By Jayson Myers.
It’s mind-boggling how a year that began with so much promise for Prairie manufacturers — and for the world economy in general — now appears to be careering toward trade wars, trade sanctions, and inflation.
It was only last year the global economy began running on all cylinders again, after a lengthy hiatus following the 2008 financial meltdown. True, there are still plenty of risks in financial markets, and Canada — along with many other countries — will need to work off record levels of household, private, and public sector debt.
But, for the first half of 2018, Canada, the United States, and a majority of the world’s leading economies were in full growth mode. Year-over-year, global trade grew eight per cent in the first six months of this year.
Western Canadian manufacturers have had a good start to the year as well. Manufacturing sales for the first half of 2018 were about seven per cent higher than for the same period last year. Exports by Prairie manufacturers are up by almost 12 per cent — their strongest rate of growth in more than a decade.
Yet, in spite of the good news, storm clouds are gathering. Political risks are undermining prospects for further economic and trade growth.
U.S. tariffs on steel and aluminum, on imports from China, as well as on other goods the U.S. imports from this country and abroad, have led to reciprocal measures on the part of its major trading partners, including Canada. Escalating tariffs are already upsetting supply chains, playing havoc in commodity markets, and pushing up costs for manufacturers and prices for their customers.
The future of NAFTA, Brexit, CETA ratification, and the World Trade Organization are all in doubt. For Canada, the future of the Trans-Pacific Partnership remains unclear. A new populist regime has taken power in Mexico and is set to review many of the economic reforms and procurement plans of the previous administration. Russia is facing international sanctions. The Turkish economy is close to freefall. In fact, the entire Middle East has become a hotbed of tension. Saudi Arabia’s sanctions on Canada are only one aspect of the geopolitical forces being played out in the region.
So, what does this all mean for you?
First of all: What happens in international markets is highly relevant for manufacturers across Canada. Exports accounted for 43 per cent of total sales revenue for Prairie manufacturers during the first half of this year. That’s up significantly from 34 per cent five years ago. As exports become more important for business, manufacturers need a strategy to diversify risks and opportunities. And, they need to take practical steps to mitigate the political, commercial, and pricing risks involved in international trade. No market is safe today — but some are lower risk than others.
While much has been said about the need to reduce Canada’s export dependency on the United States, the reality is that our American friends continue to offer a very attractive customer base for Canadian and Prairie manufacturers. The U.S. now accounts for 72 per cent of total manufactured exports from the Prairies — actually up a bit from five years ago. It accounts for more than four-fifths of the market for refined petroleum, chemicals, wood products, and motor vehicles and parts, which together add up to just under half of everything that Prairie manufacturers export.
The U.S. will remain a hot market for exporters. U.S. tariffs will have a minimal impact on most Prairie exports unless NAFTA negotiations completely go off the rails and the U.S. imposes across-the-board tariff increases on imports from Canada. (It’s remarkable that even a small risk could now be attached to what only two years ago would have been an unthinkable situation!)
Of greater concern are the cost increases that Prairie manufacturers will face as a result of Canadian and U.S. tariff action and the negative impact that price increases will have on U.S. customer demand. Look for the Federal Reserve to continue to raise interest rates in the face of inflationary pressures south of the border. The combined impact of higher prices and higher interest rates will eventually take its toll on the U.S. economy. But, even slower growth in the U.S. still offers significant potential for Prairie exporters.
On the downside, it’s clear that some markets are much riskier than others. Russia and the Middle East stand out in this regard. But, Prairie manufacturers have already seen a significant decline in export sales to these regions of the world. Sales to Russia are now running at only 45 per cent of what they were five years ago, and account for less than half a per cent of the total value of goods exported by Prairie manufacturers. Likewise, sales to the entire Middle East have fallen by 30 per cent over the past five years and by more than half since 2008. They now account for less than one per cent of Prairie-made exports, although producers of mining, oil and gas, and construction equipment, as well as fabricated metal products, are more highly exposed than other manufacturing sectors.
Today, Prairie manufacturers are looking westward for new sales growth — around the world, to the Far East and Australia in particular. Over the past half-decade, exports to China have grown by 33 per cent, to Japan by 86 per cent, South Korea by 57 per cent, Australia by 34 per cent, and Hong Kong by 26 per cent. Food, chemicals, wood products, primary metals, aerospace equipment, and motor vehicles are all seeing rapid sales growth in the Asia-Pacific. Exports to Mexico have risen 86 per cent since 2013 as well — the major beneficiaries being Prairie food, chemicals, and petroleum refining sectors. Agricultural implement manufacturers have ramped up sales to Australia and central Asia.
All of these markets remain prime prospects for international sales growth. In fact, U.S. sanctions on China will likely increase demand for Canadian products not only in that country, but around the Pacific Rim as well.
Finally, it’s important not to give up on Europe. Despite our new trade agreement with the European Union, Prairie manufacturers are today exporting only two-thirds as much as what they sold into the bloc five years ago. Of note, sales to the United Kingdom have fallen sharply with recent concerns about Brexit top of mind. But, Brexit is forcing U.K. importers to diversify their sources of supply, most aggressively for food products, consumer goods, and high-tech equipment. The rest of Europe is also recovering economically, and presents an attractive market and potential source of investment and partnerships for Canadian manufacturers of advanced technologies.
Just remember: Disruption can be expensive and it can also create new opportunities for business growth. The need for a more strategic approach in developing new customer relationships, new products and services, new and much less costly production systems, and risk mitigation practices is more important than ever.
Jayson Myers is the former president and CEO of Canadian Manufacturers & Exporters and is the current CEO of Next Generation Manufacturing Canada — Canada’s advanced manufacturing supercluster.