The recent boom in commodity markets has returned the spotlight to Canada’s natural resources, most of which are exported. The importance of resources to our overall exports is often discussed, with a figure of 40% commonly cited.1 This share has risen to 50% of gross exports thanks to the commodity boom of the last two years. But subtracting out the higher import content of manufactured exports raises the share of resources to over 60%. This puts Canada in a unique class of major industrial nations, alongside nations such as Norway and Australia, where resource exports dominate. They are the polar opposite of Japan, which imports most of its resources and exports almost none.
These estimates are usually arrived at by calculating the share of agricultural, energy, forestry and industrial materials in gross exports. But this method does not account for the difference between gross and value-added exports. As noted in our previous studies2, firms shifted to using markedly more imports in their production process in the 1990s. This phenomenon was most pronounced for autos and machinery and equipment, which import nearly half their inputs. This reflects the greater use by manufacturers of standardized parts, often made just across the US border or sometimes overseas.
As a result, much of the growth of gross exports in the last decade reflected the increasing use of imported components, not higher value-added exports. Value-added exports, which include only inputs purchased in Canada, are the key determinant of domestic output and jobs.
Conversely, many of our leading resource products have a largely extractive production process that requires few imports apart from machinery and equipment.
The implication is clear: the importance of industries such as autos that make liberal use of imports is overstated by gross exports, while industries that import less actually have a larger role than gross exports suggest, notably natural resources. This paper looks at the true role of resources in value-added exports in Canada.
The main motivation behind the growing use of imports was the relentless drive by firms to search out the lowest possible cost for inputs. As well, the rise in the Canadian dollar in the early 1990s lowered the cost of imports, giving firms an added incentive to purchase abroad. But the steady drop in the dollar from 1997 to 2003 took away much of this latter incentive, and the use of imported inputs leveled off in recent years. The recent recovery may encourage firms to buy more imported inputs.
Sectoral share of exports
In terms of the share of gross exports, autos and machinery and equipment led with about 22% in 2004. Despite their recent surge, the four resource sectors followed, led by industrial goods3 (notably metal products) and energy at 19% and 17% respectively. Forestry and agricultural products were next at 9% and 7%. Together, these four resource sectors accounted for just under half of all exports. Consumer goods trail at 4%, although they have grown the fastest, doubling their share since 1989, led by pharmaceuticals.
Energy moves to the forefront for value-added exports because it has the lowest import content (12%) of any sector. Within energy, the import share of crude oil and natural gas production is the lowest, followed by electricity. Apart from an initial investment in some machinery and equipment, there are few opportunities to use imported parts.
The production of oil from the tar sands is a good example. After a large up-front investment in clearing the land and building structures, the crude bitumen is moved, often by large earth removers and trucks, for processing at an upgrader, before being shipped by pipeline. Apart from some imports embedded in the upgrader, few imports are used.
Further downstream, petroleum refineries raise the average for energy with a 41% import content. This partly reflects imported machinery and equipment used in refineries. More importantly, the crude oil being processed is often imported, either because foreign sources are cheaper (especially on the East Coast) or they are grades that are easier to process for particular uses (such as gasoline versus aircraft or diesel oil)
Industrial goods move up to the third-largest export share at 18.6% due to a relatively low import content of 28%. Most metals and non-metallic minerals import less than 20% of their inputs. Fertilizers have an especially low import content of about 10%, reflecting large domestic supplies of potash. Non-metallic minerals also use relatively few imported inputs. The low value-added of goods such as cement and concrete outweigh the cost of transporting these heavy goods very far (even inter-provincial trade in these goods is limited). An exception is aluminum’s 40% import content, mostly raw bauxite to be processed with Canada’s relatively cheap electricity. Excluding aluminum, other non-ferrous metals use imports for only one-quarter of their inputs.
Machinery and equipment and autos fall from our first and second largest gross exports to second and fourth for value-added exports because they import such a large share of their inputs. Autos fell the most as over half of all auto inputs were imported in 2001, and nearly 70% were imports of vehicles or parts. This industry has long had the highest import content, having pioneered the use of imported parts dating back to the Auto Pact in the 1960s. Firms are concentrated in southern Ontario, giving them ready access to parts makers in the northeast US. The growth of transplants of overseas producers has reinforced the trend to use more imports. The import content of vehicle assemblies is much higher than for parts manufacturers (59% versus 38%).
Machinery and equipment saw a rapid increase in its use of imports during the 1990s. Indeed, much of its rising share of gross exports during the 1990s reflected this change in its production process, not increased value-added output in Canada. Almost all these industries have a large import content, ranging from over one-third for aerospace, appliances and farm machinery to nearly one-half for ICT equipment. Over two-thirds of all imports by this sector are machinery and equipment itself, presumably parts (even in capital-intensive sectors like forestry and mining, machinery and equipment accounts for less than one-third of all imports).
Forestry products, our largest export decades ago, have slid to fifth place with 10.9%. They have a very low import content of just 19%, reflecting the relatively simple and local nature of logging, wood and pulp and paper production. Forestry, like its cousins in agriculture and mining, uses imported machinery and equipment and mining products.
Agriculture contributes 9.3% of our value-added export earnings. It imports 22% of its inputs, led by chemicals (mostly fertilizer). Like energy, primary producers of grain, livestock and fish have the lowest import content. Food manufacturers use imports (especially processed food) for over one-quarter of all inputs. This reflects how the manufacturing process, even for food, allows firms to search out better or lower-priced alternative sources both in Canada and abroad. Fish, fruit, vegetables and sugar refiners have the highest import content, reflecting limitations on domestic supply. Dairy, meat and grain products are less reliant on imports.
Within consumer goods, clothing and textiles have a relatively high import content of nearly one-third of all inputs. Over one-half of these imports are textiles and clothing destined for further processing. These industries increasingly outsource production overseas to maintain their competitiveness in the face of rising third-world supply. Pharmaceuticals, a driving force in the growth of consumer goods exports, also have a relatively high import content of 32%.
Not all imported inputs are goods. Globalization allows most industries to use a significant amount of imported services in producing exports, especially finance and business services. The finance and business services industries themselves import nearly one-quarter of their inputs from firms abroad in the same industry. But even in most natural resource industries, imported financial and business services account for between 6% and 10% of all inputs, slightly more than autos and machinery and equipment despite the latters’ longer experience in outsourcing abroad.
Canada’s export base has shifted in recent years from manufactured goods such as autos and machinery and equipment back to its traditional natural resource products, notably energy. The low import content of the booming resource sector is one reason our trade surplus has hit record highs, despite the slowdown in overall export growth after 2000.
This shift means a growing part of our economy does not face the intense global competition felt by many manufacturers. This may assure that Canada maintains its market share of exports, but could also dull our appetite for productivity gains and innovation.
The last decade highlights two facets of how globalization affects our trade flows. The 1990s were dominated by the increased use of imports as inputs, especially in manufacturing. But recent years have seen this process stall, and even partly reversed. Now the growth of natural resource exports is the most revealing measure of our integration into the world economy.