In with the old, in with the new - Canada country report

Feature | 20 September 2017

As Canada celebrates 150 years of confederation,
Binyamin Ali looks at the steps the country is taking to capitalise on its reputation for continuity, stability, and certainty, while still improving its competitiveness as it opens up to more global trade

Canada has been steadily opening its economic borders and securing access to markets abroad over the last 25 years. Since the North American Free Trade Agreement (Nafta) with the US and Mexico came into effect in 1994, the country secured agreements with a further 14 countries (predominantly in Central and South America), which culminated in the (yet to be ratified) Trans-Pacific Partnership (TPP) and the Comprehensive Economic and Trade Agreement (CETA) with the EU in 2016.

Despite these efforts however, the US continues to be its largest trading partner (and vice-versa), with the US accounting for 76% (see Figure 1) of its goods exports (US$334bn) and 54% of its goods imports (US$235bn - both sets of figures exclude services trade).

"The oft used or clichéd expression is, 'When the US sneezes, Canada catches a cold'. [But] Canada, historically, has been a trading nation," says Faizal Jiwa, managing director and head of trade at Canadian Imperial Bank of Commerce (CIBC).

"Self-sufficiency, given the size of Canada from a population and a landmass perspective, is not an option. Canada is a resource-rich country, it's got a relatively small population, and it's set on a pretty large, resource-intensive piece of land. So Canada needs trade.

"Historically we were very much a natural resource-based economy. Earlier on, Canada was trading things like fish and fur but increasingly, we moved into lumber, farm products, and today there's an emphasis on grains and pulp, paper is another industry we focus on, and then conventionally we've been reliant on metals and minerals. Canada attempts to attract investment in the heavy oil sector, we tend to be a large exporter of crude. On the flip side, we tend to import a lot of finished goods. Foreign trade represents, gosh, I want to say over 50% [the World Bank estimates this figure to be 64%1] of Canada's GDP."

Towards globalisation

While Canada has been moving towards globalisation, the US, propelled by President Donald Trump, has gone in the opposite direction. Addressing trade deficits and 'unfair' terms with trading partners was a key (and popular) pledge during the presidential election campaign trail, and it has resulted in the US initiating the renegotiation of Nafta (see page 56 for an analysis of the Summary of the Objectives issued by the US).

"The US is Canada's biggest trading partner, so it's a very important negotiation to Canadians. But, reciprocally, Canada is the US' biggest customer," says Jeffrey Shell, managing director and co-head of global trade and banking at Bank of Montreal (BMO).

"If you consider trade at a state level, roughly two thirds of states within the US have Canada as the largest trading partner, so it's a critical relationship to Canada and I would argue, probably without too much opposition, that it's a critical relationship to the US as well. It is a very balanced trade relationship - including both goods and services, that somewhat lands with the US side as being a net winner in terms of total flows."

According to the Office of the United States Trade Representative (USTR)2, total US exports of goods and services to Canada in 2016 was US$320.1bn, while imports were US$302.6bn - as a result, the US had a trade surplus of US$12.5bn with Canada in 2016.

"Though, we would generally not think about trade as a zero-sum game, but if you do look at it that way, it is a relationship that is marginally in the US' favour. Adopting a broader view of the economic benefits of trade that include lowering the price of imports, promoting exports and encouraging innovation, it is in our collective interest to modernise, preserve and nurture low friction trade," adds Shell.

This could leave Mexico bearing the brunt of any protectionist victories for the US during the renegotiation process, given that the US had a trade deficit of US$55.6bn3 with Mexico in 2016.

In the current environment of anti-globalisation rhetoric, Canada signing the CETA agreement with the EU begins to look very timely. But although it will give the country access to the largest trading block in the world, it would be unrealistic to suggest it can make up any meaningful shortfall if there was to be a significant reduction in trade with the US.

"We're really excited about CETA. It gives us new access to the two largest economic blocks in the world when you consider Nafta as well," says Shell.

"CETA has progressive features we're really proud of, like environmental protection, labour safeguards and gender rights provisions. Though we like what it signals, our expectations, however, are that is going to have a fairly marginal impact on the Canadian economy - the smart people who have done the math have concluded that this is roughly CAD8bn in GDP upside for us, which is a good number, but not a gamechanger. Simply, no other agreement could change the reality that Nafta's really, really important to us. Nafta is the largest economic block in the world. Twenty five percent of the world's GDP resides with Nafta and we're an important part of it."

One of the areas where CETA could have more of a significant impact is on the competitiveness of Canadian companies. With European businesses entering Canada's market and competing for contracts, they will have to respond to new demands.

"Globalisation, diversification, being open and competitive, this is being preached by everybody. When you just close the border to everything, what is your incentive to become better?" Rudolf Effing, director and head of trade finance, Americas, at Deutsche Bank asks.

"You're competing with a lot fewer companies, people, and countries. So the incentive to become better is lower. People say, 'Necessity is the mother of invention', but I would replace that with 'competition' - competition is the mother of invention. So if you're not competing with anybody, why invent?

"Canada is really marching into the direction of globalisation, and taking advantage of other countries' strengths, whereas the US is going backwards into protectionism, focusing more on their domestic markets, which means that they're not taking advantage of what the rest of the world has to offer."

Figure 1: Canada exports and imports by destination

Source: Axco Global Statistics

Expansion opportunities for banks

Following the 2008 financial crisis, Canada's economy was not harmed as severely as many other western economies, but significant changes occurred as a result of the disruption - for Canada's banks, this meant expansion opportunities.

"Canada's largest banks thrived as the Canadian financial system withstood the tests of the global financial crisis. Most Canadian banks have even expanded and the largest can now be distinguished not by their Canadian business, but by their respective strategies abroad," says Shell.

"For example, at BMO, we acquired a US Midwestern-based bank called Marshall & Ilsley in 2011 and are now truly a North American bank with almost the same branch footprint in the US as we have in Canada."

While the banking sector found opportunities, Canada's SME sector suffered due to a decline in demand from the US. In response, the Canadian government, "acting through EDC [Export Development Canada] stepped up significantly, expanded EDC's mandate and allowed it to provide a lot more support to the SME sector, which is the heart of exports to the US," says CIBC's Jiwa.

Jiwa adds, "Different than previous governments, the existing liberal government headed by [Prime Minister Justin] Trudeau came in on a platform of spending, so certainly they wanted to make sure that we were not balancing the budget and were going ahead with the deficit, which again, from a Canadian mindset, is something that Canadians have to get comfortable with - spending your way to recovery and growth."

Canada's GDP grew by 3.7% in the first quarter of 20174 (the fastest rate of growth in the G8), which was mostly due to consumer spending and residential investment. In order to secure the country's future growth, Trudeau's administration has prioritised infrastructure spending and through its 'Investing in Canada' programme, will establish the Canada Infrastructure Bank. The bank will begin work in late 2017, equipped with a CAD35bn fund and a mandate to support projects that are too risky or not profitable enough to attract banks, or provide loan guarantees where the private insurance market is unable to.

"There is also focus on the Strategic Innovation Fund, where the government is trying to invest about CAD1bn in technology and the new economy, giving Canadians skills and resources required to adapt to the changes that are taking place. I think it is, in part, trying to avoid what happened in the US, with the hollowing out of manufacturing jobs in the Midwest," says Jiwa.

"We do have a very strong and emerging technology cluster in the Toronto-Waterloo corridor that is anchored by top universities and home to diverse populations," adds Shell.

"Forward-looking companies are setting up shop in the corridor and they're succeeding, and due to its proximity to Toronto, it's becoming a very exciting place to be. And there's a lot of energy behind making infrastructure enhancements to improve transportation, such as a high-speed rail connecting that market with Toronto which could really supercharge growth. So it's a way of looking at a couple of different priorities at the same time. Technological innovation, and also infrastructure modernisation."

Figure 2: Canada's exports and imports

Source: Axco Global Statistics

Punching above its weight

As the second largest country in the world, but with a population of only 36 million, Canada has a unique set of challenges. The country can point to its status as a net exporter of energy (see Figure 2) as proof of its ability to use its limited labour force, but with CETA soon coming into force and a large European market to compete with, the potential of its small population being overwhelmed does not faze Jiwa.

"From a global perspective, Canada has around 0.5% of the world's population, yet we export 2.5% of global merchandise. So we're punching well above our weight," he says.

"And, if you think about the Strategic Innovation Fund which is in part looking at providing higher value services in investment technology, in investment, in automation, the correlation between the number of people and value of exports will increasingly decline. You can be a small country that has great resources like we do, that has investment in technology, that can have automation, that can have greater output, which is uncorrelated to population. This is part of the new economy we're trying to build."

Canada is certainly trying to build a modern economy. The US' status as its largest trading partner will not alter (and there is no appetite to change this) but forward strides have been taken to diversify its trading partners to avoid that clichéd cold the next time the US economy sneezes. Diversifying exports away from raw materials towards services and value-added goods will no doubt take time, but if the remaining signatories can find a way to salvage the TPP without the US, Canada will have access to markets in the Asia Pacific hungry for its know-how and goods.

"They started their journey 20 years ago, towards becoming this global player, and I think they will continue this," adds Deutsche Bank's Effing. I think Canada will become a more prominent player in the future."

Binyamin Ali is editor of TFR

Box-out 1

Key industries by provide or territory 



Alberta has one of the most generous allotments of energy reserves in an energy-rich country. Other industries include gas, coal, manufacturing of iron and steel products, agriculture, livestock, lumber, tourism and
food processing.

British Columbia

The main industries are services, lumber and related industries, food processing, mining and manufacturing (particularly electronic items). This is a prime fishing area. Outdoor recreation and tourism bolster the local economy.


Agriculture, especially cereals, plays an important role, but industrial production is increasing in significance, particularly printing, chemicals, metals and machinery. There are rich mineral deposits and abundant timber.

New Brunswick

About 85% of the province is forested; lumber and lumber products play a significant role in the economy, along with tourism, which is encouraged by the province's natural parks. Manufacturing and a fledging communications industry contribute
to the local market.

Newfoundland and Labrador

The fishing sector and the processing of related products have declined. There is mining in Labrador but, because of the unfavourable climate and poor soil, food has to be imported. The property and energy industries are likely to expand given increased demand and new offshore projects.

Nova Scotia

Coal mining, fishing, fruit and vegetables are the main industries. Tourism, especially for sporting activities, is also important.


Toronto is the main centre for the service industries, insurance and banking. Manufacturing and industrial products also contribute to the provincial economy. Agriculture and livestock are developed throughout the province, together with mining in the north and fruit production in the south, where there is a developing wine industry. There are also hydroelectric facilities in the south (Niagara) and tourism throughout the province.

Prince Edward Island

Tourism, fishing and agriculture
are the main pillars of the economy,
with notable products including shellfish, livestock, fruit, vegetables and potatoes. Tourism is encouraged by devotees of the books by LM Montgomery, which are set on the island. Manufacturing is mainly
restricted to food processing.


Second after Ontario in industrial production, Quebec has vast
resources of hydroelectric power
in the north. Science, technology
and communications have recently emerged as growing sectors of the economy. Agriculture and farming are carried out in the lowlands and there are mineral deposits including iron, copper, zinc, gold and silver. Tourism
is also important.


The province is mainly important for farming of both cattle and cereals. In addition, there are rich deposits of minerals, oil and natural gas. Industrial processing of raw materials and timber production are also significant.

The Territories:
Northwest Territory, Yukon
and Nunavut

The economies of the Northwest Territory and Nunavut are centred
on mining, fishing and trapping.
Oil is refined on the Mackenzie River and there are mineral deposits. In the Yukon mining remains the leading industry, principally copper, lead,
zinc, silver and gold.

  1. World Bank Data. Trade (% of GDP) for Canada:

  2. USTR - US-Canada trade facts:

  3. USTR - US-Mexico trade facts:

  4. Scotiabank's Global Outlook, July 2017:

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