Canada West Foundation Blog

By: Dr. Roger Gibbins

Throughout 2011, Canadians took comfort in the fact that as the world around them seemed to go to hell in a hand basket, life was pretty good here at home. Although the Canadian economy sagged a bit, it held up well by comparison with our major trading partners. Stock markets rebounded, employment did not plummet, and across western Canada there was real economic growth and widespread prosperity.

Unlike the political deadlock and acrimony that has become increasingly characteristic of political life south of the border, Canadian governments enjoyed reasonably strong electoral support and, for better or for worse, we have been freed from the paralysis of minority governments in Ottawa. All in all, 2011 goes down as a pretty good year for Canada admidst a general international environment of uncertainty and unease.

Nonetheless, it is difficult to look forward to 2012 with anything close to unbridled optimism. Economic and political conditions in the United States, still our major market for virtually anything we produce, are unlikely to improve as Americans lurch toward the November elections. Economic conditions in Europe remain grave. Closer to home, western Canadians face huge challenges in moving resource assets to new international markets while at the same time, American markets are soft and/or overflowing with conventional Canadian products such as natural gas.

So often western Canadians believe that we have the resources the world needs, and assume the world will beat a path to our doors. Quite understandably, resource wealth breeds complacency. Increasingly, however, we realize that we will have to do much of the beating, that our competitors are many and often better positioned geographically, and that the barriers to international market access are challenging in the extreme. Being resource rich in the absence of markets is not a recipe for sustainable prosperity.

In 2012, Canadians from across the country will also have to come to grips with growing regional imbalances within the national economy, and how these play out through the frameworks of fiscal federalism and in a period of growing financial constraints for all governments—federal, provincial and municipal. On balance, western Canadians are doing very well, but how do we reconcile regional prosperity here with more disadvantaged regions of the country? How do we ensure that regional economic strength is encouraged as a national asset, and not seen as a target?

None of this means that Canadians should be fearful when looking ahead to 2012. At the same time, we will face some truly intimidating policy and political challenges as we try to re-jig the Canadian federal system and national economy to meet unstable and rapidly changing global conditions. The upcoming year will not be a time for the faint of heart, or a time for complacency. But then, to quote the last words of Australian bushwhacker Ned Kelly as he stood on the scaffold, such is life. Or, in the more current vernacular, bring it on!

On behalf of the Foundation, I would like to wish you all the best for the holidays. Thank you for your engagement over the past year. As 2012 approaches, we look forward to continuing our work as the only think tank dedicated to being the objective, nonpartisan voice for issues of vital concern to western Canadians.

By: Dr. Roslyn Kunin

Over the years, I have spoken with many people who were planning on starting their own business. They told me about the great product or service they would offer. They described how they would set up the business. They all told me how much money they hoped to be making once the business got rolling.

What they never mentioned, until they were prompted, were customers. That basic business need, someone willing and able to pay for the good or service provided was, if not totally missing from the mental image of the new business, certainly not in the foreground.

We should not be too hard on these aspiring entrepreneurs for not thinking about who was going to buy their output. For a very long time, governments, policymakers, planners and others interested in economic development did the same thing. Some still do so.

Take western Canada as an example. When we think about advancing our economy, we think about inputs. These include our resources and how we can access and develop them. They include infrastructure; transportation, communication, etc. They definitely include human capital—a workforce with both hard and soft skills and, ideally, some relevant experience.

We think about what we might produce. In the past, the focus has been around the question of how the West can move up the food chain beyond its traditional, resource-based industries and into manufacturing and the newer technologies.

What we have not been thinking about is customers. Who is going to want whatever it is we are or might be producing? For too long, we have had an “if you build it, they will come” attitude. But that only happens in the movies.

Relative to much of the rest of the world, western Canada is blessed with various essential resources, an educated labour force, decent infrastructure and political stability. But we are seriously limited by our lack of customers. We have been, and still are, far too dependent on one customer—the United States.

If you have only one customer, the US is a good one to have. It is close, big, speaks English and has similar laws and customs. But it exposes you to the risk of having all your eggs in one basket. We learned this to our sorrow in the last downturn.

To advance western Canada, we need more customers, and those potential customers are sitting across the Pacific and beginning to creep into our awareness. They want, need and can afford the resources and high level services that we can provide.

So let us adjust our focus to look west as well as south. Let us develop the pipelines and other infrastructure needed to serve new markets. Let us develop and add to our customer base. That is how businesses and economies grow.

By: Michael Holden

As the Canada West Foundation highlighted in a study released earlier this year, western Canadian exporters are gradually shifting their focus away from the United States and are increasingly selling their goods in Asian markets.

Early data for 2011 show this trend continuing. Through the first six months of the year, western Canadian exports to Asia were up 23.3% compared to the same period last year, well above the growth rate for exports to the US (11.2%) or other non-US destinations (18.3%). In total, 18.2% of western Canadian exports from January to June 2011 went to Asian markets.

Leading the charge is BC. Through the first half of 2011, BC’s total exports were 14.0% higher compared to the first half of 2010. Exports to Asia, however, have risen at more than twice that rate, owing in part to strong growth in sales to China, Taiwan and South Korea.

This increase has not only helped to cement BC’s status as Canada’s largest exporting province to Asia, but, if the pattern established through the first six months hold true for the remainder of the year, BC will be the first province to reach a significant new milestone: it will export more to Asia than to the United States. From January to June 2011, BC shipped 43.2% of its merchandise exports to Asia, compared to 42.0% of sales going to the United States.

As we’re looking at just half a year’s worth of data, this feat is mostly symbolic at this point, but if the underlying trend continues, it could represent an important structural shift in how we think about the BC economy. What happens in Asia could be more important to the province’s economic outlook than what happens in the United States.

The other three western provinces are in no danger of crossing that threshold in the foreseeable future, but Asian markets continue to grow in importance for exporters on the prairies as well. Manitoba and Saskatchewan have seen increases of 39.0% and 25.4% in exports to Asia, respectively, through the first half of 2011. Both provinces now sell more than 20% of their total exports to that part of the world.

On the surface, Alberta appears to be something of an exception to this general trend. Not only are Alberta’s exports to Asia growing more slowly than any other province (7.6% through the first half of 2011), but the share of total exports going to Asia (7.5%) remains low as well. Only New Brunswick and Ontario send a smaller share of their exports to Asia.

The weakness in growth through 2011 to date is partly due to reduced sales of primary plastics and canola – two of Alberta’s largest exports to Asia. It remains to be seen if that reduction is a temporary dip or evidence of a longer-term trend.

But in terms of overall market share, Asia is far more important to Alberta than the figures suggest. Oil and gas make up more than half of Alberta’s total exports, but based on the infrastructure in place, Alberta oil and gas companies wishing to sell their products abroad have no real choice in where they can go: all roads – or, in this case, pipes – lead to the US.

Removing oil and gas from the equation gives us a chance to see where Alberta exporters sell their products when they have a choice of customer. When you do so, Alberta’s export mix begins to look a lot more like the other Prairie Provinces. In the first half of 2011, 15.7% of Alberta’s non-oil-and-gas exports went to Asia – not as much as in Saskatchewan or Manitoba, but still much higher than in any province outside western Canada.  

On Thursday, September 8, 2011, The Canada West Foundation and the Asia-Pacific Foundation are co-hosting the Canada-Asia Cooperation Conference and Dinner, which will look at the growing web of energy-related trade, investment, strategic and environmental linkages between Canada and Asia. For more details, click here.

Global demand for Canadian energy resources, including coal, shale gas, oil sands and uranium, is on the rise, especially amongst Asia’s largest and fastest growing economies. On September 8, 2011, Canada West Foundation will be collaborating with the Asia-Pacific Foundation to host the Canada-Asia Energy Cooperation Conference, which will be held alongside the 7th Annual Canada-China Energy and Environmental Forum.

The Conference will examine the growing web of energy-related trade, investment, strategic and environmental linkages between Canada and Asia, featuring Canadian and Asian experts and practitioners from a variety of sectors. Opening Remarks will be made by Alberta Environment Minister, the Honourable Rob Renner, with Alberta Energy Minister, the Honourable Ron Liepert, providing the Luncheon Keynote.

That evening, the Canada West Foundation will share our strategic vision for the future of western Canada, and Asia’s place within that vision at our Community Board Dinner. The Keynote presentation by Victor Gao, China Co-Chairman of Daiwa Capital Markets, will explore the growing and complex relationship between Canada and Asia.

Don’t miss out on these exciting events! For more information on the Canada-Asia Cooperation Conference and Community Dinner, please click here.

By: Michael Holden, Senior Economist

On February 22nd, the Canada West Foundation released a new research paper examining western Canada’s trade relationship with Asia-Pacific. Through the Gateway: Unlocking Western Canada’s Potential for Economic Diversification by Expanding Trade with Asia-Pacific looks at the importance of Asia-Pacific markets to western Canadian exporters, their impact on economic diversification in the West and some of the policy options for further expanding trade with that region.

One of the challenges in writing on current economic developments and trends is that the timing of major data releases does not always cooperate with research deadlines. Not long after Through the Gateway was launched, new trade data was released for the 2010 calendar year. With a new year’s worth of numbers in hand (along with some minor revisions to previous years’ figures), I thought it might be useful to revisit some of the key trends we highlighted in that paper to see if and how those trends are holding up.

As it turns out, data for 2010 continue to drive home the growing importance of Asia-Pacific market for western Canada. One of the most important trends we noted in Through the Gateway was the growth in western Canadian exports to Asia-Pacific—especially since the early 2000s. From 2001 to 2008, the value of goods shipped to Asia-Pacific markets rose from $14.0 billion to $26.7 billion, before falling to $22.6 billion in 2009 because of the impact of the global financial and economic crisis.

While exports to Asia-Pacific in 2010 did not recover their 2008 peak, they did rebound strongly, reaching $25.9 billion—the second highest value on record. Leading the charge was B.C., where exports were 28.9% higher than in 2009. B.C. now exports almost as much to Asia-Pacific ($12.2 billion) as it does to the United States ($13.7 billion).

Through the Gateway also observed that growth in western Canadian exports to Asia-Pacific was being driven by shipments to the region’s developing markets. In 2009, the total value of exports to wealthy countries like Japan and South Korea was about the same as the value of exports to China and other developing economies, but long-term growth in the latter group vastly exceeded growth in the former; from 1990 to 2009, exports to industrialized countries in Asia-Pacific had grown by about 25%, while those to developing economies had risen by 428%.

Although 2010 was a good year for western Canadian exports to Japan and South Korea, there was no competing with the continued boom in sales to China and other developing markets. Western Canadian exports to developing economies in Asia-Pacific rose by 18.1% compared to 2009 (reaching $13.5 billion), while exports to industrialized economies in the region increased by 11.1% (to $12.3 billion).

A final point worth mentioning is the need to consider trade flows with the United States when assessing the importance of Asia-Pacific markets. We noted in Through the Gateway that, while the share of exports going to Asia-Pacific rose from 12.5% in 2001 to 17.5% in 2009, it was hard to say how much of that increase was because of strong growth in trade with Asia-Pacific and how much was because of weak market conditions in the U.S. Factors such as a high Canadian dollar; new regulatory and security measures; the economic downturn in 2008-2009; and the resulting drop in commodity prices have all weighed on shipments of goods to the U.S. in recent years.

With the economy stabilizing in the U.S. and commodity prices recovering, western Canadian exports to the U.S. rebounded in 2010. From a six-year low of $92.1 billion in 2009, north-south sales increased to $102.4 billion in 2010. While this figure remains well below its historic high ($141.9 billion in 2008), it’s interesting to note that the recovery in exports to the U.S. did not come at the expense of growth in trade with Asia-Pacific. While the share of western Canada’s total exports to the U.S. rose from 71.5% in 2009 to 72.1% in 2010, the share going to Asia-Pacific markets rose by even more¬—from 17.5% to 18.2%.

A new paper released through the Canada West Foundation’s Going for Gold project examines western Canada’s current trade relationship with Asia-Pacific and explains how these markets offer tremendous opportunities for economic growth and prosperity in the West, now, and in the years to come.

Through the Gateway: Unlocking Western Canada’s Potential for Economic Diversification by Expanding Trade with Asia-Pacific by author Michael Holden, Senior Economist provides the background and the numbers that show the importance of this region to western Canada’s economic prosperity. With Asia-Pacific being home to over half the world’s population and exports from the four western provinces to the region accounting for two-thirds of Canada’s total exports (totalling 9.6 Billion in 2009,) Asia-Pacific is second most important, only to the U.S.

“The research shows the importance of Asia-Pacific, not only to western Canada’s economic prosperity, but for Canada.” Canada West Foundation’s President and CEO, Dr. Roger Gibbins explains. “Considerable opportunities exist for western Canada if we take advantage of them and successfully reduce the barriers to trade and investment.”

The report describes two ways in which trade with Asia-Pacific countries promote economic diversification in western Canada 1) export market diversification and 2) export product diversification.

This publication was released at the Through the Gateway event, which was sponsored by the Vancouver Board of Trade on February 22, 2011.

All in attendance received a summary copy of the report. To download the summary report, click here.

To download the full report of Through the Gateway: Unlocking Western Canada’s Potential for Economic Diversification by Expanding Trade with Asia-Pacific, click here.

By Robert Roach, Senior Researcher

In his speech in Calgary January 25, 2011, former Governor of California Arnold Schwarzenegger argued that America must wean itself off fossil fuels to break its dependence on foreign oil, to eliminate the harmful health effects of fossil fuel pollution, to take advantage of the potential efficiencies of renewable energy sources, and to address climate change. Note that climate change is just one reason and, at present, not even the most important one.

What this signals is that the rationale for a sea change in energy use in the US is not tied exclusively to the global warming horse. As a province full to the brim with fossil fuel resources, this is not the best news for Alberta. However, the Governator also suggested that the transition will take time. Americans are not all going to be driving electric cars by next year. As many analysts have observed, fossil fuels are likely to be part of the energy mix for some time to come. We have some breathing room to adjust.

Nonetheless, the message to take away from Mr. Schwarzenegger’s comments is the value of rethinking through how to make the necessary changes before it is too late. If the US, China and other big users of fossil fuel move faster than expected toward renewable energy sources, Alberta may be caught with its pants down in terms of its key industry.

America is a democracy and will be slower to act as it debates the issues, but China is a dictatorship that could make huge investments in infrastructure designed to wean itself off fossil fuel in a time frame that would make our heads spin. If this happens, the global energy game could change overnight. We need a plan B, a plan C, and a much bigger Alberta Heritage Fund to help us through the transition that is coming sooner or later.

One potential boon for Alberta is America’s desire to reduce its dependency on oil from the Middle East. When the Twin Towers fell, something changed in the American mentality. This change is summed up by the following question posed by Mr. Schwarzenegger: “Why are we sending trillions of dollars [for oil] to people that want to blow us up?” This anger has not yet had a major influence on actual imports of oil from the Middle East, but it is a slow burning fuse that could ignite major changes in US policy. In anticipation of this, Alberta has worked hard to position itself as a friendly and effectively “non-foreign” fossil fuel supplier. It is in our best interest to keep hammering home this point.

This will buy us time, but eventually, if Schwarzenegger is even only half right, a much smaller number of future generations of Albertan’s will be working in the oil patch because demand for oil will be much lower than it is today. Prudence dictates that we do not just put our collective head in the sand and enjoy the next boom (if and when it comes). We need to plan for the coming changes and get much more aggressive about diversifying our economy.

This does not have to mean less oil and gas activity in the province. It does not have to be a zero-sum game in which we walk away from what has been, and still is, a bread and butter industry for Alberta. There is no need to say hasta la vista, baby to our energy sector.

What we need to do is continue the slow, but critically important, process of economic diversification. There will be failures. There will be missteps. But if we work hard (a key message of Mr. Schwarzenegger’s speech) and forget the limitations and naysayers, we can make Alberta not only an energy capital, but a high-tech, an education, a knowledge sector, a green tech, a you-name-it capital, too.

We have a lot to lose if we dismiss Mr. Schwarzenegger’s green pronouncements as unrealistic. The world will change (as it always does) dramatically in the next decade or two. The question is, will we be ready or will we be wondering what to do with all those pump jacks and giant trucks?

We in Vancouver can identify with our fellow citizens in Toronto as they put up with the inconveniences generated by security for the G20 meetings. Vancouver had its share of disruptions related to last winter’s Olympic Games; but, at least, we had one mother of a party during the Games to compensate. Will there be any reward for Toronto, Canada and, in particular western Canada from the G20 meetings?

Often these high level—to say nothing of high cost—meetings are not very productive and close with an amazingly content-free statement to the media. But, perhaps, the 2010 meetings will be different. Already, and even before the official meetings get underway, China has grabbed the headlines by announcing more flexibility for its currency, the yuan.

First, we should ask why China made this statement now. China has been under very considerable pressure from the United States to allow the yuan to move up against the US dollar. This would make Chinese goods more expensive and a little less competitive in the American market. It would also make US goods and services cheaper for China to buy. Both of these changes would help bring more balance to the one-sided trade that the US now has with China. By making its statement now, China hopes to deflect any criticism of its exchange rate policies. After all, it has already announced it will be adjusting them.

Then we should note exactly what China has said and not said. A conclusion that this means China will soon have a free floating currency would be reading far too much into China’s statement. Instead, China has said that it will allow the yuan to move within an unspecified range against an unspecified basket of currencies. Keeping the range narrow means that there would be little change from the present situation. Deciding what currencies should go into the basket and what weights they should have gives China far more control over the yuan than a free market would allow. In an extreme case, they may not choose to put the US dollar into the basket or they may weight it very low.

To look at what this means for Canada and the West, we would need to know if and to what extent the Canadian dollar will be in China’s currency basket. However, we can be fairly certain that any changes—even if they are little and late—will be in the direction of raising the yuan against the Canadian dollar. This will have a relatively small effect on our imports from China. Already many common goods are now made in lower cost countries like Vietnam.

It will make Canadian resources and Canadian companies that produce those resources cheaper for the Chinese to purchase. So we can expect continued strong sales of our resources into China and increased interest by China to purchase the companies that produce these resources. The former will help maintain a strong economy in Canada, especially the resource rich West. The latter will require vigilance to make sure that any organization operating in Canada follows our laws and maintains our standards. Any change is not likely to be massive, but it will be very interesting to see exactly what and how much China does and how all this plays out.

Dr. Roslyn Kunin is the Director of the Canada West Foundation’s British Columbia Office.

Posted by: Dr. Roslyn Kunin