Services Make Exports More Competitive, But Canada is Not Delivering Added Value

Canadian goods exports have less of a services component than other competitor countries

OTTAWA, Sept. 24, 2015 /CNW/ - Canadian resource and manufactured goods producers make use of a variety of services—from engineering to research and development—that enhance the competitiveness of their products abroad. But goods exports from Canada have a lower share of services embodied within their product compared to their international peers, which means that Canadian firms are falling behind global competitors in an increasingly lucrative area of international business, according to a new Conference Board of Canada report.

"Exports can fetch higher prices in international markets and boost profits by making use of, and selling, high-quality services," said Jacqueline Palladini, Senior Economist, Global Commerce Centre.

"Enhancing and supporting engagement in high-value business services activities can contribute to higher profits, support better-paying jobs, and ensure that Canada has a competitive place in markets abroad."

HIGHLIGHTS

• High-value business services—such as research and development—can add value to Canada's goods exports and increase competitiveness abroad.
• Yet Canadian goods exports contain a low and slow-growing share of value-added services.
• At 5.3 per cent, the share of business services embodied Canadian goods exports is the lowest of five of its peers: Australia, France, Germany, the U.K, and the U.S.
• Domestic barriers for services can hurt the international competitiveness of Canada's goods exports.

The very nature of manufacturing is shifting. Canadian manufacturing exports—and those of other developed countries—are in long-term decline as a share of trade. Services can make goods more competitive and profitable globally, through enhancing or differentiating the product offering, lowering costs and improving productivity, and building customer relationships.

Just 29 per cent of the value of Canada's goods exports is attributed to services. In contrast, the United States, United Kingdom and Germany are over 30 per cent, while 45 per cent of the value of France's goods exports come from services. Some of this gap may be attributed to the fact that Canada produces more relatively higher-value resources, such as oil and diamonds. Nevertheless, Canada's share of embodied services is lower in manufacturing, and in the resource sectors of agriculture, forestry and fishing, and mining (including oil and gas).

In addition, Canada struggles in adding high-value business services to goods exports. Business services include: computer services, research and development, management services, technical activities such as architecture and engineering, and legal and accounting services. Increasing the use of these services has been linked to increased competitiveness of goods abroad. Moreover, workers in business services earn higher wages than the average worker in manufacturing industries.

However, business services represent only 5.3 per cent of Canada's value-added in goods exports. The value-added business services embodied in Canada's goods exports grew rapidly between 1995 and 2000, but have since stagnated. The business service share of Australia, the U.S. and the U.K.'s goods exports is between 6 and 9 per cent, while Germany and France's business service share of goods exports lead the group at 11.4 and 15.2 per cent, respectively.

One explanation for this sluggish performance is the relatively limited presence of large, globally-oriented headquarters in Canada compared to its peers, as many high-value business services are led from headquarters. In addition, other countries' exports are more likely to be finished consumer and industrial goods compared to Canadian exports that are relatively more concentrated in resources. But even in its non-resources manufacturing industries, Canada does not appear to be engaging in as many high-value activities.

Government policies aimed at boosting the success of manufactured exports have typically focused on supporting manufacturing industries or on international trade policies and promotion. However, government policies need to also address the underlying role that services play in Canadian companies' global production. 

Companies that sell services domestically are, in fact, often competing internationally. In other words, Canadian goods producers can often just as easily purchase these services from international firms. Therefore, domestic competition policies affecting services—such as labour mobility across provinces—can impact both the competitiveness of Canada's services and the success of Canada's goods abroad.

Governments should focus on trying to create the conditions to attract and maintain engagement in higher-value activities along global value chains, rather than looking at support for specific manufacturing industries.

The research makes use of the new Trade in Value-Added database released by the Organisation for Economic Cooperation and Development in June 2015. The report, Good Service is Good Business: How Services Add Value to Canadian Goods Exports is the second of a three part research series on selling Canada's services abroad undertaken by The Conference Board of Canada's Global Commerce Centre. The Centre provides evidence-based tools to help companies and governments respond successfully to the trends reshaping the global business environment.

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SOURCE Conference Board of Canada

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