Reports of the retreat of globalisation in Canada are greatly exaggerated.

Jim Stanford's column ($ link) (update: free version here) in today's Globe and Mail makes a surprising claim:

Everyone knows globalization is an irresistible worldwide process enveloping every economy, including Canada's, in its market-driven tentacles. Right?

Wrong.

In fact, since 2000, Canada's economy has been curiously de-globalizing before our eyes. The importance of global markets to our employment and production has been diminishing, not increasing -- and at a remarkable pace.

Economists are at their happiest when they're skewering conventional wisdom, but I think Jim is drawing the wrong conclusion here:

In 2000, Canada's total exports were equivalent to 45.6 per cent of our GDP. That was the highest share ever, and reflected the effect of globalization on our economic orientation. After then, however, globalization began to unwind for us, and the export share began to fall. By 2006, it had shrunk to just 36.5 per cent of GDP.

Let's look at the data. For reasons I don't understand, Jim is using nominal exports and nominal GDP, so he's looking at the combined movements of prices and quantities:

This decline in the importance of international trade is utterly unprecedented in Canada's postwar economic history. Incredibly, Canada's economy (excluding energy) is now less dependent on exports than it was in 1994, when the North American free-trade agreement was signed. Exports are now falling in economic importance more quickly than they expanded in the early years of continental free trade.

(Emphasis added.) Why would we exclude energy, when the most important thing driving the Canadian economy is an energy-price-induced terms of trade shock? The whole point of the sectoral shift story we're seeing is the increase in production and exports of the energy sector.

This is followed by a puzzling proviso:

A word of caution is required here, because this measure -- exports as a share of GDP -- is somewhat misleading. It includes the value of imported commodities (such as auto parts) that are then processed and re-exported in another form (such as finished vehicles).

This is the only mention of imports in the column. I don't understand how the increase in cross-border integration of production processes can be so easily dismissed in an article that argues that globalisation has become a weaker force in the Canadian economy.

Another puzzle is why the appreciation of the CAD doesn't show up in this analysis. A 30% appreciation in the CAD is a much more plausible explanation for a decline in exports than a story based on the retreat of globalisation in Canada.

But more fundamentally, it's hard to see how an examination of the effects of a terms of trade shock could be interpreted as being evidence that the importance of the global economy is diminishing.

Comments

[Ben]

Oh Jim, he's at it again.

[tom s.]

I always enjoy Jim Stanford's columns, but I appreciate you challenging them too. Not being up with the data, I'm sometimes at sea who to believe. I usually believe whichever of you I read last.

I do have an idea why imports and the CAD don't appear more in his column: the 600-word limit (or maybe it's 800?) Not much space there either way.

[Phil]

Re Travis' comment - how can you make "less cyclical" distinctions between commodity sectors (including energy) and non-commodities sectors in this context? If the boom in commodities in Canada is causing the dollar to appreciate dramatically and is making other non-commodity sector relatively more expensive for the buyers of Canadian exports (thereby reducing export demand in those sectors), how can you describe the downward trend for non-commodity sectors as "less cyclical"?

[DBailie]

I feel compelled to come to Jim's defence on a couple of points.

First, regarding the exclusion of energy exports, the quote above is taken out of context. The previous paragraph begins: "This [drop in exports] occurred despite a historic expansion in Canada’s energy exports (especially oil, and especially to the U.S.), which almost doubled in the same time. Non-energy exports, therefore, fell even faster..."

Second, Jim also discussed the appreciation of the CAD: "Most of the decline in trade has occurred since 2002 when our loonie first took off – fuelled by rising commodity prices..."

[Jim Stanford]

Dear Stephen and commenters...Just back from touring around the Aussie outback, to find these comments on my recent G&M column.

Thanks as always for the spirited discussion. Thanks to Travis and DBailie for adding some perspective. A quick response to some of the complaints put forth:

1. Mixing up prices and quantities? The original column did indeed refer to the fact that about half the decline in the (nominal) ratio of exports to GDP was due to the falling value (in Canadian dollar terms) of our exports. The other half reflects a reallocation of real economic activity away from exports. I would argue, however, that even the purely price-driven portion of this decline is important. It means that Canada's exports are generating less income at home than they used to. This translates into reduced incomes (for companies and workers in those sectors), reduced domestic spending, reduced export-driven taxes for government, and other important economic effects.

Stephen and I have had a similar discussion (on the issue of real vs. nominal business investment spending) about whether GDP shares should be calculated as ratios of nominal measures or ratios of (separately deflated) real measures. For similar reasons, I think the ratio of nominal exports to nominal GDP is the most meaningful -- although it is important to decompose that into price changes and quantity changes.

2. Canadian dollar appreciation? I indeed listed this (and the Bank of Canada's accomodating attitude) as the most important reason for the phenomenon I described. Most people know that a higher dollar means cheaper imports. But few understand that it also means less "valuable" exports: that is, our export revenues for products priced globally, translated back into loonies, shrink (even if there had been no decline in real export volumes -- which in fact there has been). A real economic consequence of the loonie's appreciation has been the transfer of economic activity into non-exported (ie. non-traded) sectors, which accounts for half of the measured decline in the X/GDP ratio. (I suspect, furthermore, that this will grow as real trade flows continue to gradually adjust to the big terms of trade change. This adjustment will be dominated by the continuing hemhorrage (sp?) of Canadian manufacturing.) This shift to non-tradeables has occured despite the real and nominal expansion of one particular traded sector: energy.

3. Speaking of which, why am I interested in the extent to which this phenomenon is visible in energy vs. other exportables? For two reasons. First, I have a personal (and oft-stated) concern with Canada's reversion into natural resource exporter, which is a key factor behind the decline in exports. Second, the trends have been quite separate for energy and non-energy exports, in which case it makes good sense to consider the extent to which the growth of energy exports has offsets the decline in other exports. The fact that non-energy exports are smaller as a share of GDP than when we entered the NAFTA speaks volumes, in my view, about the extent to which NAFTA was indeed about reinforcing Canada's "hewer of wood, drawer of water" status in the continental economy -- rather than about cementing market access for Canada's value-added goods.

Is this whole trend really about "diminishing importance of the global economy", in a general sense? Not really, of course. All of these factors (including the global commodity price boom which is responsible for much of the appreciation) are wrapped up with global forces. But the fact that (in real terms, and even more in value terms) we are allocating significantly less of our output to world markets is surprising and consequential.

PS: My Globe columns have a 725-word limit.