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Will Trans-Pacific Partnership diversify Canadian economy? Not a chance.

The recent Globe and Mail leaders’ debate focused on the economy. One important – albeit crudely constructed – question asked during the debate was: “Do you have a jobs plan for industry beyond taking things out of the ground”. The question presumed that natural resource extraction has been a big employment driver in Canada, which it hasn’t. That aside, the implicit question was whether the aspiring leaders had a plan for, or even wished to see, greater industrial diversification in Canada. None of the candidates provided a direct response to the question. However, one response in particular stood out for its reference to international trade.

Before proceeding, as one of the post-debate commentators correctly pointed out, tying the economic diversity question to job creation was unwise, since – short of federal direct investment in public works, which none of the candidates appear inclined to – federal fiscal policy has a very limited impact on job creation. It can, however, significantly impact an economy’s industrial composition. For example, taxes, tariffs or legislation targeting a specific industry or sector can influence both domestic and foreign investment in that industry or sector.

International trade agreements are one such policy instrument. In response to the referenced debate question, the current (out-going?) Prime Minister, who is supposedly an economist, emphasised that international trade agreements pursued by his government would enhance economic diversity and create employment.

The problem is neither economic theory nor Canadian history support such an assertion.

Basic economic theory on comparative and absolute advantage asserts that trade leads to economic specialisation rather than diversification. This initially leads to expansion of both production capacity and employment in those areas of specialisation, with subsequent declines  in employment growth in those same areas as productivity gains accrue.

The curiously limited Canadian research on the subject, referenced in a 2012 State of Trade (SoT) special feature on international trade and its benefits to Canada, indicates the Canadian experience is consistent with the theory:

The principal conclusions suggested that trade liberalization in the form of tariff cuts reduced product diversification and reduced plant scale of non-exporters, but had little effect on their production-run length. In contrast, exporting firms reduced their product diversification and increased production-run length and plant scale when compared to non-exporters, taking advantage of the tariff cuts for further expansion.

On the other hand, while export-market participation in Canada is linked to higher plant specialization and productivity growth, employment growth was found to be lower in exporting firms, likely a reflection of exporters employing a more skilled, more productive workforce and operating less labour-intensive plants.

That a Canadian Prime Minister who touts his credentials as an economist suggested otherwise is one thing. That neither of his debate opponents called him out on it suggests that either Canada’s collective federal leadership is incompetent, or they’re all in on it. ‘It’ being the fact that, for various reasons (and vested interests), the Canadian economy is not going to transition from resource extractive industry any time soon. Which makes perpetuating the myth that natural resource extraction is a key employment driver and that its export magically leads to greater economic diversity something the aspiring Canadian leaders can all agree on.

But it’s not only the politicians who perpetuate this myth. Despite the points made in the the referenced 2012 SoT feature regarding the limited benefits of increased international trade on employment, the piece includes a chart (Figure 2) purporting to show that gains in trade have markedly improved the Canadian standard of living. This is achieved by using GDP per capita as the standard of living measure. As has become evident over the last three decades, and especially so in the few short years since the Great Recession, that’s not an appropriate measure — as income from said domestic product has increasingly accrued to fewer ‘capitas’.

So it would appear the consensus answer to the question of whether the next Canadian government will do anything to hasten an industrial shift away from “taking things out of the ground” is a solid no. The continued decline in employment over the next fifteen years, spurred by ever greater technological advancement and more sweetheart trade ‘deals’ like TPP, will largely be masked by the demographic shift. What happens after that is anyone’s guess.

One reply on “Will Trans-Pacific Partnership diversify Canadian economy? Not a chance.”

The media will probably continue to use GDP per capita as a welfare measure for a long time to come, but it hasn’t been condoned as such by international manuals on national accounting since at least the SNA 1993 manual. It advocated real net national disposable income as the best real income measure. StatCan early on declared that it had successfully implemented SNA 1993 even though it had no real income estimates. Now it calculates both real gross domestic income and the more inclusive real gross national income, which differs from real net national income only because it does not adjust for real current transfers payable abroad (as does real gross national disposable income) or for consumption of fixed capital in volume terms. The SNA 2008 manual has doubled down on its support for the real net national disposable income measure.

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