Although global trade disputes are contributing to a slowdown in exports and business investments, job creation and incomes are rising—especially in the economy’s rapidly expanding services sector. In a speech in Iqaluit, Governor Poloz explains what this means for Canada.
Trade growth is slowing
Trade disputes and a shift away from the globalization of production are slowing growth in global trade. Companies used to offshore their production. Now, more and more companies are reshoring or nearshoring.
Offshoring: companies reduced costs by moving production to low-wage countries
Reshoring: automation and the rise of wages in countries like China are now encouraging some firms to move production back home
Nearshoring: some firms are locating production closer to their customers
Economies never stand still. In China, for example, globalization has led to a steady increase in wages. And this reduces the incentive for firms in advanced economies to move production there.
But in Canada, the trade in services is growing
Trade in services has been growing at a much faster pace than goods. Last year, many service sectors saw exports growing at near double-digit rates or faster, including:
telecom, computer and information
Growth in Canada’s economy, which was based on trade in natural resources in its early years, is now driven mainly by service industries. Roughly 80 per cent of Canadians are now employed in services.
Statistics don't fully capture the contribution of services
Trade in services is difficult to track and is probably underestimated. For example, many manufactured goods include a large services component that is buried in the price. By some estimates, as much as 30 per cent of the value of goods exports is actually created through services.
Many companies today purchase back-office computing services on the cloud. Previously, a company may have invested in equipment and software and hired specialized staff to perform these functions. By purchasing cloud services, the company saves those expenses, and boosts its productivity. This is clearly positive for the economy, yet our conventional statistics show a drop in investment and in trade.
The risks of trade wars
Uncertainty affects investment
Uncertainty about global trading rules means some business investment decisions have been scrapped. Even if the uncertainty lifted completely tomorrow, these decisions could not be reversed, and some of the damage done over the past two years would remain.
The costs of tariffs
When a country imposes tariffs on imports, those tariffs are paid by its own consumers and companies. Our research shows that such trade actions lower economic output while raising prices. Companies facing tariffs on their exports will urge their governments to retaliate and, in the end, the global economy will be worse off.
The global economy could get a significant lift if trade peace were restored.
Canada’s economy has many advantages:
a well-educated and diverse workforce that is growing through immigration
a portfolio of established trade agreements
a solid economic base in natural resources
Canada can build on these strengths by remaining committed to global free trade and encouraging freer trade between provinces and territories.
And by keeping inflation low, stable and predictable, we will continue to promote the economic welfare of Canadians.
Recent economic data have been generally consistent with our expectation that the period of below-potential growth will prove to be temporary.
Stephen S. Poloz
Baffin Regional Chamber of Commerce (BRCC) and the Nunavut Mining Symposium (NMS)
April 1, 2019