Economists have long recognized international trade as a critical global welfare and efficiency driver. The proliferation of free trade agreements (FTAs) underscores this broad consensus on the benefits of international trade.
Canada exemplifies this commitment to free trade with 15 FTAs covering 51 countries, alongside foreign investment promotion and protection agreements (FIPAs), plurilateral agreements, and commitments under the World Trade Organization (WTO). These agreements are designed to boost societal welfare by enhancing labor productivity, offering consumers a broader range of products and services at lower prices, dismantling trade barriers, reducing trade-related costs, and strengthening international ties. According to the Bank of Canada, about 1 in 6 jobs in Canada are linked to exports, and estimates suggest that Canadian incomes are 15% to 40% higher due to freer trade.
With global tariffs at historical lows more attention has been paid to reducing regulatory red tape and ensuring an inclusive approach that sees the benefits of trade widely shared, including among small and medium-sized enterprises (SMEs).
In recent years, global trade has faced a "poly-crisis” characterized by supply and demand shocks related to the COVID-19 pandemic, fluctuating energy and commodity prices, geopolitical tensions, and supply chain disruptions. More recently, macroeconomic conditions and the war in Ukraine have exerted significant inflationary pressures, constraining real wages and incomes, particularly in advanced economies in 2022 and 2023. This has led to reduced imports in 2023, resulting in falling global merchandise trade volumes over the previous year (-1.2%) (see figure below). However, assessing the data over an extended period, global merchandise trade has shown remarkable resilience, growing at an average annual rate of 2.5% between 2010 and 2022, slightly below the 2.7% average annual GDP growth during the same period.
Source: World Trade Organization (WTO), Global Trade Outlook and Statistics, April 2024 and July 2023. Author’s own calculations.
Looking ahead, the WTO projects world merchandise trade volumes to grow by 2.6% in 2024 and 3.3% in 2025, aligning with forecasts from the IMF and the OECD, which also anticipate an uptick in global trade flows in 2024. Nevertheless, these projections are contingent upon various factors, including ongoing global conflicts, potential inflation resurgences, economic slowdowns from monetary tightening, and persistent geopolitical tensions.
Canada's commitment to international trade has yielded substantial benefits. In 2022, Canada’s trade-to-GDP ratio reached a 16-year high of 67.4%, indicating that international trade accounted for over two-thirds of the country's GDP. In that same year, Canada saw a 21.2% increase in goods and services exports, reaching a record value of $952 billion, followed by a new record of $965 billion in 2023. Imports also marked new highs, reaching $978 billion in value in 2023. Despite a trade surplus in 2022, Canada posted a trade deficit of $13 billion in 2023, but the balance of payments in recent years has been closer to equilibrium (see figure below).
Source: Statistics Canada. Table 36-10-0014-01 Balance of international payments, current account and capital account, annual (x 1,000,000). Retrieved on June 18, 2024. Author’s own calculations.
SMEs play a crucial role in global trade, with most exporters being SMEs. In 2023, 97% of the 48,718 exporting firms were SMEs, contributing about 40% of the total value of Canadian exports. However, over the last year, large firms exhibited the highest year-over-year growth of both exporters (+5.6%) and importers (+2.9%), with export value increasing by 3% to approximately $421 billion and import value increasing by 6.7% to $375 billion. In contrast, SMEs saw an 8.6% contraction in their export value to $282.5 billion, and a 1.9% drop in import value, highlighting the disproportionate challenges they face (see figure below).
Sources:
1. Statistics Canada. Table 12-10-0071-01 Trade in goods by importer characteristics, by enterprise employment size and number of partner countries
2. Statistics Canada. Table 12-10-0091-01 Trade in goods by exporter characteristics, by enterprise employment size and number of partner countries. Retrieved on June 18, 2024. Author’s own calculations.
Our latest survey results on international trade shows a correlation between business size and participation in international trade. Among micro businesses (0-4 employees), 75% report no engagement in international trade, compared to 65% of small businesses (5-49 employees) and 52% of medium-sized businesses (50+ employees). This trend is consistent across both import and export activities: only 25% of micro-businesses are involved in international trade (whether importing, exporting or a mix of both), while the figures rise to 35% for small businesses, and 48% for medium-sized businesses (see figure below). These findings highlight the unique challenges faced by smaller businesses compared to larger firms. Limited resources and differing operational priorities can make navigating the complexities of international trade particularly challenging for smaller enterprises.
Source: CFIB, Your Business Outlook monthly tracking survey, June - July, 2024. Based on weighted responses from 780 CFIB members who are owners of Canadian independent businesses, from all sectors and regions of the country. For comparison purposes, a probability sample with the same number of respondents would have a margin of error of +/-3.5%, 19 times out of 20.
The primary barriers to trade identified by SMEs include products and services deemed not exportable (42%) and the perception that domestic markets adequately meet their operational needs (37%). However, evidence suggests a knowledge gap in navigating the complexities associated with international trade, which leaves SMEs unable to capitalize on trade opportunities.
Engaging in international trade presents several challenges for SMEs, such as managing complex regulatory frameworks, compliance requirements and the costs associated with shipping. In fact, shipping costs have emerged as the biggest challenge for SMEs that export internationally, increasing by 15 percentage points since 2017, now impacting 66% of businesses. Currency fluctuations (56%) and duties and taxes on goods and services (50%) also pose substantial challenges. These costs are particularly burdensome for smaller firms, which often lack the financial resilience of larger companies to absorb these expenses (see infographic).
Given the inherent complexities of international trade, it's unsurprising that most SMEs involved in importing and exporting typically rely on brokerage services or intermediaries. This reliance is significant, with 80% of SMEs depending on one or both services due to their lack of expertise in customs procedures, highlighting the challenges involved. Additionally, 42% of SMEs turn to business contacts within their industry for information and assistance in identifying trade opportunities.
When asked ‘what would have been helpful (e.g., tips, information) when your business first started to import/export internationally?’, small business owners shared a variety of perspectives:
“Knowing what information is needed to ship outside of Canada. Up until last year we never shipped to the US because it was hard to find information regarding how to accomplish this. It would also be nice to easily see what the duties (and any other extra costs) would be when importing and exporting items."
- Wholesale business in Manitoba
“What all the steps are, where costs might be incurred, how to predict costs better, how to vet suppliers for import/export knowledge. We've avoided import/export because of lack of calculating costs accurately and understanding how to do it."
- Manufacturing business in Ontario
“Getting more resources of information on support and guidance, policies update on importing & exporting."
- Agriculture business in Alberta
“Substantially cut down reading material on government pages to get easy to fathom and follow instructions. There must be a way to NOT have to read volumes of pages to get to the crux of the exporting/importing rules and regulations.”
- Wholesale business in Ontario
“One contact in government to get information and assistance. Not having to guess what departments were going to need to be contacted and then never hearing back from them.”
- Wholesale business in Alberta
Notwithstanding the availability of trade support services and programs such as CanExport and Trade Commissioner services, many SMEs are either unaware of these resources or have not utilized them (see figure below).
Source: CFIB, International Trade Survey, January 18 – 29, 2024. Based on responses from 2,032 CFIB members who are owners of Canadian independent businesses, from all sectors and regions of the country. For comparison purposes, a probability sample with the same number of respondents would have a margin of error of +/-2.2%, 19 times out of 20.
Question: ‘Please indicate whether you are aware and have used the following services to help your business with activities related to importing and/or exporting?' (Select one for each line)
Despite facing market challenges over the past year and the inherent difficulties of international trade, SMEs remain optimistic about their prospects. More than half (54%) plan to boost their exports outside of Canada within the next three years. This positive outlook is driven by their ambitions to expand (81%) and seize international market opportunities (74%) (see infographic). Addressing the specific challenges SMEs encounter in global trade could further enhance their involvement and success in international markets.
International trade remains integral to Canada's economic strategy, delivering significant benefits in job creation, economic growth, and improved living standards. Strengthening trade policies that specifically support SMEs to facilitate their access to international markets and foster sustained economic expansion is essential.
Here are some public policy measures that could be implemented: