Why we should be skeptical about Canada’s services-economy future

While Canada is exporting more professional services abroad, we’re also importing more. There’s just no substitute for manufacturing

Prince Charles and Camilla Parker Bowles meet an Anne of Green Gables impersonator during their 2014 royal tour of Charlottetown

Canada will need to seriously increase tourism, such as PEI’s “Anne of Green Gables” industry, to grow its non-manufacturing export industry. (Paul Chiasson/CP)

Some of Canada’s leading think tanks badly want to make their country a dominant exporter of services. The Conference Board of Canada and the C.D. Howe Institute are among the policy shops pushing the idea. It’s easy to understand why. Canada trains lots of highly skilled workers and it boasts the sorts of livable cities in which those highly skilled people like to live. That looks like a comparative advantage if there ever was one. We’re currently paying the price for getting overly excited about becoming an energy superpower, and robots man the modern factory. If not services, then what else?

I have written previously about why we should avoid getting carried away by this idea. Few, if any, successful economies have been built a foundation on services. That doesn’t mean it couldn’t happen in theory; it just hasn’t happened to date. But if Canada is going to become an exception, it has some work to do. The most recent data suggest there is nothing exceptional about our bankers, insurers, engineers and consultants. These and other service providers have had the advantage of a weak currency for years now and they aren’t doing much with it.

The evangelists of a services economy don’t talk much about the fact that Canada spends considerably more on other countries’ services than those countries spend on ours. The gap between receipts from services—exports—and payments abroad for services—imports—was $23.4 billion in 2015, little changed from 2014, Statistics Canada reported May 30. Bank of Canada Governor Stephen Poloz and others have expressed excitement over long lines at Canada’s main attractions and packed restaurants in the cities frequented by international tourists, such as Charlottetown.  Foreigners spent more than $5.4 billion on travel in the first quarter, compared with about $5 billion over the same period a year earlier and $4.7 billion in the first quarter of 2014. Still, Canadians are sending more than $9 billion abroad every quarter to cover their own foreign vacations.

Travel represents about about 3% of Canada’s total exports of goods of services, compared with more than 5% in Australia. That implies the purveyors of vacation packages to the Great White North can do better. So can the providers of commercial services, the biggest component of the services trade. Those firms and consultants are making money, yet they appear to be losing ground to their international competitors:

Chart showing Canadian exports vs. imports of commercial services

The trade story is not entirely a negative one. Stronger exports led growth of at annual rate of 2.4% in the first quarter, StatsCan reported May 31. The weaker dollar is helping sellers of goods other than oil and gas, especially the makers of automobiles and auto parts:

Chart showing Canadian exports of automobiles vs. oil

It makes one wonder why the Canadian dollar is geared to oil prices and not U.S. demand for automobiles? In any event, the auto industry is reasserting itself as a key driver of Canada’s economy. This is good for Canada’s terms of trade, or the difference between the money entering the country and the money leaving it to buy imports. Busy factories also correlate with better levels of productivity and innovation.

But because of automated assembly lines, automakers and other manufacturers aren’t the big employers they used to be. That’s why outfits such as the Conference Board are so keen on services. They’d best keep pushing.