exports. So despite intensifying efforts, Canadian export diversification is losing momentum. In fact, on a year-over-year basis, our exports to non-U.S. destinations are now falling."

The report notes that this over dependence on China also holds risks as growth there has slowed and authorities are starting to refocus the economy more towards domestic consumption. That will require a different product mix that Canadian companies may not be positioned to fill. At the same time, competition is becoming "fierce and rising fast" as more companies seek to fill the needs of a growing consumer society.

While many commentators have pegged the slide in Canadian exports on the surge in the value of the Canadian dollar, Mr. Tal says this argument is too simple.

"A quick glance suggests that the 35 per cent appreciation in the value of the loonie between 2000 and 2007 indeed worked to slow the pace of export expansion. But despite this massive appreciation, exports still managed to expand at a pace of just over 1.5 per cent a year."

Mr. Tal and Mr. Grantham conducted a detailed sectoral analysis of the impact the rise in the Canadian dollar had on Canadian manufacturing found no direct correlation between the value of the loonie and economic performance.

Although some high vulnerability sectors such as paper manufacturing and furniture did underperform, other equally vulnerable sectors such as machinery and electrical equipment actually outperformed. He also found this on the other side of the spectrum, where sectors not dependent on a low dollar, such as textiles and chemical manufacturing, lost market share.

"The key question is to what extent Canadian exporters are adjusting quickly to reverse [the downward] trend", says Mr. Tal. "What the experience in China does show, though, is that Canadian companies can compete and succeed in developing markets. That should encourage them to broaden their horizons into other growth markets in the decade ahead."

The complete CIBC World Markets report is available at:
http://research.cibcwm.com/economic_public/download/if_2013-0416.pdf

CIBC's wholesale banking business provides a range of integrated credit and capital markets products, investment banking, and merchant banking to clients in key financial markets in North America and around the world. We provide innovative capital solutions and advisory expertise across a wide range of industries as well as top-ranked research for our corporate, government and institutional clients.

SOURCE CIBC World Markets



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