Tuesday, March 27, 2012

Trade Diversification: It's Not What You Think

For my first post on Canadian Trends it seems only fitting I talk about trade diversification in light of Stephen Harper's recent free trade meetings.

It is (or should be) well known by Canadians that in general our trade deals work like this: We produce raw materials, sell them, then buy back finished product from the countries we export them too. As well it is important to note that all of our transactions are done in USD as that is the world reserve currency.

People tend to over-simplify the mechanics and meaning of trade diversification. For instance, it is a common assumption that trading with other countries will decrease our dependency on U.S. economic health. It is overlooked however that U.S. economic health affects all countries tied to the USD.

From my research I've concluded that trade diversification efforts underway here in Canada are to follow U.S. trade, rather than diversify from it. Let me explain.

Over the last 10 years the U.S. has steadily outsourced it's industry to third world countries. Apple (AAPL) has recently been in the news taking criticism for having it's manufacturing process in China. This was an anticipated result of NAFTA and other 'free trade' deals. Since most manufacturing now occurs in the third world it is reasonable to assume that demand for raw materials is also highest in the third world. Current growth trends and predictions support this assertion.

In essence, this is now how our trade process will work should these deals be successful: Canada will produce materials and ship them to China for instance. China will make use of the materials and ship the final products to the U.S. We will then receive the goods from the NAFTA super highway. In this sense we are not diversifying from U.S. trade at all, we are simply following it to where the manufacturing process currently exists.

However, Canada is too late as manufacturing has now started moving back to the U.S. probably due to oil & gas prices. At $100+/barrel it is no longer economically viable to pay the cost of shipping across oceans. The glory days of high-paying manufacturing jobs will not be back though. Margins will be slim no matter where production occurs, and in the era of globalization our standards and expectations have been significantly lowered. I expect that instead of exporting the jobs, we will begin importing the workers.

Conclusion

In the short & medium term I am positive towards Canadian exports however in the long term I believe current free trade negotiations will increase rather than decrease our dependency on U.S. economic health. The price of oil along with tensions in Iran are likely to make any growth the U.S. experiences short term at best. Should the U.S.'s momentum falter however (and I anticipate it will), their imports will dry up and those countries already hit by high-shipping costs will have a significantly lower raw material demand.

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Richard Fantin is a self-taught software developer who has mostly throughout his career focused on financial applications and high frequency trading. He currently works for eQube gaming systems.

Nazayh Zanidean is a Project Coordinator for a mid-sized construction contractor in Calgary, Alberta. He enjoys writing as a hobby on topics that include foreign policy, international human rights, security and systemic media bias.

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