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July 25, 2016MERCHANDISE TRADE DIVERSITY IN CANADA, 2000-2015 Canada's provinces are widely exposed to international trade and the income generated from goods exports is a substantial part of nominal GDP. The degree to which each province's goods exports are concentrated in particular commodities or diversified across a range of outputs signals its exposure to fluctuations in particular markets. The Herfindahl-Hirschman Index (HHI) shown below assesses trade concentration and diversity measured on a scale from 0 representing complete diversification to 10,000 representing complete concentration.
While a higher degree of concentration of output exposes a province to fluctuations in a particular market, it can also indicate specialization that allows a province to make the most advantageous terms of trade. For example, Alberta and Newfoundland and Labrador have benefitted from concentrated output in high-valued oil products from 2002 to 2014, but both felt big impacts as a result of falling prices over the last 2 years.
From 2000 to 2015 diversity by province followed a pattern of dramatic change for three provinces (Newfoundland, Alberta, and New Brunswick), moderate change in five provinces (Nova Scotia, Saskatchewan, Ontario, Prince Edward Island and British Columbia), and little change in two provinces (Quebec and Manitoba). Export values during this period were heavily influenced by price fluctuations, which led to concentration of export value in those provinces affected by the recent rise and fall of energy and mineral commodities.
A provincial HHI score between 0 and 1000, would categorize a province as diversified with respect to the international merchandise trade export market. Over the period 2000-2015, no province meet this criteria.
A provincial HHI score between 1000 and 1800, would categorize a province as partly diversified with respect to the international merchandise trade export market. Over the period 2000-2015, four provinces meet the criteria for at least one year. Manitoba and Quebec scored between 1000 and 1800 over the entire period. Nova Scotia met the criteria in 12 of 15 years scoring within the band early in the period, but has become less diversified in three of the last four years. For Nova Scotia, exports have become more concentrated in meat/seafood as well as chemical/plastic/rubber products as the share of natural gas and forestry products in the export mix declined.
A provincial HHI score in excess of 1800 suggests that the province's goods exports are concentrated in particular commodity categories. Prince Edward Island was classified as concentrated for 14 of 15 years, however, the province has been trending towards more diverse trade. Both British Columbia and Ontario have been classified as concentrated over the period 2000-2015, but have been trending towards more diversified trade. The remaining four provinces - Alberta, Saskatchewan, New Brunswick and Newfoundland and Labrador - have more substantial exposure to energy and resource sectors. Each of Alberta, New Brunswick and Newfoundland and Labrador have shown much greater and rising concentration of their exports since 2000, with a noticable decline as energy prices fell in 2014 and 2015. Saskatchewan's trade concentrated is lower (closer to that of Ontario and British Columbia), with a moderate increase in trade concentration from 2002-2008.
NOTES ON METHODOLOGY
This analysis measures trade diversity (or concentration) by province - does a province produce a diverse range of export goods or are the province's exports concentrated in a few categories. This only includes merchandise or goods exports and does not indicate diversity or concentration in services exports.
The method computes a Herfindahl-Hirschman Index (HHI) as an indicator of diversity of goods exports as measured by their value, which can be influenced by both changes to price and quantity of output. The HHI is the sum of the squares of the shares of each commodity produced by a province (market shares are expressed as percentages). Increases in the HHI generally indicate a decrease in diversity and an increased concentration in particular goods exports. Unlike a simple examination of shares of exports by commodity, the HHI gives more weight to larger items, exaggerating smallness and largeness by squaring the share of each commodity in the total shipments of the jurisdiction. Once the HHI for a market is computed, then it can be categorized using the following scale: 0-1000 = diversified; 1001- 1800 = less diversified; and 1801 – 10,000 = not diversified.
This analysis groups the 99 commodity categories of the Harmonized Commodity Description and Coding System (HS) into thirteen commodity groups for calculating diversity of goods exports.
Sources: For the analysis, two data sources are used. The Innovations, Science and Economic Development Canada trade data online web site provides access to domestic exports values by HS code (Harmonized System 01 thru 97) for commodities and province of export. Statistics Canada CANSIM table 228-0060 provides the value of total domestic exports by province. The residual between the two sources is equal to HS codes 98 and 99 (Special Transactions) which are not available through the Innovations, Science and Economic Development website. Note that the import data available on both sites is not suitable for computing a provincial trade balance (i.e. export less imports) as exports are province of origin (production) and imports are province of clearance. Imports are not necessarily consumed in the province of clearance.