Canada's economy is more important than you might think, even though it doesn't receive the same attention as the United States, China, India and Japan. Depending on the measure you use, Canada has a top-20 or top-15 global economy, and it was ranked ninth by purchasing power parity (PPP) in 2015. The country is a major player in world trade markets, especially in mining, oil, logging and computer software.
Canada's economic system is also one of the freest in the world, ranking ahead of even the United States and only trailing Hong Kong, Singapore, New Zealand, Switzerland and Australia, according to the annual Index of Economic Freedom from the Heritage Foundation. It's a highly developed country with important import and export industries.
For all of its advantages, Canada is highly dependent on a few primary industries, many of which struggled in 2015, and the country entered the new year mired in recession. To see why this matters, consider the impacts Canadian performance on world markets, especially in the United States.
1. The Canadian Recession Could Lead to Cheap Products, Vacations
Canada's economy posted two consecutive quarters of negative growth coming in to 2016, which is the official definition of a recession. As the Bank of Canada explained, "The Canadian economy is producing fewer goods and services than is sustainable."
Most analysts attribute the Canadian recession to the global slump in commodity prices. There is no question the country's economy weakened as income declined in oil-producing regions and its mining sector laid off employees. The Canadian dollar, often called the loonie, is strongly correlated with the WTI oil price. A cheaper loonie makes Canadian products cheaper for others to buy, which might be exactly what Canadian manufacturers, producers and service companies need to expand.
Another underappreciated factor is that a cheap loonie makes it easy to travel to Canada for vacation. When the loonie started its decline relative to the U.S. dollar and the euro in 2013, the number of tourists to Canada spiked for the first time in a decade. This should boost domestic markets and give Europeans and Americans attractive vacation opportunities.
2. Canada Has Large Influence on the United States
Even though China has replaced Canada as the United States' largest trading partner, Canada is a much stronger importer of American products than any other country. According to 2015 data from the U.S. Census Bureau and research from Nomura Securities, almost 20% of total U.S. exports sell in Canada, compared to 15% to Mexico and just 8% to China. The inverse is even more apparent: The United States consumes 73% of Canada's exports and sells 63% of its imports.
Moreover, Canada joins with Russia as the United States' primary non-Arab energy-producing rivals. Canadian petroleum and energy companies have enormous reserves to draw from, which means heavy-if-unappreciated influence on American consumers and energy companies. Fortunately for both countries, the U.S. economy is more than 10 times larger than Canada's. Therefore, it's more likely that U.S. growth will help pull Canada out of recession than that Canada's troubles will spread to the United States.
3. Canada Promotes Free Trade
Entering 2016, Canada was partner to active international free trade agreements (FTAs) with the United States, Mexico, Israel, Chile, Costa Rica, Iceland, Norway, Switzerland, Liechtenstein, Peru, Columbia, Jordan, Panama and South Korea. A future agreement was underway with Ukraine, though not yet active. In addition, the Canadian parliament was negotiating with Guatemala, Nicaragua, El Salvador, Dominican Republic, India, Japan, Morocco, Singapore and all of the other members of the Trans-Pacific Partnership (TPP).
Free trade historically correlates with robust economic growth. Countries that enter into free trade agreements are more likely to grow at above-average annual rates, more likely to reduce unemployment, less likely to go to war and are more likely to promote higher global standards of living, according to the World Bank and the European Commission. When the Canadian economy recedes, however, that creates short-term challenges and long-term opportunities for all of its trading partners.
As an active free trader, Canada helps promote global economic growth and peace. Its unique and highly successful partnerships with the United States, South America and the European Union set examples for other regions to follow.