The Import Intensity of Provincial Exports

by Z. Ghanem* and P. Cross

Introduction

The December 2002 issue of the CEO examined the rising import content of exports and the implications for the importance of exports to Canadian incomes. The main conclusion was that firms increasingly used imports to produce exports, with most of this increase occurring in the five years just after the Free Trade Agreement. As a result, Canada is less dependent on exports for its value-added GDP than is commonly believed, and import demand is increasingly driven by export rather than domestic demand. In this paper, the analysis is extended to the provinces.

The methodology used is essentially the same as in the December article, which contains a more extensive description of data sources and concepts.¹ Briefly, the recently updated provincial Input/Output Accounts for 1999 are used to split out the imports used in producing exports, rolling up the detailed industry data into 21 major commodity groups.² The results reflect the different economies of the provinces, especially the dominant role played by geography and industry structure. In particular, manufactured goods are the most amenable to incorporating imports into their production process. This partly reflects “that the trend in manufacturing has been to slice up the value chain—to produce a good in a number of locations, adding a little bit of value at each stage.”³ Conversely, natural resources (with low value-added and high transport costs) are a more standardized product which often involve only a few steps in their production. The opportunity for trade in producing services is even less.

Ontario

Ontario was the only province where the import intensity of exports exceeded the national average (40% versus 33%). That one province could single-handedly offset the other nine reflects that Ontario alone accounts for half of all of Canada’s exports abroad and their high use of imports. The hefty use of imports is due to both Ontario’s industrial structure and its proximity to the US industrial heartland.

Ontario’s reliance on exports is driven by autos, machinery and electronic products. Over half of the value of auto exports is attributable to embedded imports, as this industry pioneered the extensive use of parts imported from around the world in domestic assemblies. The machinery and electronic products industries (mostly computers and communications equipment) are not far behind at over 40%. The rapid growth of these industries over the 1990s explains why the import content of Ontario’s exports rose about 5 percentage points, the second most of any province. Unlike most other provinces, Ontario resource exports (notably metals and pulp) in absolute terms lag behind business and financial services. These services have a very low import content of around 10%.

Figure 1

Quebec

Quebec had the second highest import content (28%) in their exports. This reflects both its large manufacturing base and its access to US industry. This was especially true for computers and electronic products, whose use of imports (42%) exceeds even Ontario’s. This was offset by a lower import content for transportation equipment, which is more oriented to aerospace than the auto-driven industry in Ontario. Chemicals, including the large pharmaceutical industry, also import nearly one-third of their components. The large role in Quebec of resource exports (such as forestry and metal products) pulled down the overall average.

Quebec was the only province bordering the US to post a drop in import intensity in the 1990s (down one point). This may reflect changes in its industrial structure, especially the weakness of auto assemblies, which are the heaviest users of imported parts.

Western Canada

Overall, the four western provinces ranked in the bottom five of all provinces in import intensity in both 1990 and 1999. The prairie provinces as a group had the lowest import content in exports of any region. In particular, Alberta had the fewest imports embedded in exports at 15%. This reflects the predominance of crude oil and gas in its exports: this commodity has an extremely low import content (11%), comparable to business services. Similarly, grain and meat (the fourth and fifth largest exports) have a low import content, reflecting their relatively simple production process.

But even other exports from Alberta show a much smaller import content than in central Canada. For example, the chemical industry uses imports for only 19% of its inputs, versus nearly one-third in central Canada, partly because none of Alberta’s chemical exports are pharmaceuticals, versus 19% in Quebec. This suggests that Alberta’s relative geographic isolation from the US and from ports limits the opportunities to cheaply import products used to make exports. Arguing against this, however, is the relatively high import content in high-tech industries, notably computers and electronic products (which, at 44%, exceeds Ontario and Quebec).

Similarly, Saskatchewan’s exports had a relatively low 16% of embedded imports. This is not surprising, since like Alberta its largest exports are grain and mineral fuels. Manitoba has the highest import ratio on the prairies at 22%, reflecting the predominance of transportation equipment (mostly aerospace) in exports (they have a 39% import share). Its other main exports are largely natural resources (food, metal and forestry products), all of which have a relatively low import content.

Each of the prairie provinces posted increases in import content over the 1990s, ranging from 3 points in Manitoba to 5 in Alberta and 6 in Saskatchewan (the most of any province). This may reflect a diversification away from natural resources during a decade of abysmally low prices for many commodities.

Only 19% of BC’s exports were made from imports, comparable to the prairies. Again, this low figure is largely due to the concentration of exports in the resource sector, with lumber, pulp and oil and gas contributing nearly half of all exports. One exception was primary metals, whose large import content (39%) reflects the unique production process in refining metals (smelters are located near cheap electricity sources and import ore from abroad). Conversely, BC’s machinery and equipment industry uses imports as only 25% of its inputs, the lowest in Canada outside of Newfoundland.

The Atlantic region

In the Maritimes, the use of imports is closely related to proximity to the US border. New Brunswick led the way with a 28% share. However, this has fluctuated the most of any province, and may be in the process of falling sharply as the large petroleum refineries in New Brunswick increasingly substitute crude oil from offshore Newfoundland for imports from outside Canada (data on interprovincial trade for 2001 and 2002 show that New Brunswick increased imports from other provinces the most).

Nova Scotia followed with a 26% share of imports in its exports. This relatively high percentage reflects the larger role played by manufactured goods in its exports (notably tires and transportation equipment). PEI trails with only an 18% import content, dampened by its isolation and its reliance on potatoes and tourism for exports.

Newfoundland was unique with respect to the import content of its exports. Despite its geographical isolation, it had the largest import share of any province in 1990 (38%). This quirk was largely due to oil imported by petroleum refiners. As crude oil exports from Hibernia came onstream, this diluted the overall import content by 12 points, by far the most of any province (and likely tumbled further as Terra Nova ramped up its output). Excluding oil refining, import share in exports falls to 17%, to be expected as they are mostly natural resources from a distant region.

Ranking by province

Table 1 shows that allowing for the import content of exports changes the perceived importance of exports in generating value-added GDP. The first column shows the ranking of provinces by the share of gross exports in GDP. The first two provinces (Ontario and Quebec) also have the largest import content in exports. Conversely, the western provinces all rank in the middle, as their resource base implies a low import content in their exports.

Table 1 : Export Content of Provincial GDP, 1999

Subtracting the import content of exports leaves the actual part of incomes generated by value-added exports. The ranking in column 2 shows some clear differences from the gross share of exports in column 1. Saskatchewan vaults to the head of the pack, as its 39% share of gross exports in GDP dips only to 33% after netting out import inputs. Ontario falls to second as its underlying export share in GDP is revealed to be 32% (not the 53% in column 1). Alberta jumps two spots to third place, while Quebec slides two places to fourth. There was little change among the other provinces.

The provincial dispersion of export shares also is much less than it appears. In column 1, the spread from the largest export share (53% in Ontario) to the smallest (25% in Nova Scotia) is 28 points. The share of value-added exports in column 2 is much tighter, ranging only 15 points from Saskatchewan to Nova Scotia. Intuitively, these lower portions also make more sense of the changes observed in recent years. For example, Ontario’s continued growth when the US economy slumped after 2000 would be hard to explain if exports really contributed over half of all income. Similarly, Saskatchewan’s ranking as the province most vulnerable to changes in exports is reflected in its consecutive drops in its GDP in 2001 and 2002, when grain exports wilted.

Conclusion

The sharp increase in trade flows across our border is one of the most significant economic changes in the last decade, and the most visible manifestation of globalization as firms used more imports in their production process. Provincially, however, this shift in trade and production was concentrated in manufacturing industries in central Canada. The Atlantic region may see a further trend away from imports, as domestic energy sources are substituted for imported oil. Meanwhile, western Canada has the lowest import content embedded in its imports, a function of its dependence on natural resources for exports and its distance from other producers.

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Notes

* Input-Output Division (613) 951-4108.

¹ P. Cross, “Cyclical Implications of the Rising Import Content in Exports.” Canadian Economic Observer, (Catalogue no. 11-010-XPB), Dec. 2002, Vol. 15, no. 12.
² Unlike the national data, some provincial data by commodity cannot be released due to confidentiality restraints.
³ P. Krugman, “Growing World Trade: Causes and Consequences,”
p. 334 in Brookings Papers on Economic Activity, I: 1995.