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JDI Roundtable on Manufacturing Competitiveness in New Brunswick

Why N.B.’s trade deficit matters

Herb Emery

Want to know why New Brunswick struggles to grow? It’s simple really: After 2004, we became a province of consumers rather than producers.

Gross Domestic Product is the total value of goods produced, and services provided, in an economy. Interpreted as our total income, GDP is the sum of expenditures on consumption of goods and services, government expenditures, investment expenditures, and the net of the value of what we can export over what we import.

Prior to 2012, consumption of goods and services including health care and education accounted for between 85 per cent and 95 per cent of GDP, meaning there was typically five to 15 per cent of our income available to repay debt, save and invest in infrastructure and those kinds of things.

After 2012, consumption expenditure as a share of GDP has risen from 95 per cent toward 100 per cent. In other words, we are living in a very different province today than was historically the norm for New Brunswick. Some of this can be attributed to the impacts of the 2008 financial crisis and to an aging population, but that isn’t the full story. 

After 2004, the value of New Brunswick exports stopped growing. Investment, particularly in utilities, masked this weakness in GDP growth until 2012, when investment spending stalled.

Growth of GDP – i.e. our income – has been weak. The continued rise in consumption spending after 2012 in this context is problematic. 

Most of the goods we consume in New Brunswick, and many services, are not produced here. We are a trading economy, meaning that what we can afford to import is a function of the value of what we export, borrow, or have paid for us with income from outside the province.

Up until 2004, New Brunswick paid for its imported goods and services with its exports. 

Yet after export values stagnated, imports continued to grow – meaning we were starting to borrow, spend down our assets or rely on transfers of income from outside the province.

Since 2004, we have not reduced our imports, meaning we have been living beyond our means for some time. 

Up to 2004, there was typically a trade deficit – i.e. our import values in excess of export values – that was around five per cent of GDP. In 2004, New Brunswick’s exports were equal to imports but from 2004 to 2008, the shortfall opened up to 15 per cent of GDP, where it has remained ever since.

With no investment to offset this trade deficit, we need to borrow, rely on income sources from outside New Brunswick like federal transfers and pension incomes, and spend down our assets to maintain our consumption. 

Since moving to New Brunswick, I have met many people who believe government spending causes growth and creates wealth. 

That could be true…if we produced all the goods and services that government provides or procures here, and if the increased incomes of New Brunswickers from the government spending resulted in consumption of goods and services produced here. 

But in a small open economy, like ours, if increased government spending results in more imports – as it has in New Brunswick – then any benefits of government spending “leak” out of our economy.

In short, we are stimulating GDP growth and wealth creation – not here, but in the economies we are buying stuff from. 

So if government spending and increasing consumption spending can’t grow our economy, then what are we supposed to do?

One strategy, identified by the organization Excellence New Brunswick, is to encourage New Brunswickers to buy local goods and services instead of imports. 

This strategy of voluntary “import substitution” has the potential to improve our economic situation – but, and it’s a big but, consumers and governments will need to pay the higher prices for local products and services.

New Brunswick consumers are price sensitive and have shown some real love for big-box and online retailers. Taxpayers would need to support procurements and projects that support local firms who may not be the lowest-cost option. To boot, moving beyond a voluntary strategy and introducing policies to discourage imports would run afoul of the goal of free trade between provinces. 

The other strategy, at this point, is to increase the value of exports and business sector investment. Exports and investment are linked. 

Investment will improve worker productivity in the province, which will improve the value proposition for exporters to locate and increase their production here.

So that brings us back to this question: How do we get more dollars of investment in New Brunswick in export-oriented sectors like manufacturing?

I hate to sound like a broken record, but here I would suggest that the province look at reducing business property taxes, WorkSafeNB premiums and the regulatory burdens; offset the impacts of federal carbon pricing on business; addressing labour shortages; combat rising energy costs, and reduce the policy uncertainty over what government will do. 

(The latest example of policy uncertainty that warrants special note is the forthcoming meeting in September to explore whether New Brunswick should become the only jurisdiction east of Manitoba to tax machinery and equipment with the property tax.)

If that is all too abstract, then maybe we should go back and look at what the Province did after 1987, the last time the trade deficit was growing and reached 10 per cent of GDP in 1991. With export growth, the New Brunswick trade balance was down to three per cent in 1995.

Have we strayed from what used to work – producing and exporting – and decided to gamble that consuming and spending would be an easier way to grow?

Herb Emery is a Brunswick News columnist and the Vaughan Chair in Regional Economics at the University of New Brunswick.

This article first appeared in Brunswick News publications – July 24, 2019

The JDI Roundtable on Manufacturing Competitiveness in New Brunswick is an independent research program made possible through the generosity of J.D. Irving, Ltd. The funding supports arms-length research conducted at UNB.