# data[].attributes.headline
Hi There! Lets Learn About the Comparative Advantages and Gains from Trade

# data[].attributes.subject
Hi There! Lets Learn About the Comparative Advantages and Gains from Trade

# data[].attributes.body
The purpose of this topic is to explain comparitive advantage when trading and the  advantageous created for all who take part in it, including countries, companies, and individuals.
Comparitive advantage from trade is the ability  to produce a good or service at a lower opportunity costs then its trading partners.

# data[].attributes.body
The article explains the importance of Comparative Advantage in trade and the various ways it can be applied. The article begins by providing the definition of Comparative Advantage and its origins. The article provides many different examples of the theory and reveals the advantages and disadvantages when its being used.

The article was chosen because it provides a concise overview of the whole theory and provides many contemporary examples that can be understood for any reader. The article also explains clearly the pros and cons of the theory being used and how it affects all participants in it including those who are not actively taking part in the trade such as the average person.

# data[].attributes.attachment_link.readable_text
What Is Comparative Advantage?

Comparative advantage is an economy's ability to produce a particular good or service at a lower opportunity cost than its trading partners. Comparative advantage is used to explain why companies, countries, or individuals can benefit from trade.

When used to describe international trade, comparative advantage refers to the products that a country can produce more cheaply or easily than other countries. While this usually illustrates the benefits of trade, some contemporary economists now acknowledge that focusing only on comparative advantages can result in exploitation and depletion of the country's resources.

The law of comparative advantage is popularly attributed to English political economist David Ricardo and his book On the Principles of Political Economy and Taxation written in 1817, although it is likely that Ricardo's mentor, James Mill, originated the analysis.

Key Takeaways

Understanding Comparative Advantage

Comparative advantage is one of the most important concepts in economic theory and a fundamental tenet of the argument that all actors, at all times, can mutually benefit from cooperation and voluntary trade. It is also a foundational principle in the theory of international trade.

The key to understanding comparative advantage is a solid grasp of opportunity cost. Put simply, an opportunity cost is a potential benefit that someone loses out on when selecting a particular option over another.

In the case of comparative advantage, the opportunity cost (that is to say, the potential benefit that has been forfeited) for one company is lower than that of another. The company with the lower opportunity cost, and thus the smallest potential benefit which was lost, holds this type of advantage.

Another way to think of comparative advantage is as the best option given a trade-off. If you're comparing two different options, each of which has a trade-off (some benefits as well as some disadvantages), the one with the best overall package is the one with the comparative advantage.

Diversity of Skills

People learn their comparative advantages through wages. This drives people into those jobs that they are comparatively best at. If a skilled mathematician earns more money as an engineer than as a teacher, they and everyone they trade with are better off when they practice engineering.

Wider gaps in opportunity costs allow for higher levels of value production by organizing labor more efficiently. The greater the diversity in people and their skills, the greater the opportunity for beneficial trade through comparative advantage.

Example of Comparative Advantage

As an example, consider a famous athlete like Michael Jordan. As a renowned basketball and baseball star, Michael Jordan is an exceptional athlete whose physical abilities surpass those of most other individuals. Michael Jordan would likely be able to, say, paint his house quickly, owing to his abilities as well as his impressive height.

Hypothetically, say that Michael Jordan could paint his house in eight hours. In those same eight hours, though, he could also take part in the filming of a television commercial which would earn him $50,000. By contrast, Jordan's neighbor Joe could paint the house in 10 hours. In that same period of time, he could work at a fast food restaurant and earn $100.

In this example, Joe has a comparative advantage, even though Michael Jordan could paint the house faster and better. The best trade would be for Michael Jordan to film a television commercial and pay Joe to paint his house. So long as Michael Jordan makes the expected $50,000 and Joe earns more than $100, the trade is a winner. Owing to their diversity of skills, Michael Jordan and Joe would likely find this to be the best arrangement for their mutual benefit.

Comparative Advantage vs. Absolute Advantage

Comparative advantage is contrasted with absolute advantage. Absolute advantage refers to the ability to produce more or better goods and services than somebody else. Comparative advantage refers to the ability to produce goods and services at a lower opportunity cost, not necessarily at a greater volume or quality.

To see the difference, consider an attorney and their secretary. The attorney is better at producing legal services than the secretary and is also a faster typist and organizer. In this case, the attorney has an absolute advantage in both the production of legal services and secretarial work.

Nevertheless, they benefit from trade thanks to their comparative advantages and disadvantages. Suppose the attorney produces $175 per hour in legal services and $25 per hour in secretarial duties. The secretary can produce $0 in legal services and $20 in secretarial duties in an hour. Here, the role of opportunity cost is crucial.

To produce $25 in income from secretarial work, the attorney must lose $175 in income by not practicing law. Their opportunity cost of secretarial work is high. They are better off by producing an hour's worth of legal services and hiring the secretary to type and organize. The secretary is much better off typing and organizing for the attorney; their opportunity cost of doing so is low. It's where their comparative advantage lies.

Comparative Advantage vs. Competitive Advantage

Competitive advantage refers to a company, economy, country, or individual's ability to provide a stronger value to consumers as compared with its competitors. It is similar to, but distinct from, comparative advantage.

In order to assume a competitive advantage over others in the same field or area, it's necessary to accomplish at least one of three things: the company should be the low-cost provider of its goods or services, it should offer superior goods or services than its competitors, and/or it should focus on a particular segment of the consumer pool.

Comparative Advantage in International Trade

David Ricardo famously showed how England and Portugal both benefit by specializing and trading according to their comparative advantages. In this case, Portugal was able to make wine at a low cost, while England was able to cheaply manufacture cloth. Ricardo predicted that each country would eventually recognize these facts and stop attempting to make the product that was more costly to generate.

Indeed, as time went on, England stopped producing wine, and Portugal stopped manufacturing cloth. Both countries saw that it was to their advantage to stop their efforts at producing these items at home and, instead, to trade with each other in order to acquire them.

A contemporary example: China's comparative advantage with the United States is in the form of cheap labor. Chinese workers produce simple consumer goods at a much lower opportunity cost. The United States' comparative advantage is in specialized, capital-intensive labor. American workers produce sophisticated goods or investment opportunities at lower opportunity costs. Specializing and trading along these lines benefit each.

The theory of comparative advantage helps to explain why protectionism is typically unsuccessful. Adherents to this analytical approach believe that countries engaged in international trade will have already worked toward finding partners with comparative advantages.

If a country removes itself from an international trade agreement, if a government imposes tariffs, and so on, it may produce a local benefit in the form of new jobs and industry. However, this is not a long-term solution to a trade problem. Eventually, that country will be at a disadvantage relative to its neighbors: countries that were already better able to produce these items at a lower opportunity cost.

Criticisms of Comparative Advantage

Why doesn't the world have open trading between countries? When there is free trade, why do some countries remain poor at the expense of others? Perhaps comparative advantage does not work as suggested. There are many reasons this could be the case, but the most influential is something that economists call rent seeking. Rent seeking occurs when one group organizes and lobbies the government to protect its interests.

Say, for example, the producers of American shoes understand and agree with the free-trade argument but they also know that their narrow interests would be negatively impacted by cheaper foreign shoes. Even if laborers would be most productive by switching from making shoes to making computers, nobody in the shoe industry wants to lose their job or see profits decrease in the short run.

This desire leads the shoemakers to lobby for, say, special tax breaks for their products and/or extra duties (or even outright bans) on foreign footwear. Appeals to save American jobs and preserve a time-honored American craft abound, even though, in the long run, American laborers would be made relatively less productive and American consumers relatively poorer by such protectionist tactics.

Advantages and Disadvantages of Comparative Advantage

Advantages

In international trade, the law of comparative advantage is often used to justify globalization, since countries can have higher material outcomes by producing only goods where they have a comparative advantage, and trading those goods with other countries. Countries like China and South Korea have made major productivity gains by specializing their economies in certain export-focused industries, where they had a comparative advantage.

Following comparative advantage increases the efficiency of production by focusing only on those tasks or products that one can achieve more cheaply. Products that are more expensive or time-consuming to make can be purchased from elsewhere. In turn, this will improve a company's (or a country's) overall profit margins, since costs associated with less-efficient production will be eliminated.

Disadvantages

On the other hand, over-specialization also has negative effects, especially for developing countries. While free trade allows developed countries to access cheap industrial labor, it also has high human costs due to the exploitation of local workforces.

By offshoring manufacturing to countries with less stringent labor laws, companies can benefit from child labor and coercive employment practices that are illegal in their home countries.

Likewise, an agricultural country that focuses only on certain export crops may find itself suffering from soil depletion and destruction of its natural resources, as well as harm to indigenous peoples. Moreover, there are also strategic disadvantages to over-specialization, since that country would find itself dependent on global food prices.

Pros and Cons of Comparative Advantage

Who Developed the Law of Comparative Advantage?

The law of comparative advantage is usually attributed to David Ricardo, who described the theory in "On the Principles of Political Economy and Taxation," published in 1817. However, the idea of comparative advantage may have originated with Ricardo's mentor and editor, James Mill, who also wrote on the subject.

How Do You Calculate Comparative Advantage?

Comparative advantage is usually measured in opportunity costs, or the value of the goods that could be produced with the same resources. This is then compared with the opportunity costs of another economic actor to produce the same goods.
For example, if Factory A can make 100 pairs of shoes with the same resources it takes to make 500 belts, then each pair of shoes has an opportunity cost of five belts. If competitor factory B, can make three belts with the resources it takes to make one pair of shoes, then factory A has a comparative advantage in making belts, and factory B has a comparative advantage in making shoes.

What Is an Example of Comparative Advantage?

An interesting example of comparative advantages often arises for high-powered executives, who may consider hiring an assistant to answer their emails and perform certain secretarial functions. The executive may even better at performing these duties than their assistant-but the time they spend doing secretarial work could be spent more profitably by doing executive work. Likewise, even if the assistant is mediocre at secretarial work, they would likely be even more ill-suited for executive work. Together, they are ultimately more productive if they focus on their comparative advantages.

The Bottom Line

Comparative advantage is one of the most important concepts in economics. In classical economics, this idea explains why people, countries, and businesses can experience greater collective benefits through trade and exchange than they can produce alone. However, contemporary economists have also pointed out that these gains can be one-sided, or result in exploitation of the weaker parties.

# data[].attributes.attachment_link.description
Comparative advantage is an economy's ability to produce a particular good or service at a lower opportunity cost than its trading partners. Comparative advantage is used to explain why companies, countries, or individuals can benefit from trade. When used to describe international trade, comparative advantage refers to the products that a country can produce more cheaply or easily than other countries.

# data[].attributes.body
The video is a speech by the Governor of the Bank of Canada Tiff Macklem on how Canada can strengthen its exports by focusing on the comparative advantage that it has in particular markets. The governor explains how Canada has many resources and goods that other nations are interested in bringing to their markets. The Governor further explains that by Canada focusing on the comparative advantage that it has on resources such as raw materials or  manufactured goods that are needed by countries such as the United States, it can expect greater growth in its economy.

This article was chosen because it highlights how the Bank of Canada sees the comparative advantage it has on its resources compared to other markets around the world. The video describes how Canada's resources are needed in many markets and how those resources should be strengthened to meet the demand in those markets, ultimately boosting Canada's economy.

# data[].attributes.attachment_link.title
Speech by Governor Macklem / Discours du gouverneur Macklem

# data[].attributes.body
https://www.uregina.ca/arts/economics/assets/docs/pdf/papers/104.pdf

This is an article by Researcher Sung-Chul Lee that compares the comparative advantage Canada has in the United States versus 31 other countries. In page 6 of the article, the Researcher found that Canada had a comparative advantage in the US compared to other countries when it came to trading Primary Goods. Additionally, Canada had a disadvantage when trading Secondary goods (manufacturing) in the US.

The reason I chose this article is the amount of detail it gives when comparing Canada and other countries when it comes to trading to the United States. Not only does it list where Canada has an advantage or a disadvantage, it also lists where advantage or disadvantaged has changed, among other things.

# data[].attributes.body
The video looks at Canada's lumber industry and the reasons for why it has a comparative advantage exporting it compared to other nations. The video explains that Canada has a comparative advantage due to its low costs of producing lumber and the needed demand that occurs outside of Canada for its lumber. The video shows how at different times Canada's comparative advantage over its lumber industry can either provide great economic benefits or provide little growth. The video explains for instance that Canada's advantage in the lumber industry can be attributed to lower production costs such as subsidies from the government and little regulations when exporting. The video also shows that governments from abroad introducing tougher regulations such as tariffs on exports can raise prices on lumber, losing the economic benefit that was once present.

The video was chosen because it highlights the advantages and disadvantages Canada has in the lumber market. The video provides graphs that illustrates how Canada is able to have a comparative advantage in the international market. The video also provides the losses and gains when exporting or importing the material.

# data[].attributes.attachment_link.title
Microeconomics - 93: Why does Canada export Lumber?

# data[].attributes.body
This image shows the many forest resources that Canada is a top exporter in and the comparative advantage it has when ranked among other nations. Canada is relied for its softwood lumber as it has a large resource of it. Other nations such as the Unites Stated have softwood lumber but is difficult for them to obtain due to it tough policies and limited quantity. With Canada having 30% of the world's forest area, it can produce forest products at a greater advantage.
This image was chosen because it shows the various amounts of lumber that Canada exports and the competitive advantage it has trading it globally.

# data[].attributes.body
https://youtu.be/qBc5gWfOuIA
This is a video that looks at Canada's top imports and exports. On top of listing each import and export, the video looks at the estimated worth of each. Additionally, the video compares the amount imported between each import via a percentage. In addition to this, the video compares how much the country, Canada, trades with other nations, via a percentage. It is interesting that Canada's biggest export, the US, have a percentage of 73.5. That shows how close the two countries are. It's important in a way to know these things because you can see where potential avenues of growth can be.

# data[].attributes.body
This video explains Canada's production of canola oil compared to the rest of the world and the comparative advantage that Canada has when producing and exporting to other nations. The video begins by explaining the amount of canola Canada yields in contrasts to other nations and the advantages and disadvantages that it has when exporting compared to other nations.

This video was chosen because it compares the comparative advantage that Canada has against other nations. The videos displays various graphs comparing Canada's yield to other canola producing nations and the comparative advantages and disadvantaged they have against each other.

# data[].attributes.attachment_link.title
Canola School: Comparing Canada versus the rest of the world

# data[].attributes.body
https://www.international.gc.ca/trade-commerce/economist-economiste/state_of_trade-commerce_international/special_feature-2009-article_special.aspx?lang=eng

This article is a more general one that looks at Canada's role in relation to the emerging markets of the world. Canada's opportunities for trade are assessed, as well as it's comparative advantage. I like this article because it talks about Canada's comparative advantage in markets outside of the US. With this article, we can see a more global perspective of Canada's comparative advantage, especially when it comes to the emerging markets of the world. It is interesting to know about Canada's place in the global economy, as well as what Canada can gain from trading with the emerging markets of the world.

# data[].attributes.attachment_link.readable_text
The Emerging World

An extraordinary change has come over the world in the past twenty years, one that will be obvious to future generations but whose repercussions are not yet fully understood by ours. Technological advances, primarily in the area of transmission and storage of information, have shattered the archaic notions of how things ought to function in most fields, from production and trade to war and politics³³. The new ways of communicating, organizing and working are inviting the most remote corners of the world to be actors on the global economic stage; their previously dormant forces are now part and parcel of the broad current of human progress. These emerging economies that are organizing themselves to compete in the new global marketplace are enjoying high growth rates, rapid increases in their living standards ( Figure 1) and a rising global prominence. In 2008, they accounted for 28 percent of world GDP-up from 17 percent in 1995³⁴.

At a Glance

Growing integration of the world economy allows emerging economies that have made a firm commitment to free markets and good economic governance to generate sustained growth. In time, their per capita income can be expected to converge with that of the developed world, to the lasting benefit of both.

As only a small part of the gap has been bridged so far, growth prospects remain favourable, especially for technology-induced growth based on productivity improvements.

Tapping into these markets is crucial-thirty years hence, a gain of just 0.1 percent in the Canadian share of the import markets of Brazil, Russia, India and China (BRIC) would mean an export gain of $29 billion.

Canada is already exporting 42 percent more to emerging and developing markets than predicted by economic modeling based on the factors that drive trade, such as GDP and distance. In particular, exports to China, Malaysia, Indonesia and Algeria are more than double what the model predicts. Key markets where Canadian exports are below potential include India and Brazil.

In the U.S. market, our comparative advantage lies primarily in the automotive, wood and paper, and energy sectors. Outside the U.S. market, our advantage in the agri-food, metals and minerals, and aerospace sectors is significantly stronger, but we are at a disadvantage in the energy and automotive sectors.

Competitiveness analysis in fifteen of the biggest emerging markets reveals that Canadian exports in several advanced manufacturing sectors are performing better in most of these markets than they do globally. Aerospace, in contrast, underperforms in these key emerging markets.

First among these stand Brazil, Russia, India and China (BRIC), champions of the emerging world. Their prominence is not just due to the high rates of growth they have been recently experiencing, although those are impressive. In real terms, Brazil's economy has grown by 46 percent since 1995, Russia's by 79 percent, India's by 136 percent and China's by a staggering 228 percent³⁵. But equally impressive is their growth potential in the future. They occupy a vast area (29 percent of the land surface of the globe), contain over 40 percent of the world's population and are rich in human and natural resources. Their influence is felt everywhere, from the carbon footprint in the atmosphere-China's carbon dioxide emissions more than doubled between 1990 and 2004, nearly catching up to the world-leading United States³⁶-to the emergence of the G20 as a forum to develop a collective response to the economic crisis. Those nations and the rest of the emerging world that they represent are finding their voices, and these are increasingly heard in the global debates.

This change, however, is not unexpected if one takes a look into the past. In fact, it is the global imbalance in favour of the West that is a recent phenomenon. Nearly all of human history was spent in conditions of near-universal international income parity. What is striking about the past few centuries of economic development is not the change in country rankings, but the colossal increase in disparity between the rich and the poor countries. The current income gap between one of the richest countries, Luxembourg, and one of the poorest, Liberia, is over 500 to 1. Two hundred and fifty years ago, it would perhaps have been around 5 to 1, and the broad difference between Europe and East and South Asia was smaller still, somewhere around 1.1-1.5 to 1³⁷. Reliable earlier figures are not available, but one thing is fairly certain: prior to about 1750, no society had experienced sustained growth in per capita income. Average incomes stagnated not far from the level of production of an average farmer (subsistence level) with temporary deviations, quickly corrected by population growth. At any rate, nothing approaching the modern income gap between the rich and the poor nations existed in 1750 or at any earlier time. Inequality on that scale was only made possible by the Industrial Revolution.³⁸

Figure 1
GDP per capita (PPP), 1980-2007

Source: Office of the Chief Economist

Data: World Bank

This inequality is too great to persist, and economic research predicts that it will not. Income convergence between the rich and the poor countries is a prediction of virtually all growth theories, starting with the classic Solow (1956) and Ramsey (1928) models. Growth in these models is a dynamic process that trends towards a certain steady-state income level. This steady income level may be different for different countries, and it may be continuously changed by parameters such as technological progress. Subject to these qualifications, these models state that economic growth is faster in poorer countries, as they are further from their theoretical maximum income than the richer countries.³⁹

This suggests strongly that the differences in wealth observed today are part of a transitory phenomenon, and that the convergence of poorer nations to the living standards of the rich would be a return to the normal historical experience rather than a departure from it. As the emerging economies approach the income levels of the developed countries, they are undergoing a demographic transition and their population growth rates are slowing down, mitigating the greatest historical obstacle to growth ( Figure 2). Several countries such as Japan and South Korea have successfully taken the path of growth; other emerging economies are poised to follow them.

Figure 2
Convergence in Population Growth, 1990-2021

Source: Office of the Chief Economist

Data: IHS Global Insight

Can we be reasonably sure of these predictions? Are these not saying that world poverty is decreasing with every year? Yes we can, and yes they do. World population has grown from 5.3 billion in 1990 to 6.7 billion in 2008, an impressive growth of 27 percent. However, the world's real economic output has grown 67 percent during the same period. And it is the emerging world that led the way: emerging economies grew by about 120 percent, more than twice the rate of the advanced ones⁴⁰. Thus by the end of 2008, on average every person on the planet was 30 percent richer in real terms than in 1990.

Certainly, some will find these prospects optimistic. Economic progress rarely occurs in an unbroken fashion and is not without its risks. The challenges of the catch-up process are both difficult and little explored, and there may be setbacks and crises along the way. Export-based growth of Asian countries must eventually be supplemented and substituted by domestic demand sources as their own economies get closer to the size of the U.S. economy. The ongoing economic crisis is accentuating the need to find a solution to this dilemma. What these growth predictions effectively hinge on is that, as in the past, the emerging economies will find a way to overcome the challenges as they arise, including learning the most effective catch-up techniques from each other.

It should also be emphasized that the sources and consequences of this growth merit attention: internal distributional issues are a problem, and many societies, from the United States to China, are becoming more unequal. In the end, growth must serve other societal goals: "human development is the end-economic growth a means."⁴¹ But as we will see below, the integration of the world economy and the growth of global trade has allowed many countries to find the recipe to sustained growth, and has thus at least created the potential for the world to become not only a richer, but also a more equitable place in which to live.

Determinants of Growth and the Importance of Trade

While convergence theory predicts faster growth for poorer countries, the neoclassical exogenous growth models from which it arises do not explain the extent of the observed international income differences. Their main assumption, that the eventual steady income level is largely determined by the savings rate, is not consistent with the evidence that shows that savings rates and income levels are largely uncorrelated. As an example, the leading industrial powers-the United States and Japan-have vastly different savings rates, yet their recent economic history clearly shows them converging to a similar income level. To explain why some countries are rich and others are poor, additional issues must be considered.

The most important of these is productivity. The ability to produce more output from the same set of inputs characterizes firms, nations and eras as more productive. Ultimately, when all factors of production have been accounted for, a large residual remains: total factor productivity (TFP). Interpreted as a combination of changes in technology and changes in efficiency in the use of inputs, it is believed to explain most of the current international income differences.

And this is to the advantage of the emerging and developing world. It has already been noted that knowledge and information-the basis of modern productivity-are now spreading at an unprecedented rate, and at much lower cost than ever before. To catch up with the developed world under these conditions, there is no need to engage in costly creation of new techniques-only to apply the existing ones to the economic activities. Innovation and new technology are also likely to produce large, instant dividends, increasing the likelihood of their adoption. Finally, only the latest technologies need to be adopted, bypassing the long process of iterative invention and improvement. Thus, an updated version of the convergence theory would now state that those countries that manage to adapt and use the existing stock of productive knowledge in producing goods and services more efficiently will grow faster, and those that are currently using less of that stock will be able to catch up with others by adopting more of it.

This catch-up game only became possible recently, due to the increasingly integrated world economy and the removal of many barriers, a process that was accelerated by the end of the Cold War. Globalization benefited the emerging high-growth countries both on the import and export sides. They "imported what the rest of the world knew, and exported what it wanted."⁴² This, then, is the paradigm for growth and the role of trade in the integrated global economy.

But have the emerging economies already tapped into productivity increases as a source of potential wealth? Is their growth due to increased productivity or is it largely input-based-in other words, are they simply building new factories or optimizing production processes in the old ones? Evidence on this issue is somewhat mixed, not least because of the pitfalls in aggregate TFP calculations. Bosworth and Collins (2003)⁴³ study the period spanning 1960 to 2000 and show that if China is excluded, TFP among East Asian countries grew no more rapidly than the world average. Rapid growth in that region is primarily explained by large increases in physical capital and contributions from increased human capital. On the other hand, China has exhibited tremendous productivity growth in the 1980-2000 period, reaching 5 percent per year in the last decade. Other studies contend that high growth rates in the emerging world (including China) are input-based, particularly due to increased urbanization and the consequent transfer of rural labour to a more productive urban economy. Overall, there is a broad consensus that China is considerably ahead of India in TFP growth, and that those two are ahead of Brazil and Russia. Yet in terms of overall productivity, evidence shows that emerging markets, BRIC countries in particular, remain far behind. For example, in ease of doing business (a proxy for institutional quality and productive efficiency), the only BRIC country in the top 100 is China and it ranks 83 rd.⁴⁴

By any measure then, the evidence indicates that the prospects for long-term growth of the emerging economies are very encouraging. Only a small part of the gap separating them from the developed world has been bridged so far ( Figure 1) and therefore possibilities for both input-based and TFP growth have been barely tapped into⁴⁵. Conditions for continuing progress include maintaining macroeconomic stability, high rates of saving and investment, good economic governance, and-perhaps most important-being able to rely on the integrated global economy with relatively few restrictions on trade and capital flows. While the current economic crisis may disrupt any or all of these in the short term, a truly seismic change would have to occur to upset the growth promise of the emerging world in the long term.

Trends and Projections for Emerging World Growth

This expected robust growth in the medium and long term will result in a tremendous opportunity for Canadian commercial performance, one that it is important to seize at an early stage. To illustrate the scope of these developments, consider some recent trends and projections in key emerging markets. In the five years from 2003 to 2008, emerging economies grew at an annual average rate of over 7 percent. Although the current global recession is affecting these countries significantly (recent forecasts suggest that their growth could be below 2 percent this year), economists expect that their share of world growth will continue to increase, as the conditions for long-term growth have been achieved in the last decade, namely structural reforms and better macroeconomic policies. In fact, both the global nature of the ongoing crisis and this spectacular growth are largely due to the same factor-the increasing integration of the world economy. While certainly painful, an economic crisis in these countries is a far cry from a traditional crisis involving famines or plagues, or a permanent crisis of unobserved rural poverty, whose incidence and harm have been drastically reduced by their recent economic progress.

Overall, the currently emerging economies will constitute the majority of the top 10 economies list in 2050, replacing several advanced economies, such as Italy and Spain ( Table 1).

Rank

GDP in 2008

GDP in 2039 (GI)

GDP in 2050 (PwC)

Consider this:

China already replaced Germany as the third-largest economy in 2007 and is on its way to surpassing Japan around 2010. It is expected to overtake the U.S. economy as the world's largest around 2025.

PricewaterhouseCoopers (PwC) estimates that by 2050, China's GDP will exceed that of the United States by about 30 percent, both at market exchange and PPP.

In the same year, India is projected to nearly catch up with the United States, while Mexico, Russia and Indonesia will overtake the German, U.K. and French economies.

The top emerging economies-consisting of the BRIC countries, Mexico, Indonesia and Türkiye, the so-called E7-will overtake the current G7 and are projected to be 50 percent larger than the G7 by 2050. In 2007, E7 economies corresponded to about 25 percent of the size of the G7.

BRIC international merchandise trade overtook that of the U.S. in 2007.

PwC projects the following countries will have a larger GDP than Canada by 2050: Mexico, Indonesia, Vietnam, Türkiye and Nigeria.

Such long-term projections may prove to be overly optimistic as they neither account for any shocks that will affect these economies throughout this period, nor for the inherent risks to macroeconomic stability, governance and free-market commitment. As projections by PricewaterhouseCoopers (PwC) also rely significantly on labour force growth, these may end up being optimistic for countries with fast-growing populations. More conservative estimates by IHS Global Insight (GI) project fewer drastic differences in the top 10 club in 2039. GI estimates that the nominal GDP of emerging economies will exceed that of traditional advanced economies by 2030. But by any accounts, a major realignment will take place in world patterns of trade, output and wealth. By 2039, the combined GDP of emerging markets and developing countries will represent 58.7 percent of the world's total GDP (GI projection, April 2009).

Impact of Emerging Markets Growth on Canadian Commercial Interests

Canada is a trading nation. Our trade openness ratio is second only to Germany's among the G7. Consequently, any major shifts in global output and trade are likely to have relatively strong impacts on Canada. To estimate the effect on Canada's commercial performance, we conducted a brief market share analysis of Canadian exports to BRIC countries.

First, we compared the evolution of the total imports of BRIC countries with their imports from Canada⁴⁶. For BRIC as a whole between 1999 and 2007, total imports have grown at an average annual rate of 17.8 percent (at current prices, in Canadian dollars), compared to 14.5 percent growth in imports from Canada⁴⁷. This indicates that Canada's market share in these key emerging markets has declined, as shown in Figure 3. Note, however, that this is in line with Canada's overall merchandise exports falling significantly as a percentage of GDP between 1999 and 2007 ( Table 2).

Figure 3
Canadian Shares of BRIC Import Markets

Source: Office of the Chief Economist

1999

2007

2038

Scenario 1

Scenario 2

Constant 2007 MS

0.1% increase in MS

0.1% decrease in MS

BRIC

Total Competitiveness effect (billions of dollars)

-
29.1 -29.1
Canadian Exports-to-GDP ratio (%)*

36.8
28.8
39.2

39.7

38.6

Had Canadian exports kept pace with the growth of the BRIC imports (i.e., assuming a "constant market share"), the increase in Chinese imports from Canada over 1999-2007 would have been approximately one third greater ($10.9 billion instead of the actual increase of $8.3 billion). Thus the overall competitiveness effect over 1999-2007 in China is equivalent to a $2.6 billion export loss; in Brazil, the export loss is $0.7 billion. This contrasts with small export gains in Russia ($73.5 million) and in India ($19.0 million). Retaining market share in these emerging markets is by no means easy, but given their projected growth in import demand, the rewards of doing so are immense.

How immense? Let us take a look thirty years into the future. To do so, we examined Canada's exports to the world (top 20 destinations for Canadian merchandise, representing 95 percent of our exports), and developed three possible scenarios for 2038 based on forecasts by GI for the size of BRIC import markets in that year. The first scenario assumes Canada is able to maintain its current market share in BRIC markets. The second scenario posits that Canada is able to increase its market share in these markets by a mere one-tenth of a percentage point⁴⁸. The last scenario (pessimistic) is one whereby our market share decreases by one-tenth of a percentage point, continuing on its current downward path.

The results of this analysis are shown in Table 2. Overall, the potential effect of increasing our market share in BRIC countries by just one-tenth of a percentage point by 2038 is equivalent to $29.1 billion in extra export earnings in that year⁴⁹. Moreover, if Canada is able to maintain its 2007 market share everywhere in the world, our exports-to-GDP ratio would increase to 39.2 percent in 2038 (exceeding the 1999 level). With an increase of just one-tenth of a percentage point in market share in BRIC countries, Canada stands to increase this ratio to 39.7 percent in 2038.

If our market share in BRIC countries continues to decline, we stand to lose: $20.4 billion worth of exports in China, $6.8 billion in India, $1.2 billion in Russia, and $770 million in Brazil.

These figures, based on GI forecasts for the growth of BRIC demand for merchandise imports, underscore the potential consequences for Canada of adopting a policy of active engagement in key emerging markets to benefit from the fast growth in these countries: thirty years hence, a 1 percent increase in our BRIC market share would be worth $290 billion in exports.

Canadian Trade With the Emerging Markets: Are We Missing Opportunities?

Given the rising importance of the emerging markets, and Canada's relatively large distance from most of them, a crucial question arises: Is our proximity to the United States (and, relatively speaking, to most of the OECD countries) preventing us from seeing the opportunities in the emerging and developing world? Are we, in effect, over-trading with developed countries and under-trading with the rest? This question can be answered by an inquiry into the roots and causes of international trade according to economic theory. We conducted this exercise by employing the widely used, intuitively appealing and empirically successful gravity model. The idea behind this model originated with Newton's law of gravity (hence the name), which simply states that the force of attraction between two objects is directly proportional to their masses and inversely proportional to the square of the distance between them. Similarly, in the economic context, trade flows between two partners are assumed to be positively related to their economic masses (GDP) and negatively to the trading distance. With some additional variables that help explain trade flows, this sets up a powerful and robust model-in the sense of explaining a large proportion of variation in trade flows (70-80 percent) and doing so consistently across countries and time periods.

The Gravity Equation

A gravity model expresses an empirical regularity well known to trade economists, stating that trade flows between two countries are directly proportional to their economic size and inversely proportional to the distance between them, as follows:
Xij = A [YiYj /Dij] (1)
(X: trade flows, Y: GDP, D: distance)

Taking logarithms of both sides results in a standard log-linear form of the gravity equation, which is occasionally augmented by several other variables, according to the theoretical origins of the model or else thought to be of empirical importance. Those variables are assumed to be contained in the vector A.

However, the intuitive appeal of this specification was, until recently, not grounded in formal economic theory. Work by Anderson (1979), Deardorff (1998) and Anderson and van Wincoop (2003) established that to avoid the omitted variable bias and ad hoc specification, the gravity equation should be formally derived from theory. Following Anderson and van Wincoop (2003), among others, we used the following gravity equation:
1n Xj = 1n Yj + 1nDCj + 1nPij + WTOj + FTAj + LANDj + ENj +FRj + EMEj (2)
where X is Canadian exports to country j, Y is its real GDP, D is its distance from Canada, P ij is the relative producer price index, and the other terms are dummy variables for WTO membership, free trade agreement (FTA) with Canada, being landlocked, having English or French widely spoken, and being an emerging or developing economy according to the IMF in 2008.

We estimated this equation for the 2000-2007 period, modeling Canadian exports to all destinations where data permits (over 170 countries in all), and allowing for time variation across the years. Exports are explained by GDP, distance, price levels, WTO membership, FTA with Canada, use of English/French, being landlocked, and being an emerging/developing economy. The estimated coefficients were then used to generate predictions for 2007 Canadian export trade values that stem from the gravity theory. The difference between these predictions and the actual observed values determines whether we are, according to the model, over- or under-exporting to a particular country or region.

Our key finding ( Table 3) was that the "emerging and developing markets" effect was positive (0.35) and strongly significant. This means that between 2000 and 2007, Canada was exporting 42 percent more to an average emerging or developing country than to a developed country, after adjusting for size, distance and all other factors considered by the model.

Variable

Coefficient

t

|t|

Observations 1359

R² 0.89

Gravity Trade Model: Interpretation of Regression Results (Table 3)

Overall, the equation explains 89 percent of variation in Canadian exports across the period-a very good fit.

The reported coefficients are expressed as elasticities, measuring the proportional change in exports in response to a small change in the independent variable.

The results of the estimation produce significant, expected and robust coefficients.

The coefficient on the real output is significant and positive, as expected, and close to the theoretical value of 1.

Distance has the expected negative coefficient close to -1, which is roughly in line with typical estimates.

Price levels have the expected positive effect: countries with higher internal prices import more.

The WTO membership of the destination enhances our merchandise exports, while the FTA effect is positive but not proven beyond a doubt (or "statistically significant")-possibly due to the small number of FTAs Canada has concluded. Being landlocked impacts trade negatively.

Spoken English has a strong positive effect, while French is positive but not statistically significant.

The "emerging and developing markets" variable is positive and significant at the 1 percent level, with an "over-export" factor to these equal to exp(0.35) = 1.42.

These results show that rather than missing opportunities and under-exporting to the emerging world, Canada is trading more than expected with the emerging and developing world. How can we explain this result? Several factors could be at play. First, the Canadian export product mix may be more attractive and better suited to the current needs of emerging markets-meaning that we possess a comparative advantage in the goods that they predominantly import. Second, Canadian exporters could already be taking advantage of potential opportunities in the emerging world, on account of its expected growth, and establishing themselves in those countries with a view to the future. Further research would be necessary to assess the validity of these hypotheses, as well as to investigate other potential explanations.

Country and Regional Analysis

The vast majority of our exports (93.7 percent) are expected to end up in the advanced economies. Canada slightly under-exports to these (by 1.4 percent), but significantly over-exports to Asia (by 74 percent), particularly to East Asian countries such as China and Indonesia, and to Africa (by 47 percent) ( Table 4 and Table 5). Trade with East Asia is more than double expected, generating over-exports of over $6 billion. This raises the share of this region in our exports from the expected 2.0 percent to 3.4 percent and largely balances our under-exports to the advanced economies. Other regional results are of interest as well. There is substantial over-exporting to the Middle East (by 36 percent), and under-exporting to Emerging Europe by 22 percent (all due to Eastern Europe, as CIS actually shows modest over-exports). Both South Asia and Latin America are characterized by small under-exports (6 to 9 percent). Note that these estimates take into account the emerging market effect discussed in the previous section, and any over/under-exports are in addition to that effect.

Group

EXPORTS, US$ M

Over/Under

Over/Under, %

Share

Over/Under

Predicted

Actual

Predicted

Actual

TOTAL
417,910 417,910 0 100% 100% 0%

Actual Exports

Predicted Exports

Over/Under Trading

Over/Under

A detailed country analysis shows severe under-exports to the Western European economies such as Germany and France (and the UK to a lesser degree). Among BRIC countries, Brazil and India are the two top under-export destinations in the emerging world-with -24 and -31 percent respectively. Conversely, exports to China are more than double expected, and exports to Algeria and Indonesia are triple the expected amounts.

These results are not easily accounted for on the aggregate level;⁵⁰ considerable differences exist between countries in our sample that are unaccounted for by the simple model. The theory of international trade provides for several types of trade, depending on the incentive: trade in differentiated goods driven by monopolistic competition, trade driven by factor abundance, and trade driven by unit-labour requirements (comparative advantage). As an example, Canada's reasons to trade with the United States differ from its reasons to trade with South Africa (i.e., intra-industry, intra-firm, differentiated goods flows versus resource exports). This leads to a divergence of South Africa coefficients from the predictions of the model. Export mix matters, and so does Canadian comparative advantage in areas of specific interest to specific countries. Thus our understanding of the drivers of Canadian exports is enhanced with a regional analysis by sector, undertaken below.

In interpreting the above results, some consideration must be given to the peaking commodity prices, particularly for food and metals, which are the primary Canadian exports to some countries in the sample. However, the appropriate robustness checks showed that excluding 2007 from the sample actually slightly increases the over-exporting factor to the emerging markets-i.e., this factor is completely unrelated to the 2007 events. Moreover, while over-exporting to some countries in 2007 can be attributed to higher commodity prices, there are many cases of over-exporting that are not commodity-driven. Overall, despite the scale of these price shocks, they are not found to be the principal driver for the reported results.

Patterns of Canadian Competitive Performance: An Examination of Canada's Comparative Advantage in Emerging Markets

The aim of the analysis that follows is to develop a framework for a detailed analysis of Canada's trade with individual countries of interest. To answer questions about Canada's performance, an analysis of trade by sector is necessary, and we employed the comparative advantage approach to identify the patterns of Canada's competitiveness in a given market. We then compared these with the broad sectoral patterns of Canada's competitiveness in the world market as a whole. Supplemented by an analysis of local circumstances, sectors that perform relatively better in a particular market than in Canada's overall global benchmark may then be identified as potential examples to emulate in other countries ("lessons learned"). Sectors that perform relatively worse may in some cases be identified as potential opportunities, and hence targeted for trade promotion efforts.

Measures of Competitiveness

To measure the competitiveness of Canada's exports, we employed the concept of revealed comparative advantage (RCA)⁵¹. Dating back to the original motivation for international trade as expressed by David Ricardo, this concept is simply an observation that countries should export goods that they are relatively good at producing, and import the rest. To the extent that world trade can be explained by this simple Ricardian model, the observed competitive patterns may be interpreted as revealing the underlying comparative advantage through a real-life experiment⁵².

To define comparative advantage, it is usually stated that if the share of a commodity in Canada's exports to a country is greater than the share of the same commodity in the world's exports to the same country, then Canada is said to have a revealed comparative advantage in this particular commodity in this country. This advantage, however, will be compensated for by a disadvantage in some other area, as all commodity shares sum to a value of 1. For example, the share of construction, mining and lifting machinery in Canadian exports to South Africa is 7.7 percent, while the share of that commodity in global exports to South Africa is 3.9 percent. This means that Canada has a revealed comparative advantage in construction, mining and lifting machinery in South Africa relative to the world.

To actually calculate comparative advantage, we used the normalized RCA (NRCA)⁵³ approach, which allows comparisons across different industry sectors, countries and time periods. A positive NRCA value indicates a comparative advantage, and a negative value indicates a disadvantage54.

Fixing the Benchmark: Canada's Competitiveness in non-U.S. markets

To benchmark Canada's comparative advantage in the emerging markets, we compared it with the Canadian RCA pattern in the rest of the world (which, for the purposes this article, is the world market excluding the United States), since the patterns of Canada's RCA in the world as a whole are driven largely by the disproportionate influence of the United States on Canadian trade. The pattern of Canadian exports to the world is very distinct from its exports to the non-U.S. markets. The NRCA index shows that in 2006⁵⁵ (and generally over the 2000-2006 period), in the world market, Canada held a large comparative advantage in the automotive, wood and paper, and energy sectors; a small advantage in the aerospace, agri-food, and metals and minerals⁵⁶ sectors; a small disadvantage in chemicals and miscellaneous manufacturing; and a large disadvantage in the machinery and electrical equipment sector.

However, after excluding the United States, the pattern of NRCA in the rest of the world is quite different ( Figure 5). Canada's comparative advantage in the agri-food, metals and minerals, and aerospace sectors increases greatly, while the wood and paper sector preserves its advantage. However, automotive products and particularly energy become areas of comparative disadvantage, while the machinery and electrical equipment sector becomes even more disadvantaged than before. These changes reflect Canada's different areas of specialization outside of the U.S. market.

Due to the enormous size and special character of the Canada-U.S. trading relationship, it dominates the patterns of Canadian RCA worldwide. Thus Canada's RCA in energy in the U.S. market causes Canada to post a high worldwide RCA in that sector, and yet Canada is very disadvantaged in energy exports to the rest of the world ( Figure 4 and Figure 5). It may be surprising to think of energy (or even automotive products) as an area of comparative disadvantage for Canada. Yet this is easily explained when we compare the share of energy in Canadian world exports (21.1 percent) with its share when the U.S. market is excluded (4.8 percent). Meanwhile, the share of energy in total global exports is 15.0 percent. Conversely, while Canada's comparative advantage in metals and minerals seems very low in the world as a whole, this sector performs impressively in the non-U.S. markets. This is again due to the fact that the shares of metals and minerals in Canadian exports to the world (13.0 percent) versus the world excluding the U.S. market (19.5 percent) differ greatly.

Figure 4
Canada's NRCA Patterns in the World

Figure 5
Canada's NRCA Patterns in the Rest of the World (Excluding the United States)

To address this comparability issue and analyse Canadian export performance in the emerging markets appropriately, we studied Canadian NRCA in the world excluding the United States. Figure 5, therefore, shows the appropriate benchmark for our comparison. It will be referred to in the rest of the analysis for the sake of brevity as the Canadian pattern of global comparative advantage.

Aggregate Versus Full Detail Analysis

The nine-sector broad view discussed above may hide crucial information. For example, Canada has a natural comparative advantage in wheat production in the world, which may be expected to result in a higher competitiveness in this area-but aggregation with the rest of the agri-food sector conceals that fact ( Figure 4). Conversely, although Canada is at a comparative disadvantage in the chemicals sector, an RCA analysis at a more disaggregated level shows a significant comparative advantage in fertilizers (Table 6); similarly, in the world market, Canada's RCA performance in the metals and minerals sector shows a disadvantage between 2000 and 2005; however, Canada has a clear advantage in aluminum, nickel and articles thereof, as well as in zinc over that period. Therefore, a more disaggregated view is useful to nuance the broadly presented results.

Therefore, to make the analysis manageable yet informative, we considered two types of sectoral breakdown: a broad aggregation into nine major sectors discussed above and a more detailed analysis based on a DFAIT Clustered Trade Classification (CTC) system comprised of 53 commodities. This more detailed CTC analysis frequently yields insights that a broad aggregation would miss⁵⁷.

Table 6 shows the top 10 ranking Canadian commodities by their comparative advantage score in the non-U.S. markets (among the 53 CTC commodities).

CTC

CTC Name

NRCA

Rank

Canada's advantage in wood and wood pulp, cereals and seeds, nickel, aerospace, ores, as well and meat, fish and live animals is maintained in both the world and non-U.S. markets. Our lowest NRCA in the rest of the world is in energy, textiles, automotive products, iron and steel and their products, and ICT electrical and electronic equipment. Fertilizers, power-generating machinery and inorganic chemicals rank at a fair advantage.

Regional Competitiveness Analysis by Sectors

An analysis of individual countries is needed in order to compare the specific patterns of Canada's export performance in selected countries to the global benchmark. To this end, we evaluated competitiveness by sector both at the broad (i.e., nine sectors) and detailed (53 CTC commodities) levels on the NRCA basis, with Canadian exports evaluated against total world exports to the countries in question. Note that some commodities (energy, automotive products and aerospace products) form sectors of their own due to their size and importance.

For analysis, we selected 15 major emerging markets in five regions, all of which are in the top 20 destinations for Canadian merchandise exports in emerging markets. We used country-specific imports data⁵⁸ to profile a pattern of competitiveness with advantages and disadvantages by sector. Comparing this to the pattern of Canadian global comparative advantage, we identified sectors of better-than-expected performance, using the term "over-exports" to refer to these, and "under-exports" otherwise. Over-exporting may provide lessons to learn for our commerce in neighbouring or similar countries, while under-exporting may indicate potential areas of opportunity⁵⁹.

Given our definition of comparative advantage as a higher proportion of a commodity in the Canadian exports to a country than its proportion in the world's exports to that country, the following may be possible reasons for under-exporting a given commodity to a given market:

abundant local supply of main commodities in the sector, causing unusual import product mix (e.g. Russia will import metals, but not nickel which is locally abundant);

abundant regional supply of main commodities in the sector, causing imports from that destination to substitute for imports from Canada;

local free trade agreements, which make it cheaper to import from an FTA partner than from Canada (trade diversion);

non-tariff barriers that affect Canada more than other exporters;

Canada's global pattern in that sector (e.g. aerospace) is mainly formed in other countries that are dissimilar to the country in question;

large over-exports exist in another (dominant) sector in the same country;

insufficient information or awareness of opportunities in a country.

Identifying which of these factors is relevant in a particular market would be the subject of further work building on the local market knowledge accumulated by the Trade Commissioner Service. Cases of unexploited opportunities which are explained by insufficient information are of the most interest, although the impact of trade preferences or barriers is also relevant to Canada's trade policy development.

In the individual country discussions, rankings (+/- numbers) denote the relative standing of the commodity in the local competitiveness ranking versus the global ranking. The more positive the ranking, the more a commodity is over-exported to a particular market, for a maximum possible rank of +52 (53 commodities in total). Tracking these rank movements was one of our principal means for identifying over- and under-exports⁶⁰.

When discussing comparative advantage only, it is also useful to speak of a "local top 10" which simply refers to the top 10 commodities in the local competitiveness ranking.

Guide to Comparative Advantage Charts and Analysis

Asia

Asia is the key area of the emerging world. It is home to the biggest economic development success stories in history: Japan and the four Asian Tigers, which act as role models for their neighbours. Establishing a solid presence in Asia is crucial to the long-term prospects of any exporting nation. The earlier gravity analysis has shown considerable over-exporting by Canada to Asia as a whole. We examined in detail Canadian exports to four key emerging markets in Asia: China, India, Indonesia and Malaysia. The broad nine-sector pattern of Canadian competitiveness in these countries is depicted in the previous graphs. Our discussion of common trends in these graphs is followed by individual country specifics, with some discussion at the detailed 53-commodity level (CTC).

Common Themes

Canada severely under-exports wood and paper to both countries.

Exports of chemicals to both countries are close to the global benchmark.

Miscellaneous manufacturing is less disadvantaged in both countries than globally.

Machinery and electrical equipment is over-exported as well, particularly to South Africa.

Other manufacturing sectors perform above the global benchmark: automotive exports do better in South Africa and aerospace exports do better in Algeria.

1.1 China

China is by far Canada's largest merchandise trading partner among emerging markets, and second overall. It is the fourth-largest destination for Canadian exports, and the second-largest source of imports.

The key over-exported commodities relative to Canada's global comparative advantage in the chemicals sector are organic chemicals (ranked +38 over benchmark), rubber and its products (+23) and fertilizers (+3), although overall success is mitigated by under-exports of inorganic chemicals (-26 under benchmark). In the metals and minerals sector, sulphur, salts and minerals are over-exported (+11), but precious stones and metals are under-exported (-27). Fats, oils and animal feed are over-exported (+15) in the agri-food sector, although overall its performance is below par. Automotive exports are at less of a disadvantage than globally, i.e. over-exported (+8).

Paper and print are under-exported (-21), thus reducing competitiveness in the wood and paper sector, although wood and wood pulp are performing well, bringing this sector up to par. Power-generating machinery is significantly under-exported (-30), as is construction, mining and lifting machinery (-21), driving down competitiveness in our machinery and electrical equipment sector.

Note that Canada held a high comparative advantage in power-generating machinery in 2000, and remained at an advantage (although declining) until 2008 when it lost that advantage.

Significantly, between 2000 and 2008, Canadian performance in the aerospace and automotive sectors has deteriorated (both were areas of comparative advantage between 2000 and 2003), while our competitiveness in metals and minerals, and chemicals has been growing. This may be an indication that China is moving up the value chain in these areas, and is manufacturing its own aerospace and automotive products using imported raw materials. While Canada retains a large comparative advantage in cereals and seeds, this has decreased compared to 2000. In contrast, our advantage in sulphur, salt and minerals has grown over the last eight years.

1.2 India

India is Canada's fourth-largest destination for merchandise exports among emerging markets. In 2008, it ranked second as a destination for both Canadian fertilizers and vegetables after the United States.

The key commodities over-exported to India are vegetables and pulses (+9 over benchmark) that drive our advantage in the agri-food sector, fertilizers (+5) in the chemicals sector, and construction, mining and lifting machinery (+8) that raises our performance in the machinery and electrical equipment sector. Paper and print (+8) are over-exported, but under-exports of wood and pulp (-6) lead to overall under-exporting in the wood and paper sector. Similarly, lower than expected exports of meat, fish, animals and their products, inorganic chemicals and power-generating machinery are mitigating our advantage in the agri-food, chemicals and machinery and electrical equipment sectors, respectively. Under-exporting in metals and minerals is a significant departure from the benchmark, led by the under-exports of precious stones and metals (-39).

Canadian performance in wood and paper has been generally in decline since 2000, despite our strong competitiveness in paper and print. Metals and minerals, however, generally improved (except for in 2007). The advantage in the agri-food sector improved sharply in 2007 (reversing years of declines), attributable to vegetables and pulses as well as cereals and oilseeds. In 2007, Canada was the leading source of vegetables and pulses in India, holding 37.7 percent of the Indian import market.

1.3 Indonesia

Indonesia is Canada's seventh-largest merchandise export market among emerging countries. It is an important importer of Canadian cereals-and Canada ranks first as a source of fertilizer and wood pulp imports in Indonesia.

Although the broad pattern of Canadian competitiveness in Indonesia is very similar to the performance in India, there are differences at the detailed commodity level. Significant over-exports exist in toys and sports equipment (+21 over benchmark), and miscellaneous (non-medical/optical) scientific instruments (+6)-both contributing to over-exporting in the miscellaneous manufacturing sector. As in India, construction, mining and lifting machinery over-exports (+12) are behind over-exports in the machinery and electrical equipment sector; under-exports of power-generating machinery (-25) are limiting our competitiveness here. Fruit and vegetable preparations (+17) are among the key over-exports to Indonesia in the agri-food sector (cereals rank first), but meat, fish, animals and their products are under-exported (-24). Low competitiveness in ores and concentrates (-13) is behind our under-exports in the metals and minerals sector; under-exports in the aerospace sector (-34) are considerable.

Although Canada is highly competitive in wood and wood pulp globally (first among the 53 CTC commodities), it is notable that Canada has a large advantage in this area in a country that holds wood in abundance. Canada is the leading provider of wood pulp (chemical and mechanical) to Indonesia (which imported $1.6 billion worth of wood pulp in 2008, almost 20 percent of which came from Canada). Wood pulp's second-place ranking (out of 53 commodities) and our large share of the Indonesian wood and paper import market may be an important lesson for our exporters.

Competitiveness in the chemicals sector has been increasing over 2000-2007, turning positive in 2004. Performance in machinery and electrical equipment has also been improving; while the high advantage in wood and paper has been in decline since 2000, it increased again in 2006 and 2007.

1.4 Malaysia

Malaysia is the thirteenth-largest destination for Canadian merchandise exports among emerging markets.

The key commodities over-exported to Malaysia are plastics (+38 over benchmark) and fertilizers (+6), both driving the impressive Canadian performance in the chemicals sector, with possible lessons to learn for other destinations. Over-exporting fats, oils and animal feed (+18) and fruit and vegetable preparations (+12) raises our agri-food sector to a better-than-expected performance.

Key under-exports to Malaysia include precious stones and metals (-34) and ores and concentrates (-26), leading to a relative disadvantage in metals and minerals; weak performance in paper and print (-26) is responsible for under-exports in the wood and paper sector. Meat, fish, animals and their products are also under-exported, restricting Canadian advantage in agri-food.

Canadian competitiveness in chemicals has increased over time, mainly due to fertilizers. Meanwhile, the advantage in wood and paper has been declining, similar to what was observed elsewhere in Asia. The disadvantage in metals and minerals has deepened over the 2003-2007 period.

The profound disadvantage in machinery and electrical equipment (despite electrical and electronic equipment being the second-largest Canadian export commodity in Malaysia) is indicative of the sheer size of the Malaysian import market in this sector. This sector, ranked first overall in Malaysian imports, thus remains a potential area of opportunity.

2. Latin America and the Caribbean (LAC)

Increased engagement in the Americas is a priority for the Government of Canada. The gravity model has shown some under-exporting to the region as a whole, particularly to Brazil. Although there is strong variation across surveyed countries, we noted some general patterns of comparative advantage in the region. We examined in detail Canadian exports to four key LAC countries: Mexico, Brazil, Venezuela and Colombia.

Common Themes

Canadian exports to Brazil feature a pattern of competitiveness that is distinct from other LAC countries surveyed. Its highlights are over-trading in chemicals (primarily fertilizers) and under-trading in the agri-food sector relative to our global comparative advantage.

For the other three countries, the agri-food sector in the LAC region is very competitive, even compared to strong Canadian global performance. This is driven by the advantage in cereals and seeds (including canola) and vegetables and pulses.

With the exception of Brazil, the chemicals sector is on par or under-exporting compared with the global pattern (especially in Venezuela). Negative competitiveness in this area persists despite the competitiveness of fertilizers in Mexico and Colombia, where these are in the top 10.

Metals and minerals are under-traded to all countries, but still show positive comparative advantage, except in Colombia. The types of minerals and metals exported vary according to country.

Energy is somewhat over-exported to these markets, especially to Colombia.

Wood and paper exports have less of an advantage than globally, especially in Mexico.

With the exception of brazil, automotive products are over-exported considerably, especially to mexico. aerospace products are under-exported, although less so to mexico.

Miscellaneous manufactured products appear to be less disadvantaged in Brazil than in the rest of LAC or globally.

2.1 Mexico

Mexico is Canada's second-largest merchandise export destination in the emerging markets, and our fifth-largest commercial partner worldwide in terms of merchandise trade.

Canadian exports to Mexico display considerable variability from the global patterns at the detailed level. Metals and minerals exports are characterized by a large advantage in iron, steel and their products (+46 above benchmark); however, under-exports in nickel and articles thereof (-13) and ores and concentrates (-13) lead to overall under-exports in this sector. Our performance in the machinery and electrical equipment sector displays a similar dichotomy-while construction machinery is over-exported (+13), power-generating machinery is under-exported (-35), resulting in overall exports being below the global benchmark. Near-benchmark performance in chemicals masks over-exports of certain commodities, e.g. other chemical industry products (+36), and under-exports of inorganic chemicals (-25).

The automotive sector (an area where Canada is generally not competitive globally) performs strongly in Mexico (+49 above benchmark) due to North American integration. At the commodity level, automotive products rank second out of 53 CTC commodities, but have seen a decline in their advantage in recent years. The aerospace sector is generally underperforming in the countries under analysis in the LAC region, but in Mexico it ranks third out of 53 commodities (considerably higher than before 2008).

2.2 Brazil

Brazil is Canada's third-largest merchandise export market among emerging countries and the largest economy in the region.

In Brazil, the agri-food sector is severely under-exporting relative to the global benchmark, posting an NRCA of practically zero. This is primarily due to the weak exports of meat, fish, animals and their products (-25 under benchmark). An unusually high comparative advantage is shown in the chemicals sector, which in combination with the negative benchmark leads to large over-exports. Over-exporting occurs primarily for fertilizers (+6), although inorganic chemicals are under-exported (-27). The advantage in fertilizers has grown tremendously over last eight years; in 2000 it was negative.

By contrast, in 2000 Canada was competitive in the machinery and electrical equipment sector in Brazil. In 2008, however, this was an area of disadvantage close to the global benchmark, partly due to the under-exports of power-generating machinery (-35). In the metals and minerals sector, sulphur, salt and minerals were over-exported to Brazil (+12) ,but ores and concentrates were under-exported (-32). Competitiveness in the wood and paper sector trailed our performance in the rest of the world yet displayed a mixed picture: paper and print were over-exported (+8) while wood and wood pulp were under-exported (-16).

Some other commodities that show over-trading include: ships and boats, furniture and bedding, miscellaneous (non-medical/optical) scientific instruments, all in the miscellaneous manufacturing sector while the aerospace sector is under-exporting considerably.

2.3 Venezuela

Key Over-Exports

Fruit and vegetable preparations

Paper and print

Energy

Venezuela is our biggest market for cereals in the Western hemisphere after the United States. It ranks 11th among emerging countries as a destination for Canadian merchandise exports.

In the agri-food sector, our cereals exports dominate, as expected, but it is the high competitiveness of fruit and vegetable preparations (+17) that is interesting. The Canadian energy sector seems to be over-exporting to Venezuela as well (+31). Overall metals and minerals performance is lower than the benchmark, partly based on nickel under-exports (-6). Paper and print is over-exported (+9), but under-exports of wood and wood pulp cause the wood and paper sector to under-export overall. Under-exports of fertilizers (-24) and inorganic chemicals (-18) are behind the weaker chemicals performance, while under-exporting power generating machinery (-25) does not prevent overall exports in the machinery and electrical equipment sector from being on par with the global benchmark.

Competitiveness in the aerospace and automotive sectors is around zero, indicating a better-than-par automotive performance and a below-par performance in aerospace. However, between 2000 and 2005, Canadian automotive exports were an area of considerably greater advantage than in 2008. Railway stock and parts and miscellaneous (non-medical/optical) scientific instruments have performed better than expected in the miscellaneous manufacturing sector.

2.4 Colombia

Colombia ranks 18th as a destination among the emerging countries for Canadian merchandise exports.

In the agri-food sector in Colombia, we noted that dairy, eggs and honey, an area of global export disadvantage, ranks among our top 10 competitive exports (+20), although sector competitiveness over time is declining. Among metals and minerals, copper exports to Colombia display very high competitiveness (+37) compared to our global performance. However, the sector as a whole was in an unusual position of competitive disadvantage, with aluminum (-23) and ores and concentrates (-13) in particular under-exporting. Energy was over-exported (+46) and so were automotive products (+43). Competitiveness in chemicals has been rising over time, but still remained at a disadvantage in 2008; under-exports in this area are partly due to inorganic chemicals (-25). This is offset by the declining competitiveness in wood and paper, underscored by weaker wood and wood pulp exports (-31).

3. Emerging Europe

Eastern Europe and the CIS are here classified together as "emerging Europe", although the countries in this grouping display marked differences. These differences, combined with their quickly evolving economies, make it difficult to generalize about the countries in this region. The two countries selected for consideration in this region are Russia and Türkiye. Emerging Europe is an area of relative under-trading according to the gravity analysis.

Common Themes

The agri-food sector displays very strong competitiveness in both countries.

The machinery and electrical equipment sector is performing much better in Russia than globally.

The relative sector performance in Türkiye is very close to Canadian global pattern.

3.1 Russia

Russia is the fifth-largest destination market for Canadian merchandise among emerging countries. It is a key market for Canadian meat exporters (mainly pork).

In Russia, the over-exports in our agri-food sector are driven by massive meat exports (+5), and to a lesser extent by cereals and seeds. Vegetables and pulses were under-exported (-28). The metals and minerals sector is under-exporting to Russia, where none of the traditional commodities of comparative advantage such as nickel (-8), aluminum (-17) or ores and concentrates (-28) are in the top 10. This is probably because of the abundant local supplies of these commodities, yet overall there seems to be an import market in Russia for metals and minerals in which Canada is not a major participant. In the wood and paper sector, we are also at a comparative disadvantage in Russia: although our wood and wood pulp exports are in the top 10, the paper and print category is a significant under-exporter (-36).

In contrast, the performance of the machinery and electrical equipment sector yields important insights. This area of traditional disadvantage for Canadian exporters is booming in Russia, due to strong competitiveness in agri-food machinery (+18), construction, mining and lifting machinery (+15), and other machinery (+29). The positive performance of our miscellaneous manufacturing sector-especially ships and boats, furniture and bedding and certain scientific instruments - shows that there are further lessons to learn from Canadian performance in the Russian market. This advantage, however, has been declining since 2002, as it has in the automotive sector.

3.2 Türkiye

Türkiye ranks eighth among emerging countries as a destination for Canadian merchandise exports. It was the third-largest destination for Canadian iron and steel exports in 2008 after the United States and Mexico.

Türkiye is perhaps the most representative country of the overall Canadian pattern of global comparative advantage among the 15 countries considered. Strengths and weaknesses of Canadian exports in Türkiye roughly correspond to global patterns, with small differences. Metals and minerals are performing somewhat worse-precious stones and metals are under-exported at (-35) along with aluminum (-29) although iron and steel and their products, and copper and articles are over-exported-while agri-food, dominated by vegetables and pulses (+9), and energy are performing somewhat better.

Although pharmaceutical products are over-exported (+16), weakness in fertilizers (-31) and inorganic chemicals (-27) makes chemicals an under-exported sector. Power-generating machinery is under-exported (-39), leaving the machinery and electrical equipment sector on par with the global benchmark.

4. Africa

Africa consists predominantly of developing rather than emerging economies. South Africa and Algeria were selected for this analysis because they represent our largest export markets in Africa. The pattern of competitiveness in these countries not only differs from the rest of Africa, but also from each other: their economic structures are dissimilar and they are located at opposite corners of the continent. The gravity analysis has shown considerable over-trading with Africa as a whole, in particular with Algeria.

Normalized Revealed Comparative Advantage (NRCA) in South Africa (2008)
Black outlines represent global benchmarks (right axis). Coloured bars are specific to the country (left axis).

Normalized Revealed Comparative Advantage (NRCA) in Algeria (2007)
Black outlines represent global benchmarks (right axis). Coloured bars are specific to the country (left axis).

Normalized Revealed Comparative Advantage in Algeria - Text Alternative

The figure depicts Normalized Revealed Comparative Advantage (NRCA) for Canadian exports to Algeria in 2007 by major sectors. In comparison to Canadian export performance to the World excluding the US, Canadian exports to Algeria over-performs (better than average) in the Agri-food, Energy, Machinery & electrical, Aero and Miscellanous manufactures sectors; under-performs (worse than average) in the Metals & minerals, Chemicals, Wood & paper and Auto sectors.

Sources: UN Comtrade database and World Trade Atlas

Common Themes

4.1 South Africa

South Africa is the tenth-largest destination among emerging markets for our merchandise exports, and our largest export market in Africa.

The export advantage in metals and minerals is driven by over-exports in sulphur, salts and minerals (+13) and precious stones and metals (+10), in spite of under-exports in ores and concentrates (-23). Very high competitiveness here is, however, a recent development: an impressive increase in 2008 could be partly due to commodity price increases. Although the agri-food sector as a whole is below the global benchmark, there may be lessons to learn from the export performance of miscellaneous food (+15). Wood and paper may be a sector of unexploited opportunities in South Africa, as indicated by under-exporting in paper and print (-33) and wood and wood pulp (-20), but there may be lessons to learn in the machinery and electrical equipment sector (construction, mining and lifting machinery is over-exported at +14 over par), as well as miscellaneous manufacturing (ICT scientific instruments are over-exported at +21, miscellaneous non-medical/optical scientific instruments at +6 and both are among the top 10 in NRCA locally). Although fertilizers (-36) and inorganic chemicals (-33) are under-exported, under-trading is not a feature of the chemicals sector as whole.

4.2 Algeria

Algeria is Canada's leading commercial partner in Africa (and tenth in the world) in terms of merchandise trade, and a key source of imports (primarily crude oil). Algeria ranks twelfth as a destination for Canadian exports among emerging countries, and second in Africa.

In Algeria, the pattern of over-exporting in the agri-food sector is driven by large exports of cereals and seeds (+1, first in competitiveness overall) and vegetables and pulses (+7, third overall), although meat, fish, live animals and their products are under-exported (-26). Canada's advantage declined in this sector between 2000 and 2005. The aerospace sector is the other area of recent high competitiveness (ranking second overall), although this may only be a temporary spike (a 2007 development). Metals and minerals and wood and paper products are severely under-exported relative to the global pattern, driven largely by aluminum (-16) and wood and wood pulp (-45). Under-exporting in inorganic chemicals (-18) is behind slightly weaker-than-expected chemicals exports.

Some lessons may be learned from the high performers in the machinery and electrical equipment sector (3 of which are in the local top 10), particularly in areas where Canadian competitiveness is generally negative: ICT electrical and electronic equipment (+43), and electric power-generating equipment (+33). Construction, mining and lifting machinery (+10) is also over-exporting and is among top 10 competitive commodities - yet power-generating machinery is underperforming (-36).

5. Middle East

The Middle East offers as many challenges as it does opportunities. Countries in this region differ considerably in their economic structure from the neighbouring regions. There are also internal differences depending on whether an economy is oil-dominated, such as the United Arab Emirates (UAE) and Saudi Arabia, or not, for example, Egypt. These three countries are selected for our analysis.

Common Themes

The agri-food sector demonstrates good overall performance, with small over-exports to the UAE and small under-exports to Egypt.

The metals and minerals sector significantly under-exports to the two oil-based economies, but not to Egypt. The Canadian commodities making up this sector are globally competitive but nearly absent from the UAE's and Saudi Arabia's top 10.

Due to small local import markets for energy, and their composition, Canada's energy exports perform better in this region than the global benchmark, although Canadian export volumes are very small.

The wood and paper sector under-exports slightly to the oil-based economies.

Some manufacturing sectors are doing very well. Automotive exports to Saudi Arabia are extremely competitive, and yet these flows are not matched by Canadian export data⁶¹. Aerospace products are over-exported to UAE. Some miscellaneous manufacturing components perform very well in the UAE and Egypt, leading to over-exports to those destinations.

5.1 United Arab Emirates (UAE)

The UAE is the sixth-largest destination for our merchandise exports among the emerging markets.

The highlight of Canadian export performance in the UAE is the agri-food sector, over-exporting on the strength of cereals, vegetables and pulses, as well as the less traditional area of miscellaneous food (+16). The aerospace sector is also very competitive (second out of 53), on par with our global performance but in contrast to our performance in most emerging markets. Although the chemicals sector as a whole is not an area of competitive advantage, pharmaceutical products are in the top 10 in competitiveness, even though inorganic chemicals are under-exporting at (-32). Furniture and bedding (+28) along with ICT scientific instruments (+19) drives Canada's over-exports in miscellaneous manufacturing.

Canadian exports of machinery and electrical equipment are performing better in the UAE than globally, although this advantage has declined since 2002. Over-exports include metallurgy and machine tools (+21) and other machinery (+25), while under-exports include power-generating machinery (-26). The metals and minerals sector remains a sector of possible opportunity, with considerable under-exports in precious stones and metals (-38) and aluminum (-30).

5.2 Saudi Arabia

Saudi Arabia is Canada's largest partner in the region in terms of bilateral merchandise trade, and ranks ninth among emerging countries as a destination for Canadian exports.

The striking feature of Canadian export competitiveness in Saudi Arabia is the large advantage in the automotive sector (ranks 2nd, +49 over par in a 53-commodity list). Moreover, Saudi automotive imports do not seem to be reflected in the Canadian data (export levels as reported by Statistics Canada are considerably lower). This situation is particularly unusual outside the North American continent. The agri-food sector shows competitiveness on par with the global benchmark, but surprisingly, it is a very recent development as NRCA in this sector was negative prior to 2006. Within the sector, fruit and vegetable preparations and miscellaneous food are over-exported (both +16). Under-exporting in the metals and minerals sector is driven by aluminum (-29) and precious stones and metals (-23). As in the UAE, pharmaceutical products rank ninth among 53 commodities (+16). Power-generating machinery is the key under-exporter (-32) in the machinery and electrical equipment sector.

5.3 Egypt

Egypt is a key country in the region, linking Africa and the Middle East, and exercising considerable influence in both regions. It ranks 19th among emerging countries as a destination for Canadian merchandise exports.

The broad competitiveness pattern in Egypt is similar to the global picture, except for the under-exporting in the aerospace sector (-7). However, the metals and minerals sector, while showing positive comparative advantage in 2008, i.e., over-exporting, had been consistently negative over 2000-07. The positive 2008 performance was due to a sharp increase in Egyptian imports of Canadian iron and steel and their products, which ranked first among 53 commodities (+49). This performance was somewhat offset by under-exporting of precious stones and metals (-31) and aluminum (-19).

Our performance in the agri-food sector is on par with the global benchmark, although it is interesting that the dairy, eggs and honey commodity group (an area of disadvantage for Canadian exporters) is among the top 10 in competitiveness (+22). Meat, fish, animals and their products are under-exported (-34). Strong competitiveness in the wood and paper sector is driven by paper and newsprint (+9). Chemicals are under-exported, partly due to the under-exporting of inorganic chemicals (-17) and fertilizers (-15). The miscellaneous manufacturing sector, although barely over-exporting overall, is an area of interest due to the good export performance in ships and boats, as well as miscellaneous (non-medical/optical) scientific instruments.

Conclusions

Increasing globalization and integration of the world economy is the principal force behind the observed economic rise of the emerging world. The increasing exchange of information and ideas, goods and services, and capital and labour produces many challenges-yet it also produces unprecedented wealth for hundreds of millions in these emerging nations. Their road to prosperity will not be easy-there will be crises, like the current one, that will test the resolve of these nations and their governments to stay the course. Strong foundations for stable, long-term growth will have to be developed, the chief challenge being the progress from input-based and export-based models to a sustained technology-based growth, as it is here that the greatest potential for convergence with the developed world's income and productivity lies. Economists predict that as long as the conditions for sustained growth remain in place (integrated global markets, good governance, macroeconomic stability and sufficiently high saving and, most important, investment rates), the emerging world will continue to catch up with the advanced economies in per capita income, with benefits to both sides.

Sustained growth in these markets will increase their importance for Canada. In BRIC countries alone, a gain of just 0.1 percent in Canadian market share in 2038 would mean a $29 billion gain in exports. To achieve these gains and more, it is important to establish an early foothold for Canadian goods and services in the emerging world. Canada's geographical position in this regard is not thought to be the most advantageous. Yet in spite of that, a gravity model of Canadian exports produces a surprising result: Canada exports 42 percent more on average to emerging and developing economies than to the developed countries, after adjusting for the main variables that explain trade flows (economic size, distance, price levels, language and trade agreements). Over and above this, some countries and regions show surprisingly high results-merchandise exports to the crucial East Asian market are more than double the expected exports, and nearly 50 percent higher to Africa. On the other hand, Canada under-exports to Eastern Europe, South Asia and Latin America. Among the BRIC countries, Canada over-exports to China but under-exports to the other three, particularly to India.

Applying the concept of comparative advantage creates a framework for the evaluation of Canadian export performance vis-à-vis our global competitiveness in specific sectors. This is of particular interest with regard to emerging markets as sustained growth usually leads to a movement up the value chain, and hence implies ongoing changes in the mix of traded merchandise.

The data show that in the U.S. market our comparative advantage pattern is characterized primarily by advantages in the automotive, wood and paper, and energy sectors. Outside the U.S. market our advantage in the agri-food, metals and minerals and aerospace sectors is significantly stronger, but we are at a disadvantage in the energy and automotive sectors. Our exports of machinery and electrical equipment and miscellaneous manufactured products are revealed to be at a relative disadvantage in both the world and the non-U.S. markets.

However, we find that the majority of the advanced manufacturing sectors are over-exporting to the largest emerging-market destinations relative to our global benchmark. The miscellaneous manufacturing and automotive products sectors do markedly better in these markets, and in most cases the machinery and electrical equipment sector does as well. Aerospace is the only sector that generally under-exports to these destinations, due to our strong performance in advanced economies (Western Europe) and consequently higher global benchmark in this area; among commodities, this is also the case for power generating machinery. Thus while resource-related sectors (agri-food, wood and paper and metals and minerals) account for most of our exports to emerging markets, Canadian manufacturing exports to these destinations are performing above par. This suggests that the emerging markets will play an important role in the future of the Canadian manufacturing sector.

The analysis also suggests insights and hypotheses of interest at the country level. For example, we learn that our chemicals sector is doing unusually well in China (mainly due to organic chemicals and fertilizers), and that while India seems to prefer to get its metals and minerals elsewhere, Canadian agri-food is extremely competitive there. Going more deeply, an unusually large Canadian disadvantage in machinery and electrical equipment in Malaysia reminds us that Malaysia is a large assembly hub for this equipment, and highlights Canada's limited participation in this trade. A conspicuous weakness of our agri-food exports to Brazil, on the other hand, may imply local self-sufficiency, or perhaps better-placed alternative suppliers such as Argentina. Finally, examining the time patterns of Canadian sectoral competitiveness in China, we can reflect upon our decreasing competitiveness in the aerospace and automotive sectors vis-à-vis our growing competitiveness in metals and minerals. This adds to the evidence that China is moving up the value chain in this sector, electing to build its own airplanes and automobiles, and procuring Canadian raw materials instead. While some of the proposed interpretations are only hypotheses, they may be validated with a detailed analysis of a specific market. The main value of the comparative advantage framework is that it suggests and guides the analysis of market opportunities on the basis of economic evidence.

Taken farther, the comparative advantage framework could also shed light on the reasons behind the under/over-exporting at the country level identified in the gravity model. Further work in the gravity model framework could also seek to explain why Canada exports more to emerging markets in aggregate than the model developed in this paper predicts. One possible explanation is that Canadian exporters have been forward-looking in recognizing the potential of the emerging markets and taking their expected future growth into account. Another explanation would emphasize the role of the product mix, and point out that emerging markets are voracious consumers of raw materials and resources. As Canada enjoys a comparative advantage in many of those, it is in a good position to supply them⁶². A more structured gravity model can help explain the differences in Canadian exports between countries, while detailed country studies using the suggested framework of comparative advantage could determine which of the export sectors are responsible for the overall country result and suggest trade expansion opportunities.

Report a problem on this page

Thank you for your help!

You will not receive a reply. For enquiries, please contact us.

Date Modified:

# data[].attributes.attachment_link.title
New horizons for Canada: The return to a multi-polar world (2009)

# data[].attributes.attachment_link.description
An extraordinary change has come over the world in the past twenty years, one that will be obvious to future generations but whose repercussions are not yet fully understood by ours. Technological advances, primarily in the area of transmission and storage of information, have shattered the archaic notions of how things ought to function in most fields, from production and trade to war and politics33 .

# data[].attributes.body
https://d3n8a8pro7vhmx.cloudfront.net/canadaaction/pages/2135/attachments/original/1610435214/canada_top_exporter_of_minerals_metals_in_the_world.jpg?1610435214

This image shows 16 different metals and minerals that Canada exports. In each of these metals and minerals, Canada is top 10 in the world when it comes to exports. It is interesting to note that Canada is in the top 5 of many of these 16 metals and minerals. Canada is even ranked #1 for one of the minerals: Potash. Knowing Canada's strengths is important for both Trade and for Comparative Advantage. Canada's relatively strong rankings in mineral exports can be a potential avenue that the country can focus on when it comes to growing the economy. Emphasizing the strengths of the Country in exports could make the economy more efficient.

# data[].attributes.body
https://www.international.gc.ca/trade-commerce/economist-economiste/state_of_trade-commerce_international/special_feature-2012-article_special.aspx?lang=eng

This article, though not directly talking about comparative advantage, talks about Canada's gains from international trade. I think this would be important to know when talking about Comparative Advantage. The reason this would be important is knowing what Canada can benefit from in terms of trading internationally will allow the country to choose where it wants to specialize. If there are goods and services that Canada can get internationally, and at a better rate than can be produced locally, the choice of focusing on the country's strengths emerges. However, in order to make the choice of focus on the strengths of the country, an assessment of Canada's gains must be done first. This is where an article like this would come in.

# data[].attributes.attachment_link.readable_text
Canada depends heavily on trade to sustain incomes and living standards of Canadians and the prosperity of the nation. Consider that, in 2011, Canada's exports and imports of goods and services were approximately $1.1 trillion in total- which is, on average, about $31,600 for every person in Canada, or $3 billion each and every day-and that the overall size of Canada's economy, as measured by its gross domestic product ( GDP), was $1.7 trillion last year. Thus, the share of trade in the economy was about 63.3 percent in 2011. Indeed, the share of trade in the economy has risen over the decades, in particular during the 1990s when it climbed nearly 34 percentage points following the elimination of most of the trade-dampening tariff barriers between Canada and two of its most important trading partners-the United States and Mexico.

But statistics only partially highlight the importance of international trade to Canada and Canadians. Economic models and theories can also be used to ask the question of what is the benefit of international trade to Canada. The answer to the question is, however, multi-dimensional and not entirely computable. From one vantage, the trade data suggest, as a first order of approximation, that one in five jobs in Canada depend on exports, either directly or indirectly.Footnote 41 Yet this is simply an accounting of how much spending in the economy is accounted for by exports. Taken from another perspective, this vastly understates how dependent Canada is, and Canadians are, on trade. The structure and the organization of the entire economy are crucially dependent on trade and integration with regional and global trading networks.

The purpose of this special feature is to delve deeper into the benefits that trade brings to an economy and/or its citizenry. The focus is on Canada and, where possible, we bring forward evidence that pertains to, or can be applied to, Canada. The theoretical aspects of the analysis have been confined to a few broad sections. We have tried to keep these portions as short and non-technical as possible, perhaps too general for the more technical reader. However, the key message about the benefits of trade is intended for the average Canadian-who may never have realized how much trade improves the quality of the Canadian way of life.

The Importance of Trade

Many of the benefits of exports to Canadians are straightforward. Exports allow Canadians to sell their goods and services in exchange for foreign goods and services. They also help to support jobs in Canada, directly to those producing the goods and services, and indirectly to those providing supporting activities to the producers of Canadian exports. Other benefits are less tangible. For example, exports mean added production beyond that produced for the domestic market, which allows for economies of scale in production and lower average costs for producers, in turn lowering prices for consumers. Competing in export markets also means seeking out efficiencies and being innovative in all aspects of business. Rather than trying to produce many products, firms tend to focus on and specialize in products or services where they have an advantage. This drives up their productivity, allows firms to pay higher wages, and helps to increase the prosperity of the nation. Firms that rise to the challenges of the export marketplace increase their production volumes and become larger. They develop wider and deeper client bases and are better able to withstand downturns and softer market conditions in a region, thus becoming more secure and stable employers. For governments, larger and more-efficient firms are more profitable and thus pay more in taxes, providing additional revenues to the public coffer. These benefits, while indisputably real, are difficult to capture empirically.

The level of income in a nation is a reflection of the efficiency with which the resources of that nation are combined to produce goods and services and the relative value of the price of the nation's goods and services that are exported compared to those imported (i.e. the terms of trade). As a small economy, Canada produces only a fraction of the goods and services it consumes and imports the rest. In a world devoid of international trade, it would be unrealistic to think that a country like Canada could make the necessary investments to produce the range of products and services it presently enjoys. In other words, Canadians' access to a broad variety of foreign-made machinery, computers, and communications technologies, and to travel and entertainment services, for example, reflects Canada's ability to sell Canadian-made goods and services in international markets.

Indeed, it would be very difficult to imagine a world without international trade for the average Canadian. The typical Canadian starts the day by awakening to the sounds of a clock radio. Inside that radio, the alarm mechanism is controlled by a microchip. That microchip, and indeed the entire clock radio, was most likely imported. Even the bed linen, whether cotton or polyester, is made of fibres that are likely imported. When the typical Canadian sits down to scan the day's headlines while eating breakfast, the glass of orange juice or cup of coffee or tea on table are imported goods: the oranges, tea, and coffee originate from other parts of the world. And the headline news, about fiscal austerity in Europe or a natural disaster somewhere in the world, is a service imported into Canada from an international newswire.

Many of the cars the typical Canadian encounters on the daily commute have direct or indirect foreign connections. Roughly one third of new cars in Canada are built overseas, another third are transplants built in North America by foreign-owned manufacturers such as Toyota or Honda, and the remaining third are North American "big 3" carsFootnote 42 containing subcomponents sourced from countries around the world.

The typical Canadian's cell phone and computer were likely manufactured in another country as well, with the subcomponents, such as microprocessors and RAM, produced and/or assembled in still other countries. The operating software and many of the software programs on these devices are also likely of non-Canadian origin. Likewise, many commonly used food products, ranging from spices and out-of-season fruits and vegetables to nuts and chocolate, and even many appliances in Canadian kitchens, are also imported. International trade enriches the lives of everyday Canadians in so many ways and through so many direct and indirect channels that it would be virtually impossible to disentangle its effects or to precisely measure the innumerable benefits and conveniences it brings.

But imports also have other effects on the economy beyond providing variety and choice for consumers. Imports provide inputs to producers and competition for Canadian producers. They provide jobs directly to people in the transportation, wholesale, and retail sectors and indirectly to many others whose activities support those involved in importing; the bankers, for example, who arrange for the exchange of currencies and transfer of payments.

Specialization, Comparative Advantage, and Gains from Trade

Economic theory has one central explanation for the process of wealth creation resulting from trade: let people do what they do best or, in one word, specialization. Throughout economic history, mankind has gradually increased its economic well-being through specialization. The division of labour, specialization, and the international exchange of goods and services have been key to improving economic conditions. As specialization increased, so has productivity and total output, leading to a larger economic pie to be divided among the population.

There are many instinctive reasons that make specialization more efficient. First, the specialist acquires more expertise and performs better over time. Second, specializing avoids the costs of switching between different activities. Third, specialization avoids the need to provide everyone with a different set of tools for all activities. Finally, economic agents can choose occupations that they enjoy more and thus be better at it.

Trade among nations further accentuates the importance of specialization by allowing the gains from specialization to be extended to a wider area.

In the context of international trade, economists have developed the concept of comparative advantage, in which one party is better than the other at producing all goods and services, but by a different margin. The concept of comparative advantage was first articulated by David Ricardo in 1817, using an example involving England and Portugal and two goods (cloth and wine). Ricardo showed that even when one of the two countries has an absolute advantage in producing both goods (i.e. it can produce more output with one unit of labour in both sectors) there is scope for mutually beneficial trade if both countries specialize according to their pattern of comparative advantage.Footnote 43 More precisely, it is said that a country has a comparative advantage in the production of good X if it is relatively more productive in the production of that good.

It is differences between the relative prices between countries (as reflected in costs of labour to produce the goods) that underpin the incentive to engage in trade.Footnote 44 The divergence between self-sufficiency and free trade prices only partially explains the gains from trade. A more complete explanation of those gains should also take into account the underlying factors that give rise to different prices, thereby creating the conditions for mutually beneficial trade. These factors are the ones that lie behind the sources of comparative advantage. They include such things as differences in technology and differences in natural endowments. In addition, there are other gains from trade that are not linked to differences between countries. In particular, countries trade to achieve economies of scale in production or to have access to a broader variety of goods. Moreover, if the opening-up of trade reduces or eliminates monopoly power or enhances productivity, there will be gains from trade beyond the usual ones. Finally, trade may have positive growth effects.

Differences in Technology

As already mentioned, differences between countries are one of the main reasons why they engage in trade. The Ricardian model and its extensions point to technological differences as the source of comparative advantage. This was illustrated in Ricardo's example of England and Portugal by using labour as the only factor of production,Footnote 45 so that differences in technology show up as differences in the amount of output that can be obtained from one unit of labour. These differences allowed each country to exploit its comparative advantage and expand the size of the economic pie.

Differences in Resources Endowments

Given that the Ricardian model assumes labour as the only factor of production, differences in labour productivity thus provide the only possible source of comparative advantage between countries in that model. Clearly, however, differences in labour productivity are not the only source of comparative advantage. Differences in resource endowments also play a role. For example, countries that are relatively better endowed with fertile land than others are more likely to export agricultural products.

The idea that international trade is driven by differences in relative factor endowments between countries forms the core of the Heckscher-Ohlin trade model. Because this model focuses on another source of comparative advantage-factor endowments, it provides an additional explanation of trading patterns. The model rests on the theory that a country has a production bias toward, and hence tends to export, the good that intensively uses the factor with which it is relatively well endowed. However, the gains from trade in the Heckscher-Ohlin framework are fundamentally similar to those in the Ricardian model: that is, they are gains from specialization that arise because of differences between countries.

Empirical Results

While the concepts of comparative advantage and gains from trade appear straightforward, the benefits of trade are difficult to capture empirically. This is because there is considerable difficulty in translating the theories of Ricardo and Heckscher-Ohlin into forms that are testable by empirical research. Thus, very little is known about the empirical magnitudes of gains from international trade, and the mechanisms that generate these gains. In particular, limited evidence is available on how much specialization contributes to an economy's overall prosperity.

The example of trade liberalization in Japan in 1858 provides one of the few cases in which a country moved from economic isolation (or self-sufficiency) to open trade. Using this example, Bernhofen and Brown (2005) estimate the size of gains from trade resulting from comparative advantage on national income. They found evidence that Japan's trading pattern after opening up was governed by the law of comparative advantage and estimated the gains in real income from trade resulting from comparative advantage at 8 to 9 per cent of GDP.

The Jeffersonian trade embargo that cut off the United States from shipping between December 1807 and March 1809 provides a second test case. Here, the welfare cost to the United States of the nearly complete embargo on its international trade was estimated to be 5 percent of GDP. This cost, however, does not represent the total gains from trade because trade had already been restricted prior to the embargo (Irwin 2002).

The literature on testing and estimating Heckscher-Ohlin models is both voluminous and complex. Moreover, according to a 2008 review by the World Trade Organization most of the empirical work that attempted to test or estimate Heckscher-Ohlin models used inappropriate methods and is therefore largely irrelevant. In recent years, however, empirical work has been more about accounting for global trade flows than about testing hypotheses related to trade theories. Nonetheless, studies using appropriate methods have shown that if technological differences and home bias are included in the model and if the assumption of an integrated world is relaxed, there appears to be a substantial effect of relative factor abundance on the commodity composition of trade.

The "New" Trade Theory

The trade flow literature has highlighted the fact that traditional approaches, which attribute trade to differences between countries, have difficulties in explaining the existence and degree of trade in similar products within the same industry (i.e., what economists call "intra-industry trade") and of trade between similar countries (in terms of technology or resources). To explain these phenomena, a "new" trade theory was needed. The best known approach is Krugman's monopolistic competition model which provides a framework to explain these phenomena (Krugman 1979). The Krugman model employs two basic assumptions, both of which can be readily observed in the real world: "increasing returns to scale" and consumers' "love of variety". With increasing returns to scale (also called economies of scale), firms that double their inputs more than double their output.Footnote 46 Since goods can increasingly be produced more cheaply (i.e. more output for the same cost), producing at a larger scale becomes economically efficient. The reason why, at the extreme, economies do not rest on a single firm producing a single product is because consumers prefer to choose from different varieties for each product they buy rather than buy the same one each time. This is Krugman's "love of variety".Footnote 47 Consumers' love of variety favours the existence of many small firms, each producing a somewhat differentiated product, while the exploitation of economies of scale makes it worthwhile to organize production in larger firms.

Under this approach, each firm produces a product "variety" that is "differentiated" from the varieties produced by other firms. Thus, each firm has some leeway to set prices without fear that consumers will immediately switch to a competitor for the sake of a small difference in prices. However, while these varieties are not exactly the same, they are substitutes for one another, and each firm continues to face competition from other producers in the industry. So what happens if two countries, each with identical industry technologies and factor endowments, open up to trade? According to traditional models on country differences, no trade would occur. In contrast, with differentiated goods and increasing returns to scale, trade opening enables firms to serve a larger market (and reduce their average costs) and gives consumers access to an increased range of product varieties. However, as consumers can choose among more varieties, they also become more sensitive to price. Hence, each firm can produce a larger quantity than before the trade opening (selling to both domestic and foreign markets), but each must sell their product at lower prices.

The gains from trade in such a scenario are threefold. Firms produce larger quantities and better exploit their economies of scale ("scale effect"). Consumers in both countries can choose from a wider variety of products in a given industry ("love-of-variety" effect). At the same time, in an integrated market, consumers pay lower prices (also known as a "precompetitive effect"). Because of these gains, it makes sense that similar countries trade with each other and export and import different varieties of the same good. However, while the "new" trade theory provides a framework explanation of why similar countries may find it beneficial to trade with each other, the usefulness of the theory can only be determined by the actual evidence of the predicted gains from liberalization. We thus turn to the economic literature for evidence on the various effects (e.g. scale, variety, and price), including the evidence for Canada.

Economies of Scale Results

According to "new" trade theory, firms are able to expand production within the domestic economy and enjoy lower costs through economies of scale by specializing in a variety for which they have a competitive advantage, thereby creating the conditions for intra-industry trade between countries. By engaging in international trade, firms can further expand production by offering their differentiated products to consumers in other countries, thereby lowering average costs and prices. This "economies of scale" hypothesis has been tested in the economics literature, and the evidence is mixed.

Following the conclusion of the Canada- U.S. Free Trade Agreement ( CUSFTA), almost all Canadian manufacturing industries exhibited substantial rationalization between 1988 and 1994. Head and Ries (1999) analyzed the impact of the CUSFTA on the size and scale of operations for 230 Canadian industries at the 4-digit SITC level. Trade liberalization was expected to have two opposing effects on the size of Canadian industries. On the one hand, a positive effect on the size of Canadian firms was expected as a result of the lowering of U.S. tariffs, due to enhanced opportunities to expand production by initiating or increasing exports to the U.S. market. In this respect, the study found that the average U.S. tariff reduction of 2.8 percent caused a 4.6‑percent scale increase among Canadian industries. On the other hand, an opposing negative effect due to increased U.S. penetration of the Canadian market was also expected. The study found that the average 5.4‑percent reduction in Canadian tariffs caused a 6.1‑percent scale decline in Canadian industries. Thus, the evidence on balance did not support an increase in the size and scale of Canadian industries as a result of Canada-U.S. trade liberalization, nor did it constitute a factor to explain the observed gains from economies of scale and specialization in many Canadian industries during the period following the introduction of the CUSFTA.

Baldwin and Gu (2006) analysed the impact of trade liberalization (the Canada- US FTA and NAFTA) on exporters and non-exporters in Canadian manufacturing industries. The analysis incorporated plant scale and production-run length both essential to achieving benefits from economies of scale-as well as product diversification. 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.

The economies of scale benefits may thus be overstated. The likely explanation is that economies of scale at the plant level for most manufacturing firms tend to be small relative to the size of the market because most plants have already attained their minimum efficient scale. Average costs therefore seem to be relatively unaffected by changes in output; in other words, a large increase in a firm's output does not lead to lower costs, and a large reduction in output does not lead to higher costs. When faced with competition from imports, many firms are forced to reduce output but production costs rarely rise significantly.

Variety Effects

The explanation for trade based on product differentiation suggests that many varieties of a product exist because producers attempt to distinguish their varieties from those of their competitors in order to win brand loyalty from consumers, or because consumers demand a wide spectrum of varieties. Although countries without substantial cost differences are not specialized at the industry level in international trade, they are, nonetheless, specialized at the product level within the same industry, which results in intra-industry trade.

With the opening of trade, each country increases its exports of varieties to other countries; at the same time, each faces increased competition from foreign varieties produced from abroad. As a result, a country undergoing free trade is expected to produce fewer domestic varieties due to foreign competition, but will receive a broader range of available varieties via imports. Moreover, there is a price effect associated with trade liberalization and increased competition, which lowers the price for each variety. Consequently, the sum of the varieties under freer trade would exceed the number of varieties available before the opening of trade (Feenstra, 2003).

Hillberry and McDaniel (2002) used detailed U.S. trade data to examine the extent to which the increase in NAFTA trade was associated with trade in new varieties. Their study decomposed the growth in U.S. trade with its NAFTA partners over the period 1992-2002 into price, volume, and variety effects. The variety effects are measured by the change in trade values due to trade in more or fewer goods using the Harmonized Tariff ( HS) Schedule. During the 1993-2001 period, they found a 35‑percent increase in U.S. exports to Canada and a 69‑percent increase in Canadian exports to the United States. Of the measured 35 percentage point increase in U.S. exports to Canada, only 3.4 points represented trade in new goods. In other words, Canadian imports from the United States would have risen by 3.4 percentage points holding the prices and quantities of other pre-existing trade constant, due to new varieties. This represents a gain to consumers in Canada.

Chen (2006) used data on trademarks to quantitatively estimate the impact of the CUSFTA on the variety of goods available. He found that not only did the annual variety of products available to Canadians increase by 60 percent, but because of the size difference and positive relation between the size of the market and the number of varieties available in that market, Canada benefited more than the United States in terms of the number of new products available as a result of trade. The smaller Canadian economy gained access to some three times as many new U.S. varieties than U.S. consumers received from Canada.

Price Effects

A number of studies have examined the effect of foreign competition on pricing decisions by firms and concluded that trade liberalization has indeed reduced mark-ups of price over costs, although disentangling the price effect from other relevant factors has proven difficult. Badinger (2007) examined the effects on price-over-cost mark-ups using data across 18 sectors in 10 EU member states in relation to the creation of the European Union ( EU) single market. After taking cyclical and technological factors into account, the study found that mark-ups in manufacturing declined by 31 per cent following integration while services mark-ups increased slightly. Badinger argued that the comparatively weak state of the single market for services and the persistence of anticompetitive strategies in certain services sectors might explain why services mark-ups did not behave as expected.

The WTO (2008) reported on several case studies that found significant price impacts arising from trade liberalization for several developing countries. For example, India posted important decreases in pricecost margins for most industries in response to a range of liberalization measures undertaken in 1991 (Krishna and Mitra 1998). Similar results were obtained for Côte d'Ivoire following the implementation of a comprehensive trade reform in 1985 (Harrison 1990). The relationship between the exposure to trade and price-cost margins at both the industry and plant levels was also examined across several developing countries-in particular, Chile, Colombia, Mexico, Morocco, and Türkiye-and findings suggested that the price effects of increased import penetration were particularly strong in highly concentrated industries where firms had a degree of market power prior to trade opening (Roberts and Tybout 1991).

The trade literature therefore provides overwhelming evidence that trade liberalization fosters increased intra-industry competition. Exporting firms expand their production to serve a larger market, but given that most firms operate at an efficient plant size where output can be shifted considerably with minimal impact on costs, evidence of pronounced economies of scale is weak. Consumers, however, gain access to an increased range of product varieties following trade liberalization. Moreover, as competition in differentiated but substitutable products becomes more heated, prices fall.

The "New" New Trade Theory

The new trade theory, however, has one major drawback: it is based on the assumption of a representative firm. This contradicts the evidence generated by micro-level datasets covering firms and plants, which shows that differences among firms are crucial to understanding world trade.

Equally important, the predictions arising out of the new trade theory did not coincide with some features of trade in the real world. In particular, exporting industries do not export to all countries as implied by their theoretical cost advantage and importcompeting industries sometimes experienced productivity gains following trade liberalization, despite smaller scales of production. The analysis thus shifted from the industry level to the firm level in order to better understand trade flows (e.g., Melitz 2003).

Melitz showed that differences between firms were an additional source of comparative advantage: although, on average, no firm within a specific sector might be productive enough to export, given the dispersion of firm productivities, there might still be some firms left which would be productive enough to do so. This insight was important as it explained why countries might export (or import) in sectors where they may have a comparative disadvantage (advantage). Another major insight was that trade liberalization not only led to resource reallocations between sectors but also to allocative efficiency gains within sectors as resources are reallocated from lower-efficiency firms to higher-efficiency firms (Melitz 2003). These insights laid the foundation for the "new" new trade theory.

Under "new" new trade theory, comparative advantage can be determined at a very low level of aggregation-even within the firm at the component or task level. Such an approach can thus help us understand the increasingly granular nature of international trade and the emergence of global value chains.

Gains from Trade to Canada

The discussion thus far has addressed the broad benefits that trade brings to an economy, covering the key economic concepts, models, and theories. Clearly, many aspects of trade are intertwined. For example, liberalized trade brings about increased competition in domestic and foreign markets, increases product variety and puts downward pressure on prices. It also induces firms to specialize and produce more, but in fewer product lines, and use their particular talents, resources, and factor endowments most efficiently to their benefit. These effects, in turn, lead to supplementary benefits such as greater productivity, higher wages, and increasing prosperity. The following sections address some of these supplemental benefits of trade in the Canadian context.

Trade and Specialization in Canada

Trade in international markets is driven by the search for goods and services produced elsewhere at a relatively lower price than the opportunity cost to produce them at home. In exchange for the comparatively low priced international goods, Canada supplies goods in which it specializes. The outcome is an international division of labour that produces economic welfare gains from increased specialization. Canada stands to increase growth, firms to increase output, workers to receive higher wages, and consumers to access higher quality products at reduced prices.

Canadians have the opportunity to gain from specialization in two forms: a one-time shift in resources from less to more efficient sectors or firms, and in an ongoing form as workers, firms, and the nation as a whole focus their efforts on what they do best- and become increasingly better at doing it. One-time shifts can be understood as welfare- enhancing structural changes. Here gains derive from the movement of resources from a less to a more efficient sector. However, moving forward, while a country may specialize by moving its factors of production into more efficient sectors, it is natural that, with practice, their ability to produce the goods in which they specialize would improve with time. This type of adaptation, or learning by doing, is suggestive of the second form of specialization-ongoing or dynamic specialization. Gains in this case come from increased productivity (output per hour) through a "learning by doing" process in the same sector.

While most easily understood at the industry level (for example, the auto industry), specialization can occur at finer levels as well, such as at the firm level or plant level. Nonetheless its impact can be felt throughout the economy. Research has identified the link between specialization and trade liberalization at the plant level in Canada. Baldwin et al. (2001) found a strong relation between the export intensity of plants in manufacturing industries and their specialization following a period of increased trade liberalization in the late 1980s and implementation of the CUSFTA. The average nominal tariff (customs duties paid divided by imports) decreased from 6.5 percent in 1973 (as part of the Kennedy Round) to 1.1 percent in 1996, over which time the export intensity increased, for example, from 31 percent in 1990 to 47 percent in 1997. Likewise, commodity specialization at the plant level increased sharply with the implementation of the CUSFTA. About 30 percent of Canadian manufacturing firms that operated continuously from the early 1980s to the early 1990s reduced the diversity of their output. Within this group of firms, between 1983 and 1993 some 38 percent more firms switched from multiple-plant to singleplant firms than switched from single-plant to multiple-plant firms, further suggesting a move toward increased specialization.

Furthermore, given that Canada comprises many diverse regions, it was not surprising that the impact of increased trade liberalization and specialization yielded different impacts across the country. Brown (2008) has shown that the impact of trade liberalization on specialization was found to be greater in regions outside of urban areas and outside of Canada's industrial centres of Ontario and Quebec. As in the case for Canada as a whole, plants with higher export intensities in these regions were found to have increased levels of specialization in the industries under investigation.

The key benefit from specialization lies in the fact that as plants specialize they become increasingly productive, either through a one-time shift in resources or through an ongoing process of learning or exploitation of scale economies. As specialization has been shown to increase at the plant-level in tandem with trade liberalization, so too has plant-level labour productivity. Trefler (2004) found that 14 percent of export-oriented industries increased productivity following the implementation of the CUSFTA; and furthermore, productivity improvements across industries were shown to grow at a compound annual rate of 1.9 percent. As a whole, labour productivity in Canadian manufacturing rose about 6 percent with the implementation of the CUSFTA -strong support for the welfareimproving nature of specialization.

Along with labour productivity, output and wage growth were also shown to increase with the implementation of the CUSFTA (Trefler 2004). 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.

The impact of specialization on Canada's trade has also been analyzed using computable general equilibrium ( CGE) models, which have the capacity to assess the gains from trade on a per-agreement basis. Typically, CGE models estimate the economic welfare gains from FTAs under the assumption of perfect competition.Footnote 48 As such, these models are best understood as estimates of the potential economic impacts of the FTA under investigation. Nonetheless, while a number of assumptions are made in the model, the results most likely understate the gains in output and economic welfare for a given amount of trade expansion. More specifically, under the assumptions made, the removal of tariffs has less of an effect on domestic prices, as the industries are already perfectly competitive, which is not the case in reality. Therefore, although the analysis does not separate out specialization in particular from gains overall, general economic gains are estimated- of which specialization is deemed to be one component. All of the four most recent joint studies released by DFAIT Footnote 49 have shown that Canada stands to gain by eliminating tariffs and increasing trade liberalization.

A discussion of the positive impacts of specialization must also take into account the effects of technology on specialization. Indeed, countries specializing in the export of goods with higher technological contents experience elevated growth rates. By exporting products with higher technological intensity, countries have typically experienced higher growth rates (Lee 2011). Industries defined as having high technological content include aircraft, pharmaceuticals, and electronics. In this regard, Canada, with its highly educated workforce, is well positioned for higher growth, provided it focuses on producing innovative, technologyintensive exports.

Trade and Domestic Competition in Canada

An often overlooked aspect of open trade is the added competition imports create in the domestic market. If not for imports, domestic producers would have a higher degree of market power. This lack of competition could allow them to set higher prices, give them less incentive to innovate, and result in lower quality goods and services being supplied to the market place. Imports thus become an important source of added competition, requiring domestic firms to compete with companies from around the world. Foreign exporting companies are usually world-class producers, offering leading-edge, high-quality, or innovative goods and services, while others offer lower-cost goods from countries with more abundant labour. The very presence of foreign competitors compels domestic firms to seek out efficiencies and cost savings and to offer higher-quality goods at the same or lower prices. This, in turn, makes domestic firms leaner, more efficient, and more competitive, thus benefiting consumers. Although additional competition may force some domestic firms to exit the marketplace, this is more than offset from the productivity growth as more efficient producers take over, and the resulting gains are passed on to consumers.

In reality, Canadian firms do face increasing competition from imports. As a percentage of the total domestic manufacturing market, imports have risen from 45 percent in 1992 to 53 percent in 2009 (latest data available). In some manufacturing sectors, such as clothing, chemicals and electrical equipment, this trend has been even more pronounced, while in others, such as beverages and tobacco, import penetration is less striking. Research indicates that the increased influence of imports has raised the competitiveness of Canadian manufacturers.

Figure 1
Imports as a Share of the Total Canadian Domestic Market* for Selected Manufacturing Industries

* Domestic market = domestic shipments + total imports - domestic exports

Source: Office of the Chief Economist, DFAIT
Data: Statistics Canada

Figure 1 Text Alternative

1992

2009

The impact of increased competition in Canada can be seen following the implementation of the CUSFTA and NAFTA. Increased competition from imports caused the number of firms in the domestic economy to decrease as smaller and less efficient firms closed, allowing more efficient firms to expand and become even more productive. In the six years following the CUSFTA, the number of manufacturing plants declined by 21 percent while output per plant in Canada increased by 34 percent. This reduction in number of firms was found to be largely induced by the reduction in tariffs (Head and Reis 1999).

The notion that increased imports from trade liberalization results in the closing of some domestic firms may at first appear to be a negative outcome. But it is important to realize that this is one of the main mechanisms by which increased competition makes the domestic market more efficient: firms that were compelled to shut down did so because they could not compete with the quality or price of foreign imports, while those domestic firms that remained were more efficient and better able to face the increased competition from abroad. In this way, imports cause a reallocation of domestic resources to more efficient uses. Plant turnover (closing of some companies and opening of others) contributed between 15 percent to 20 percent of manufacturing productivity growth during the 1988-1997 period (Baldwin and Gu 2002).

Not only does competition force out less productive plants, but the surviving firms are also compelled to become even more productive in domestic economy. Baldwin and Gu (2009) looked at 7,000 Canadian manufacturing plants for the period 1984 to 1990 and found that plants in industries with the largest tariff changes also experienced the largest increases in product-run length, and increased plant size. This was due both to increased competition from imports and from gains in exporting accruing from greater access to the U.S. market.

Studies from other countries support these findings. For example, Liu (2010) showed that greater import competition in the United States led multi-product firms to drop peripheral products and focus on core production. Gibson and Harris (1996) investigated the effect of trade liberalization on manufacturing in New Zealand and found that liberalization caused smaller-sized, higher-cost plants to close, while low-cost specialized plants were more likely to survive. In Chile, Pavcnik (2000) showed that the trade liberalization undertaken in that country in the late 1970s and early 1980s resulted in plant level productivity improvements that were mainly due to the reshuffling of resources and output from less to more efficient producers.

CGE models can also be used to show the impact of imports on competition. For example, Cox and Harris (1985) show that by incorporating scale economies, imperfect competition, and capital mobility into these models, the estimated gains from trade to Canada under the CUSFTA increase by a significant factor (in the order of 8 to 10 percent of GNP) through rationalization of industries, greater production runs, lower price-cost mark-ups, and increases in factor productivity.

Imports also encourage innovation in an economy, first, by obliging domestic producers to innovate to improve their products and production processes in order to compete with foreign goods and services; and second, the imports themselves produce spill-over effects by introducing foreign technology and ideas into the domestic marketplace to consumers and producers alike. Unfortunately there is little empirical evidence on the impact of imports in Canada in this regard, but there are some international studies that quantify the spill-over effect. One such study examined the impact of Chinese imports on a sample of 200,000 European firms and found that competition from Chinese imports led to technology upgrading within firms as well as resource reallocation to technologically intensive plants. Between 15 to 20 percent of technology upgrading in the EU between 2000 and 2007 was attributed to competition from Chinese imports (Bloom et al. 2009). A link between imports and innovation was also found in Mexican plants. Teshima (2008) documents that sectors affected by greater tariff reductions were induced to increase R&D expenditures. However, in that case, R&D expenditures were more likely to go toward upgrading processes as opposed to products, suggesting that competition from imports generated greater incentives to increase production cost efficiencies rather than to create new products or increase product quality.

Trade and Productivity in Canada

Productivity performance is central to economic growth, competitiveness, and standards of living. This section examines two avenues by which opening trade has contributed to improvements in Canadian productivity: improvements in allocative efficienciesFootnote 50 and improvements in productivity efficiencies.Footnote 51

Open economies tend to grow faster than closed economies because reduced barriers to trade improve productivity performance and support capital accumulation. For example, a recent study based on results from 14 OECD countries and 15 manufacturing sectors found that an increase in openness by one percentage point increased productivity in manufacturing by an average 0.6 percent (Badinger and Breuss 2008).

One of the best-known examples of open trade leading to improved productivity performance is the North American Auto Pact of 1965. Prior to the signing of the Auto Pact, the Canadian automotive industry produced most car models for Canadian consumers and the U.S. automotive industry did likewise for U.S. consumers. Since the Canadian auto market was much smaller than the U.S. market, the Canadian auto sector was at a substantial disadvantage in terms of scale of production in the Canadian market, and productivity in the sector was about 30 percent below that of the U.S. auto sector. The establishment of a free trade area for automotive products under the Auto Pact allowed manufacturers to consolidate the production of car models in one partner country, and export those models to consumers in the other partner country. This rationalization of production resulted in the reduction of the number of car models assembled in Canada. However, by concentrating resources into fewer models, total Canadian auto production actually increased while average costs for auto production decreased. Canadian auto products became much more competitive compared to the pre-Auto Pact era and exports of Canadian auto products to the United States surged. Moreover, a few years after the inception of the Auto Pact, Canada's productivity gap with U.S. auto industry had virtually disappeared (Wonnacott and Wonnacott 1982).

Other examples of gains in efficiency arising from increased intra-industry trade include empirical research into the effects arising from the implementation of the CUSFTA conducted by Baldwin, Beckstead and Caves (2001), Baldwin, Caves, and Gu (2005), and Baldwin and Gu (2006), who documented a dramatic reduction in the number of manufacturing products produced in Canada following the implementation of the CUSFTA in 1989. In particular, Baldwin, Caves, and Gu (2005) report that the decrease in the number of products produced in Canada was accompanied by substantial increases in production runs for individual products.

Moreover, because of productivity differences between firms, when trade barriers are removed (or reduced), more productive firms tend to thrive and expand, while less productive firms contract or possibly exit. This generates another type of allocative efficiency gain known as the "reallocation" effect. In essence, market share is reallocated from less efficient firms to more efficient firms-with the result that overall efficiency in the industry improves.

Using firm-level data, Lileeva and Trefler (2010) examined the significance of this "reallocation" effect in raising Canada's overall manufacturing productivity in the wake of the Canada- U.S. FTA. Analysing plantlevel exports between 1984 and 1996, they found that as the United States lowered its tariffs against imports from Canada under the CUSFTA, Canadian exporters grew by exporting to the U.S., thereby raising overall productivity. A market share-shift analysis showed that this raised average manufacturing productivity by 4.1 percent.

At the same time, corresponding Canadian tariff cuts pressured some Canadian firms to contract and even exit in the face of foreign competition. This selection effect also generated overall productivity gains in the Canadian manufacturing sector since the contracting and exiting plants were substantially less efficient than the average Canadian firms. Trefler (2004) estimated that this selection effect increased overall Canadian manufacturing productivity by an estimated 4.3 percent.

Thus, the allocative efficiency gains via reallocation and the selection effects induced by the CUSFTA combined to generate a productivity gain of 8.4 percent (i.e. 4.3 percent plus 4.1 percent) for Canadian manufacturing.

Beyond those gains associated with differences in efficiency between firms, gains also arise from within individual firms themselves. As exporting firms become larger because of open trade, it becomes attractive for some firms to invest in innovation and technology, skills and knowledge, thereby raising their profits and productivity. The development of new products and processes, and adapting these to foreign markets, also involves substantial fixed costs, so only the larger, integrated markets can support the sales volumes needed to justify incurring the high fixed costs of innovation and investment. While adapting to local conditions in foreign markets is often a dynamic and timeconsuming learning process, it is by learning through exporting that many exporting firms improve their productivity.

For evidence on within-firm productivity gains, Lileeva and Trefler (2010) divided 5,000 firms that had not exported prior to the CUSFTA into two groups: those that started exporting in the CUSFTA implementation period and those that did not. The study found that the CUSFTA raised the productivity of new exporters by 15.3 percent, and furthermore that these new exporters accounted for 23 percent of Canadian manufacturing output, and were therefore responsible for raising Canada's overall manufacturing productivity by 3.5 percent (i.e. 15.3 percent multiplied by 0.23). In addition to these new exporters, existing exporters, or firms that had already been exporting to the United States prior to the CUSFTA, also responded to improved market access by increasing their exports: this contributed to an overall 1.4‑percent productivity growth for Canadian manufacturing. Finally, productivity gains came from increased imports of intermediate inputs imported from the United States under the CUSFTA, which contributed an additional 0.5‑percent increase in total productivity to Canada's manufacturing industry.

The gain from the CUSFTA on overall Canadian manufacturing productivity is therefore 13.8 percent-the sum of the allocative gains (between firms) and the productive gains (within firms)-a remarkable trade-related achievement.

Allocative efficiency gains (between firms)

Growth of most productive exporters

4.1%

Contraction and exit of least productive exporters

4.3%

Productive efficiency gains (within firms)

New exporters invest in raising productivity

3.5%

Existing exporters invest in raising productivity

1.4%

Improved access to U.S. intermediate inputs

0.5%

Total
13.8%

Sources: Trefler (2004) and Lileeva and Trefler (2010)

Trade and Prosperity in Canada

Trade and prosperity go hand-in-hand. Trade allows consumers to buy products and services to which they would not otherwise have access. It is as a result of international trade that Canadians are able to eat fresh fruit and vegetables in the winter, have access to coffee and chocolate, and to the choice of more than 300 models of carsFootnote 52 and 197 models of cell phone.Footnote 53 Because of trade, almost everything that Canadians consume daily is cheaper than it otherwise would be, stretching Canadian incomes even further.

Through higher wages, trade puts more money in the pockets of Canadians to spend on necessities like food, shelter, and government services like education and healthcare or on discretionary items like flat-screen TVs and the occasional vacation. Because trade encourages companies and workers to specialize in what they do best, to innovate, and to grow large by serving global markets, the productivity of firms improves, which in turn drives up wages for workers and increases Canada's prosperity. The end result is increased standards of living.

Figure 2
Trade and Standards of Living in Canada

Figure 2 Text Alternative

Trade Share of GDP

GDP Per Capita

It is hardly coincidental that the Canadian standard of living and Canada's openness to international trade (both exports and imports) are closely linked. Each incremental opening to international trade has been linked to further improvements in the Canadian standards of living ( Figure 2). This relationship between trade and improved standards of living has been formally tested in a large project on understanding economic growth undertaken by the OECD. Using the data from 21 advanced countries over nearly 30 years, the OECD reported that, controlling for other factors, every 10‑percentage point increase in trade exposure (as measured by trade share of GDP) contributes a 4‑percent increase in GDP per capita. Employing a different methodology than that used in the OECD, Frankel and Romer (1999) found further evidence supporting the link between international trade and economic growth for developing countries in particular. Here, a 1‑percent rise in trade share produced a rise in per capita incomes of between 0.8 and 2.0‑percent. This finding suggests that openness to trade is a key factor in economic development.

Trade and Wages

Figure 3
Real Wage Rates (1997)

Data: Gu and Rennison

Figure 3 Text Alternative
Real Wage Rates (1997) in 1992 dollars per hour

Exporters: $18.36

Importers: $18.14

Business Sector: $17.18

Trade has a significant impact on workers through its effect on wages. While some firms may shrink or exit when faced with the additional competition that trade brings, others will meet the challenge. Research shows that the latter will be the most productive firms. In addition, as these firms grow and expand abroad they will become even more productive and innovative, allowing them to pay higher wages while also increasing their employment. This was the case in Canada following the implementation of both the Canada-U.S. Free Trade Agreement and NAFTA. Gu and Rennison (2006), for example, find a significant and growing wage premium in traded sectors (both exports and imports) compared to the economy overall once the public sector is removed from consideration.

Because exporting firms are more productive, they are thought to pay their employees higher wages. Indeed, Bernard and Jensen (1999) estimated that U.S. exporters pay, on average, wages that were 9.3 percent higher than those paid by non-exporters. Similarly, a 25‑percent export wage premium was found by Arnold and Hussinger (2005) for German manufacturers. However, other factors, such as manufacturing plant size, capital intensity, degree of foreign-control, and multi-unit firm status, as well as certain individual worker characteristics, are also factors positively associated with higher wages. A recent paper by Breau and Brown (2011) performed plant-level regressions controlling for such factors. Canadian exporters paid wages that were, on average, about 14 percent higher than those paid by nonexporters; however, this wage premium fell to slightly over 6 percent, once plant characteristics were taken into account and was further reduced to slightly under 6 percent once controls for indivual worker characteristics were included.

Conclusions

International trade is driven by the search for goods and services produced at relatively lower prices than the opportunity cost to produce them domestically. As trade is liberalized, competition for markets heats up. Except for those firms (and their employees) that are the least productive, the increased competition is beneficial. Competition from imports prevents firms that hold power in domestic markets from over-charging, or under-producing, for the market. More importantly, competition from imports causes domestic firms to realign their resources, to drop less-profitable lines of production, and to specialize in one variety (or on a "differentiated" product) for which the firm has a comparative advantage. The outcome is an international division of labour and increased economic welfare.

This was the case following the CUSFTA and NAFTA. Economic evidence suggests that increased competition from imports induced a number of smaller and less-efficient firms to close and allowed more efficient firms to expand. At the plant level, Canadian plant sizes increased and production runs lengthened due to gains accruing from greater exports to the United States.

Moreover, following both agreements, Canadian consumers were introduced to a greater variety of products than before. One estimate found that the agreements increased the annual variety of products available to Canadians by 60 percent, which was about three times as great as the new varieties introduced into the United States from Canada. A separate study found that roughly 10 percent of the increase in U.S. exports to Canada represented trade in new goods.

As firms narrow production lines, concentrate on differentiated products, extend production-run lengths and face new entrants in their markets, they are induced to compete in prices as well. Evidence suggests that trade liberalization also brought about reduced mark-ups over costs-to the benefit of consumers.

Liberalized trade is also expected to have an impact on productivity levels. Between 1984 and 1996, following the CUSFTA, Canadian manufacturing productivity rose by an estimated 13.8 percent. The expansion of exports and realignment from lessefficient to more-efficient producers following that agreement accounted for about 60 percent of the overall increase in productivity, or 8.4 percentage points. Better access to intermediate products combined with increased productivity from new and existing exporters contributed the remaining 5.4 percentage points in improvement of productivity.

Empirical evidence strongly supports the observation that firms that export pay higher wages. Higher wages (wage premiums) are induced by increased productivity, and Canadian exporters are indeed productive, paying wage premiums compared to non-exporters.

Overall, an open trade policy leads to higher wages for employees, lower prices and greater variety for consumers, and greater productivity in business operations through less costly inputs and more efficient and longer production runs. The increased level of competition also creates an environment in which firms are facing incentives to innovate and control costs-to the benefit of all Canadians.

Bibliography

Arnold, J.M. and K. Hussinger (2005), "Export Behaviour and Firm Productivity in German Manufacturing: A Firm-Level Analysis," Review of World Economics, 141-2: 219-243.

Badinger, Harald (2007), "Has the EU's Single Market Programme Fostered Competition? Testing for a Decrease in Mark-up Ratios in EU Industries," Oxford Bulletin of Economics and Statistics, 69, 4: 497-519.

Badinger, Harald and Fritz Breuss (2008), "Trade and Productivity: An Industry Perspective," Empirica, Springer, vol. 35 (2): 213-231.

Baldwin, John R., Desmond Beckstead, and Richard Caves (2001), "Changes in the Diversification of Canadian Manufacturing Firms (1973-1997): A Move to Specialization," Statistics Canada, No. 11F0019 No. 179, 2001.

Baldwin, John R., Richard Caves, and Wulong Gu (2005), Responses to Trade Liberalization: Changes in Product Diversification in Foreign- and Domestic-controlled Plants. Economic Analysis (EA) Research Paper Series. Catalogue No. 11 F0027MIE2005031. Ottawa: Statistics Canada.

Baldwin, John R. and Wulong Gu (2002), "Plant Turnover and Productivity Growth in Canadian Manufacturing," Industrial and Corporate Change, Vol. 15, Issue 3, June: 417-465.

Baldwin, John R. and Wulong Gu (2006), "The Impact of Trade on Plant Scale, Production-Run Length and Diversification", Statistics Canada, Economic Analysis Research Paper Series.

Baldwin, John R. and Wulong Gu (2009), "The Impact of Trade on Plant Scale, Product -run length and Diversification," Producer Dynamics: new evidence from Micro Data, NBER chapter 15.

Bernard, Andrew B. and J. Bradford Jensen (1999), "Exceptional Exporter Performance: Cause, Effect, or Both?" Journal of International Economics, 47, I: 1-25.

Bernhofen, Daniel M. and John C. Brown (2005), "An Empirical Assessment of the Comparative Advantage Gains from Trade: Evidence from Japan," American Economic Review, 95, I: 208-225.

Bloom, Nicholas, Mirko Draca, and John Van Reenen (2009), "Trade Induced Technical Change? The Impact of Chinese Imports on Innovation, Diffusion and Productivity," NBER Working Paper No.16717, Cambridge, MA.

Breau, Sébastien and W. Mark Brown (2011), "Global Links: Exporting, Foreign Direct Investment, and Wages: Evidence from the Canadian Manufacturing Sector," The Canadian Economy in Transition Series, Statistics Canada Catalogue No. 11-622 - No. 021, August 2011.

Brown, W. Mark (2008), "Trade and the Industrial Specialization of Canadian Manufacturing Regions 1974-1999," International Regional Science Review, 31, 2: 138-158.

Chen, Shenjie (2006), "The Variety Effects of Trade Liberalization," in NAFTA@10, John Curtis and Aaron Sydor Editors, Foreign Affairs and International Trade Canada, 2006: 43-72.

Cox, David and Richard Harris (1985), "Trade Liberalization and Industrial Organization: Some Estimates for Canada," Journal of Political Economy, Vol. 93, No. 1, Feb: 115-145.

Feenstra, Robert C. (2003), Advanced International Trade: Theory and Evidence, Princeton University Press, Chapter 5.

Frankel, Jeffrey A. and David Romer (1999), "Does Trade Cause Growth?" American Economic Review, Vol. 89, No. 3. June 1999.

Gibson, John and Richard Harris (1996), "Trade Liberalisation and Plant Exit in New Zealand Manufacturing," The Review of Economics and Statistics, Vol. 78, No. 3, pp.521-529.

Gu, Wulong and Lori Rennison (2006), "The Effect of Trade on Productivity Growth and the Demand for Skilled Workers in Canada," in NAFTA@10, John Curtis and Aaron Sydor Editors, Foreign Affairs and International Trade Canada, 2006: 105-124.

Harrison, Ann E. (1990), "Productivity, Imperfect Competition and Trade Liberalization in Côte d'Ivoire," Policy Research Working Paper No 451, The World Bank, Washington, D.C.

Head, Keith and John Ries (1999), "Rationalization Effects of Tariff Reductions," Journal of International Economics, 47, 2: 295-320.

Hillberry, H. Russell and Christine A. McDaniel (2002), "A Decomposition of North American Trade Growth Since NAFTA", International Economic Review, May/June 2002, U.S. International Trade Commission.

Irwin, Douglas A. (2002), "The Welfare Costs of Autarky: Evidence from the Jeffersonian Trade Embargo, 1807-1809," NBER Working Paper No. 8692, Cambridge, MA.

Krishna, Pravin and Devashish Mitra (1998), "Trade Liberalization, Market Discipline and Productivity Growth: New Evidence from India," Journal of Development Economics, 34, 1-2: 115-136.

Krugman, Paul (1979), "Increasing Returns, Monopolistic Competition, and International Trade," Journal of International Economics 9, 4: 469-479.

Lee, Jim (2011), "Export Specialization and Economic Growth Around the World," Economic Systems, 35: 45-63.

Lileeva, Alla and Daniel Trefler (2010), "Improved Access to Foreign Markets Raises Plant-Level Productivity ... for Some Plants," The Quarterly Journal of Economics, CXXV, 3: 1051-1099.

Lui, Runjuan (2010), "Import Competition and Firm Refocusing," Canadian Journal of Economics, Vol. 43, No. 2, May: 440-466.

Melitz, Marc J (2003), "The Impact of Trade on Intra-industry Reallocations and Aggregate Industry Productivity," Econometrica, Vol. 71, No. 6, November: 1695-1725.

Pavcnik (2000), "Trade Liberalization, Exit, and Productivity Improvements: Evidence from Chilean Plants," NBER Working Paper No. 7852, Cambridge, MA.

Roberts, Mark J. and James R. Tybout (1997), "The Decision to Export in Colombia: An Empirical Model of Entry with Sunk Costs," American Economic Review, 87: 545-564.

Teshima, Kensuke (2008), "Import Competition and Innovation at the Plant Level: Evidence from Mexico," Columbia University Mimeo.

Trefler, Daniel, "The Long and Short of the Canada-U.S. Free Trade Agreement," The American Economic Review, Vol. 94 No. 4, September 2004.

Wonnacott, Paul and Ronald J. Wonnacott (1982), "Free Trade Between the United States and Canada: Fifteen Years Later," Canadian Public Policy VIII (Supplement): 412-427.

World Trade Organization ( WTO) (2008), "Trade in a Globalizing World", Chapter II in World Trade Report 2008 - Trade in a Globalizing World, Geneva.

Footnotes

Footnote 41

Trade, Output, and Jobs in Canada.

Footnote 42

Footnote 43

Footnote 44

Footnote 45

Footnote 46

Footnote 47

Footnote 48

These models, popular for estimating the economic welfare gains from FTA s, usually assume a perfectly competitive market structure, that is, all industries in the domestic economy are price takers and their individual production cannot affect supply enough to influence prices. Under this assumption, the removal of tariffs produces a smaller effect on domestic prices as the industry is already competitive. Therefore, gains in trade often arise through other channels, such as increased exports.

Footnote 49

Footnote 50

Footnote 51

Footnote 52

Consumer Reports magazine estimates that 34 brands and 305 models of automobile are available in Canada.

Footnote 53

Office of the Chief Economist, DFAIT.

Report a problem on this page

Thank you for your help!

You will not receive a reply. For enquiries, please contact us.

Date Modified:

# data[].attributes.attachment_link.title
International Trade and Its Benefits to Canada (2012)

# data[].attributes.attachment_link.description
Canada depends heavily on trade to sustain incomes and living standards of Canadians and the prosperity of the nation. Consider that, in 2011, Canada's exports and imports of goods and services were approximately $1.1 trillion in total- which is, on average, about $31,600 for every person in Canada, or $3 billion each and every day-and that the overall size of Canada's economy, as measured by its gross domestic product ( GDP), was $1.7 trillion last year.

# data[].attributes.body
1. During the research of this project, we learned how comparative advantage is advantageous in boosting a countries economy, particularly Canada's. We read and watched videos on how Canada uses the goods and services it has and how it exports it abroad to other nations that need it in their markets. We were also able to understand the advantages and disadvantages of comparative advantage that Canada has when exporting their resources with other nations.

2. This topic is relevant to us as comparative advantage is used among the resources present among us. For instance, in the province of Ontario, the forestry industry is profitable as there is a desired market for it across the world. We also see other resources such as raw materials being heavily extracted in Canada and exported to countries that desire it in their markets.

3. The most important thing that we can pass on to our family members after learning this topic is that Canada has a comparative advantage in certain resources, and that those resources should be focused on trading abroad to other markets that desire it as it has the ability to greatly boosts its economy.