Lies, damned lies, and trade statistics: North American integration and the exaggeration of Canadian exports.

• Author: Weir, Erin M.K.

1. INTRODUCTION

   The pervasive notion that Canada is extraordinarily dependent on trade influences debates about foreign policy, domestic policy, and even the future of Confederation. Many commentators argue that securing access to foreign markets should trump other interests and values in formulating Canadian policy. Influential Canadians have proposed a "grand bargain" with the US in which Canada would conform to American security, energy, military, and trade policies in order to ensure an open border. (1) The Security and Prosperity Partnership of North America--agreed to by Canada, the US, and Mexico in March 2005--constitutes at least a small step toward such a bargain. (2)

   On the domestic front, the case for lower taxes, less regulation, and smaller government is largely based on the perceived need to compete in global markets. (3) Proposals to redistribute wealth, or to advance other social values, are often rejected not because they are seen to be undesirable, but because they are deemed to be infeasible in the new globalized economy. Some observers even contend that trade flows are altering the very foundations of Confederation.

   Policy arguments about Canada's dependence on trade are almost always supported with reference to exports, rather than imports. For example, former free-trade negotiator Gordon Ritchie describes exports as "the central pillar of our national interest." (4) By contrast, leading economist Paul Krugman argues that "imports, not exports, are the purpose of trade. That is, what a country gains from trade is the ability to import things it wants." (5) In fact, many of the things that Canada imports are used as inputs to produce exports. (6) By taking both exports and imports into account, this paper paints a different picture of Canada's international trade and its implications for public policy.

   As Canadian nationalist Mel Hurtig observes, "Canadians have been constantly bombarded with statements to the effect that our exports now [2002] account for between 40 and 50 percent of our GDP." (7) However, gross exports declined from 45 percent of GDP in 2000 to 38 percent of GDP in 2003, and remained at this level in 2004 and 2005. Gross imports were equal to 38 percent of GDP in 2000 and declined to 34 percent in 2003, remaining at this level in 2004 and 2005. (8) Trade numbers should be interpreted carefully: simply using more recent data and measuring trade in terms of imports rather than exports reduces its magnitude from nearly half to one-third of the economy.

   Conventional trade statistics compare gross exports, including a substantial amount of imported content, to value-added GDP, consisting only of Canadian content. Export statistics measure the gross value of goods and services moved across Canada's borders, but GDP measures the value of goods and services created in Canada. Grant Cameron and Philip Cross of Statistics Canada explain that the use of imported inputs to produce Canadian exports has the effect of "inflating trade flows relative to their actual contribution to the economy." (9) While Canada's gross-export tally amounted to 41 percent of GDP in 2002, the import content in these exports was worth 14 percent of GDP. Therefore, exports contributed only 26 percent of Canada's GDP that year. (10)

   Despite Statistics Canada's excellent technical work on the import content of exports since 1999, (11) almost all policy literature continues to present exports as accounting for around 40 percent of GDP. (12) For example, the Government of Canada's recent International Policy Statement indicates that "exports account for almost 40% of our economy." (13) Misleading gross figures are not used solely for the sake of simplicity. The Government of Canada published NAFTA @ Ten: A Preliminary Report in 2003. Since the section on Canada-US trade and investment includes some forty-three graphs, twenty-five statistical tables, and fourteen map and pie-chart displays, its omission of the import content of exports cannot be attributed to the somewhat greater complexity of value-added figures than gross figures. (14)

   Instead, inflated trade statistics seem to have been retained because they provide a convincing rhetorical basis for policies that promote "competitiveness." Some policy proposals, especially a Canada-US customs union and a North American Monetary Union (NAMU), are founded on these misleadingly large numbers. More accurate trade statistics deflate powerful rhetoric and, in certain important cases, substantively change policy analysis.

   Further implications arise from the fact that imported content is unevenly distributed between the countries to which Canada exports, the industries that produce exports, and the provinces from which exports emanate. Policy-makers should pay particular attention to the import content in exports to the United States, manufactured exports, and exports from Ontario.

2. OVERALL EXPORTS

   When a plant uses an imported input to manufacture a product for export, the full value of the product is counted in export figures. However, the value of the product minus the value of the imported input is counted in GDP. North American integration creates massive discrepancies between Canadian export and GDP statistics. Suppose that iron from Canada is used to make steel in the US. The steel is used to manufacture a part in Canada, which is used to produce a component in the US. The component is installed in a vehicle in Canada, which is sold in the US. Canadian export figures would include the value of the vehicle, plus the part, plus the iron. Canadian GDP would include the vehicle, minus the component, plus the part, minus the steel, plus the iron. The vehicle adds much more to export figures than to GDP because it contains imported content (i.e. the steel and component).

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   Ignoring imported content implies that about 40 percent of Canada's national income comes from foreign markets. In fact, content imported from other countries makes up more than a third of Canada's gross exports. In 2002, the most recent year for which value-added figures are available, Canada obtained 26 percent of its income from foreign markets. (15) As Ziad Ghanem and Philip Cross of Statistics Canada note, "Canada is less dependent on exports for its value-added GDP than is commonly believed." (16)

   The gap between gross exports and value-added exports was equal to 15.2 percent of GDP in 2002. A small part of this gap consists of finished products imported to Canada and re-exported to other countries (equal to 2.7 percent of GDP). The lion's share is imports embedded in exports (equal to 11.1 percent of GDP). Embedded imports are so significant because some components, such as auto parts, move across the border - and hence count as exports - several times during the production process. The remainder of the gap (equal to 1.4 percent of GDP) reflects withdrawals from inventories and export taxes on tobacco products, both of which increase gross exports but add nothing to GDP. (17)

   The movement of products back and forth across the border during the production process implies substantial export content in Canadian imports. Unfortunately, statistics on this phenomenon are not available. However, gross-import figures overstate the economic significance of trade in the same way as gross-export figures.

   Exaggerating Canada's trade dependence implies that the Canadian state has little capacity to manage the economy. If imports amount to nearly 40 percent of GDP, then consumer demand stimulated by macroeconomic policies could leak out of the country through increased purchases of imports, rather than boosting Canada's economy through increased purchases of Canadian products. This logic assumes that consumer spending drives demand for imports, but nearly 40 percent of imports to Canada are used to produce exports. (18) As Cross notes, "In the past decade, we have seen imports rise despite a recession in domestic demand [during the early 1990s] and then fall without a recession [in recent years], both of which were without precedent .... Fluctuations in imports appear to be increasingly driven by changes in export rather than domestic demand." (19)

   Since Canada's consumer demand no longer drives its import demand, it may be possible to stimulate the former without a corresponding increase in the latter. In any case, some of the demand that leaks out through imports would be returned to Canada through the export content of these imports. Canadian governments therefore possess greater capacity to manage the Canadian economy than is usually acknowledged.

   A value-added approach to trade statistics also sheds new light on the Canada-US Free Trade Agreement (CUFTA), the North American Free Trade Agreement (NAFTA), and other free-trade agreements signed by Canada. Thomas Courchene, a leading Canadian economist, states that an "historical review of [CUFTA and NAFTA] would surely assign high marks for increasing trade." (20) Between 1988 (the year before CUFTA came into effect) and 2000, Canada's gross exports increased from 26.7 to 45.6 percent of GDP. According to many commentators, "the results exceeded all expectations." (21)

   A decade after CUFTA, bank economist John McCallum wrote, "Why the overall increase in Canada-US trade was so much larger than predicted remains something of a mystery. The [Agreement] presumably accelerated a trend toward the rationalization of North American production facilities, implying an increase in intra-industry and intra-firm trade in intermediate goods." (22)

   Statistics Canada research confirms that the import content in Canadian exports more than doubled from 6.8 to 16.1 percent of GDP between 1988 and 2000, while the Canadian value-added in exports rose less dramatically from 18.9 to 28.8 percent. (23) According to Cross and Ghanem, "much of the growth of gross exports in the last decade reflected the increasing use of imported...