A new Conference Board of Canada study released by the International Trade and Investment Centre challenges the conventional wisdom about Canada’s trade profile. Canada is less trade-dependent than previously thought, has a smaller trade relationship with the United States than commonly believed, and relies on the services sector for a much larger share of its trade.
“These findings challenge some of the core views about what Canada trades, who it trades with and how much it trades,” said Michael Burt, Director, Industrial Economic Trends. “Using value-added trade measures, the description of Canada as a ‘small, open economy’ may be less accurate than previously believed. Value-added trade may also help to explain in part why Canada was less affected by the recent global recession than other countries.”
The publication, Adding Value to Trade Measures: An Introduction to Value-Added Trade, argues that conventional trade data—namely measures of imports and exports—can distort the “real” trade picture. Conventional trade measures have not been adapted to gauge transactions accurately when more than one country is involved in the production of a single good. This analysis utilizes a new methodology to estimate value added in the context of trade.
Value-added trade refers to the increase in worth of a good or service due to a specific step in the production process. For example, if a chair is worth $10 before being painted and $12 after, the value added by painting is $2. The first major outcome of the value added trade method is to eliminate double counting, which occurs when inputs cross borders multiple times before becoming a finished product. The second is to allocate the value embedded in a traded product back to its source. For example, an exported car contains a variety of inputs including raw materials, engineering services and even electricity.
From the analysis, the three key findings are:
- Canada is less trade-dependent – Using value-added trade measures, Canada’s share of global trade falls from 3.1 per cent to 2.9 per cent. These results may help to explain why declining global trade during the recession had less of a net effect on Canada’s economy than it did in other countries.
- Canada’s trade mix is different – using value-added trade, the services sector becomes more important relative to goods-producing sectors. When measured in value added terms, services account for about 40 per cent of Canada’s trade, compared to 16 per cent using conventional statistics. Gaining increased prominence are business and financial services, as well as trade, transportation and communications services.
- Canada’s trade relationships change – the largest adjustment occurs in Canada’s relationship with the United States. Using value-added measures, the U.S. share of Canada’s overall trade falls from 69 per cent to less than 62 per cent. Other regions of the world increase their share of Canada’s overall trade, particularly Europe (up more than two percentage points) and Japan (which gains more than one percentage point).
This is the first of three Conference Board publications on value-added trade. The next briefing will examine in more detail how the Canadian industrial trade mix changes when estimated in value-added terms and how our trade relationships with the rest of the world change. It will also shed more light on Canada’s role in global value chains. The final briefing in the series will reveal Canada’s comparative advantage and competitiveness in a world of value-added trade.
The analysis is supported by the International Trade and Investment Centre, which helps Canadian leaders better understand what global economic dynamics —such as global and regional supply chains, barriers to trade, U.S. policies, or tighter border security—could mean for public policies and business strategies.