13 March 2015, Global Connections

Revive Trade, Fuel Growth

Global and local economic and trade experts offer insights on how international trade can serve as a catalyst for business growth in Canada

The Canadian economy, like that of its counterparts around the world, is more globally integrated than ever before. As the economy has become more global, international trade has become even more crucial to growth.

The Canadian economy, like that of its counterparts around the world, is more globally integrated than ever before. As the economy has become more global, international trade has become even more crucial to growth.

As the Canadian economy struggles to recover from the Great Recession, an increased focus on international trade can help fuel growth. In the first quarterly webinar in HSBC's “Fueling Growth Worldwide” series, experts in global trade and Canadian economics discussed how trade can help boost the domestic economy and how Canadian businesses can facilitate that growth by capitalizing on current international trade opportunities.

“Canadian companies have a chance now to step up and help fuel the growth our economy needs,” said David Watt, Canadian Chief Economist at HSBC Bank Canada. “A few years from now, we don't want to look back and say we wish we'd taken advantage of the trade opportunities open today.”

Why trade is necessary for growth now

While the U.S. economy seems to be experiencing a real recovery, the Canadian economy continues to lag. Peter Hall, Vice President and Chief Economist at Export Development Canada, attributed the stagnation to the slow growth of “three important chunks” of the economy: consumer confidence, housing and provincial government budgets.

Following the Great Recession, the confidence of Canadian consumers rebounded sharply, but it's now stagnant. Consumers' debt-to-income ratio has continued to rise, “creating a great amount of consumer vulnerability,” Hall said. While the Canadian housing market corrected more quickly than the U.S. market following the burst of the housing bubble, Canada now has a housing surplus with properties overvalued 10% to 30%, Hall said. And British Columbia is the only province with a balanced budget.

Indicators of slow domestic growth make it clear that the opportunity for foreign investment, through increased international trade, could offer the Canadian economy a boost. “Canadian consumers did their work a few years ago, when confidence was high,” Watt said. “Today, Canadian consumers continue to save too little and spend too much, and they are not a force that can carry us out [of the challenging period of growth we currently face].”

Not only does slow domestic growth point to international trade as a viable economic solution, but trade has a successful track record behind it as well. For instance, following a substantial decrease during the Great Recession, exports recovered substantially. “Prior to the economic crisis, global trade was growing at a pace several times the growth of GDP,” said Douglas Lippoldt, Senior Trade Economist at HSBC Global Research. “Since then, the growth of trade has slowed, but it is still expanding more rapidly than the GDP overall.”

Canadian companies have a chance now to step up and help fuel the growth our economy needs

David Watt, Canadian Chief Economist at HSBC Bank Canada

Finally, increasing openness to trade in countries around the world, including a number of emerging economies, presents new opportunities for Canadian companies. For instance, China's efforts to make the Renminbi (RMB) an international currency has opened up new opportunities for trading with Chinese companies in their own currency. And with Canada designated as an RMB trading hub in November 2014, the outlook for trade with China looks brighter for Canadian companies.

In addition, the Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership, if enacted over the next few years, could facilitate free trade for sizeable markets in Europe and Asia. “They will go way beyond what's been achieved so far,” Lippoldt said. “Canadian companies will be able to see real benefits from these agreements in terms of market access and potential growth.”

How businesses can help fuel local growth for international expansion

As trading opportunities increase around the globe, Canadian businesses are in an ideal position to harness those opportunities and fuel domestic growth, while benefiting their bottom lines through increased profits and lower costs. But how can Canadian companies start making a difference for themselves and the domestic economy? The experts advise business leaders to educate themselves about the opportunities and pinpoint the markets that offer the best prospects for their businesses.

“Canada has been signing free trade agreements with several countries over the past few years, and negotiations are ongoing with others,” Watt said. “Beyond the United States, we're developing deeper relationships with other countries. Businesses need to get prepared to start taking advantage of these agreements.”

Getting prepared may mean opening a bank account in RMB or training staff on how to work with exchange rates to utilize foreign currency. It may mean building relationships with potential customers in other countries or seeking the help of experienced partners that can help you navigate the paths of international trade.

While many types of businesses can benefit from increasing trade, some sectors are particularly well positioned to help fuel export growth. Machinery and equipment, which has seen a recent 9% increase in exports, is one of those sectors, Hall said. As the United States experiences robust recovery, its companies will continue to purchase more machinery and equipment, as will those in other recovering or emerging economies.

The automotive and aerospace sectors also offer increasing opportunities for trade. “The American auto sector is now looking north of the border, and we have a lot of supply chain components in place here,” Hall said. “If the capability is still in the economy, expansion is still on the table. I'm not so sure that companies or industries that have left will never come back.”

And if the expansion of the World Trade Organization's Information Technology Agreement is concluded, it will significantly increase the scope of duty-free treatment of electronic products, representing new opportunities for selling many kinds of technology at lower prices, Lippoldt said.

Many types of Canadian goods and services may be in demand in new markets overseas, and there are plenty of open markets to explore. While the United States will remain an important trading partner, HSBC experts recommend also looking closely at China, India and Indonesia. The growth potential in these and other emerging markets is tremendous. Globally, HSBC estimates that between now and 2050, emerging markets will see an almost 3 billion people joining the ranks of middle class consumers*.

Buyers in these emerging economies are eager to purchase new products and services. If Canadian businesses are up to the challenge, much of that foreign investment could be made in Canada, fueling growth for individual companies and the entire domestic economy.

*Source: Karen Ward and Frederic Neumann, Consumers in 2050, October 2012, p.5

Disclaimer

The information presented is not meant to be comprehensive and does not constitute financial, legal, tax or other professional advice. You should not act upon the information contained in this document without first obtaining specific professional advice. While reasonable care has been taken in preparing this document, HSBC does not make any guarantee, representation or warranty (express or implied) as to its accuracy or completeness. The information presented in this document is subject to change without notice.

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