The food processing industry is a microcosm of the challenges facing Canadian exporters.
Downsizing and plant closings by food multinationals have sapped investment and caused a swelling trade deficit with the rest of the world, according to new research released this week by the Ottawa-based Canadian Agri-Food Policy Institute.
The trade deficit in the high-value secondary processed food sector – everything from pizza to beer – widened to $6.8-billion last year from $6.5-billion in 2012, continuing a decade-long trend, CAPI reported.
"The trade deficit is a surrogate measure of competitiveness," David McInnes, the institute's president and chief executive, explained in an interview.
"This is Canada's largest manufacturing sector in terms of employment and No. 2 in GDP. It really does flag that we may not be as competitive as we need to be."
The CAPI report comes as Canada posted another monthly trade deficit of $177-million in January – the 38th monthly shortfall in the past three years. The deficit was down from $922-million in December, Statistics Canada said Friday.
The overall trade deficit for 2013 hit $7.4-billion.
The improvement in January was driven mainly by higher energy exports and lower auto imports.
Based on volumes, however, exports declined 3.8 per cent, more than offsetting a 3 per cent drop in imports.
But economists said they are seeing early signs of a turnaround in Canada's long export slump, helped by the falling Canadian dollar.
"Trade will continue to be supported by a weaker Canadian dollar and stronger growth in the U.S.," Royal Bank of Canada economist Josh Nye said in a research note.
CAPI's Mr. McInnes argued the lower Canadian dollar is only one factor that has swelled the food manufacturing trade deficit in recent years.
He said Canadians' growing appetite for imported food and more open borders as a result of the North American free-trade agreement have also reshaped the Canadian industry.
"NAFTA gave us access to a large market south of the border. It also gave companies the opportunity to retrench south of the border and serve Canada from there," Mr. McInnes pointed out.
"For us, that suggests we are going to need to find ways to differentiate our food offerings," he said.
The risk is that Canada increasingly becomes a food commodity exporter rather than a shipper of value-added products, causing repercussions throughout the supply chain.
The industry is still reeling from a string of factory shutdowns in Ontario, including H.J Heinz Co. in Leamington and Kellogg Co. in London.
Bank of Canada officials are also fretting about Canada's export performance, particularly in manufactured goods. In a speech this week, deputy governor John Murray acknowledged the central bank doesn't yet fully understand why the past two years have been so dismal.
"There has been a seeming disconnect between foreign demand and the performance of non-commodity exports," he told an audience in Victoria, B.C., Thursday.
"The sectors of the U.S. economy that did especially badly in the recession were those that were especially important to Canadian exporters. As these sectors recovered, our exports should have accelerated. But they didn't."
One reason Canadian exports to the U.S. have not recovered from the recession as fast as exports from other countries, Mr. Murray suggested, is Canada's relatively high share of sales to budget-squeezing federal, state and local governments. The bank estimates that 12 per cent of Canada's non-commodity exports between 1997 and 2012 went to the U.S. government sector.