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Canada is improving its global connections

The world is less connected than it was six years ago, but Canada has managed to buck the trend, according to the latest Depth Index of Globalization report from the IESE Business School in Spain.

The report studies trade, capital investment and labour migration trends in order to rank countries according to how globally connected their businesses are.

"Roughly speaking, Canada is a little [more integrated] than it was in 2008. But the world at large is not quite there," says Pankaj Ghemawat, economist and professor at IESE in Barcelona.

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Foreign trade and investment flows dipped alongside a wave of protectionism when the financial crisis hit. Most of the world has yet to catch up to pre-crisis levels, he says.

While Canada's depth of globalization has uniquely rebounded, it scores strikingly weakly in terms of trade flows. Canada ranks 45 out of 139 countries in the overall "globalization" index, behind Ireland and Malaysia, but ahead of the United Kingdom and the United States. However it ranks just 106th in the trade category, which measures foreign trade activity as a proportion of the country's gross domestic product.

Mr. Ghemawat says this poor trade ranking was "surprising" given the relative openness of Canada's economy, although our export sector was hit hard by a stronger currency and weak demand from the U.S. in the aftermath of the recession.

There are reasons to be optimistic that this will change. The loonie's dramatic decline over the past year will no doubt have enormous implications for Canada's trade balance going forward.

"Canadian exporters are probably sighing with relief right now," Mr. Ghemawat said. "The [weaker Canadian dollar] should definitely be good news for Canadian growth."

He did, however, sound a note of caution. "Currency volatility discourages investment, which is problematic," he added, "especially when it's vis-a-vis your largest trading partner."

Currency devaluation is an "unrealistic" method of encouraging exports over the long term, says Mr. Ghemawat. Rather, he prescribes making investments in other measures, such as infrastructure, sound regulation, and promoting foreign languages in education. Canada in particular would benefit from diversifying its trading partners beyond the U.S., he says.

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"There are obvious advantages to living on the doorstep of the largest economy in the world, but [Canada] needs to expand elsewhere," Mr. Ghemawat says. He sees the November trade deal with the European Union as an encouraging step towards Canada stretching exports beyond North America.

Around the world, Mr. Ghemawat observes that globalization is contracting from 2007 levels, and a glaring question mark for future globalization lies in capital investments. Cross-border merger and acquisition deals fell sharply during the crisis, and while stock markets are surging and credit is flowing, deal volumes have yet to catch up to pre-crisis levels. "The biggest problem right now is lingering fear in the minds of businesses. Fundamentals have recovered, but M&A hasn't picked up yet. No one really knows if it will."

According to the study, the next big shift in globalization will be in people, rather than simply trade. Whether studying abroad or moving in order to find work, labour mobility is expected to increase, especially from developing countries outward.

Tourism will be another of the key drivers of future integration. "If you think you've seen a lot of Chinese tourists, it's only the beginning," Mr. Ghemawat says.

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