The global economy is going through tectonic changes. Twenty years ago, industrialized nations represented two-thirds of global output, while developing nations were one-third. Two decades from now, the ratios will have reversed. This changing landscape reflects rapid productivity growth, and often strong population growth, in emerging economies. Concurrently, advanced countries are mired with sustained slow growth, as they struggle with the long-lasting legacies from the recent financial crisis, unsustainable fiscal balances and aging populations.

A key risk is that governments could resist globalization through protectionist policies. Fortunately, today’s leaders are not headed in this direction. The government of Canada is striving to create additional opportunities to make Canada a bigger player in a globalized world, which includes seeking out free trade agreements, such as the Trans-Pacific Partnership. However, this raises the questions of whether Canadian businesses are well positioned to take advantage of the possibilities for increased trade and investment and whether they can cope with ever-rising foreign competitive pressures. Canada’s track record is not encouraging.

The value of Canadian exports during the pre-recession period of 2000 to 2008 rose by a modest 2% per annum, but the volume of exports was flat. Imports grew during the period at a rate of close to 5% annually; but imports appear to have been fuelled by domestic consumption, rather than used to bolster export capacity. This occurred at a time when world demand was growing strongly and global trade flows were ballooning.

During the economic recovery, exports have rebounded; but, exports as a share of the economy have fallen to 34%, down from 37% before the recession and 41% in 2002. Moreover, the volume of exports is still 3% below the pre-recession levels, with non-energy exports down 5%. Imports are now above their pre-recession levels, suggesting Canadian businesses are facing increased foreign competition in domestic markets.

Of course, businesses can tap markets abroad without trade, such as setting up plants in foreign locations. In the pre-recession period, Canadian foreign investment did increase, but it was dominated by just two sectors: energy and financial services.

The poor trade and investment performance reflects several factors, including the dramatic appreciation in the Canadian dollar since 2002 that has fuelled talk of a Canadian-style Dutch Disease. The resulting policy debate has been misguided. The choice between growing Canada’s resource sector or growing its non-resource sectors is a false one. Canada must develop its commodity resources in the most sustainable way possible for the benefit of the nation and the world, while non-resource sectors have to find ways to be profitable with a strong currency. Rather, emphasis should be placed on the need for Canadian businesses to be more productive and innovative to succeed in a globally integrated economy. This is true for exporters and domestic-oriented firms that compete with foreign rivals. Sadly, Canada has a productivity problem today.

Canadian productivity has been rising at an average annual pace of close to 1% over the past decade. This is one of the slowest rates in the industrialized world. In ranking, it puts Canada modestly above Italy and below Spain — not good company. Moreover, foreign-owned enterprises operating in Canada have recorded significantly stronger productivity growth than domestic-owned firms.