Not a day goes by without headlines of doom and gloom spread across the front pages of most newspapers.  While many such news items are mere hype, some refer to developments that merit further scrutiny.

The subprime mortgage crisis in the United States, which continues to grab headlines, has rattled the financial markets around the world.  In a recent report, the International Monetary Fund estimated the worldwide losses stemming from the subprime mortgage crisis may reach US$945 billion. To put this number in perspective, consider that these losses equal 81% of Canada's GDP.  

The immediate impact of the crisis has been widely felt in the United States.  As the consumer spending declines and the credit markets tighten, the retail sector has started to brace for the tough times ahead.  Already, the International Council of Shopping Centers is projecting a large increase in retail bankruptcies for 2008.  As for those retailers who may ward off bankruptcies, huge layoffs and store closures are on the cards.

Thanks to the globally integrated financial markets, where lenders and borrowers are now spaced thousands of miles apart, the impact of subprime mortgage losses has spread far and wide.  Consider that high-risk, high interest mortgage credit issued in small-town US has ended up in portfolios held by banks in Europe. UBS AG, a European bank, may be out $33 billion for its investments in the subprime mortgage securities.  UBS losses, resulting from the American mortgage crisis, suggest that while lenders may have added distance between them and their borrowers, they may not still distance themselves from the financial vulnerability of financial assets of dubious credibility.

At the same time when the economies in the developed world are assessing their losses resulting from poor investments, economies in developing world are facing a different crisis.  Food shortages and increase in the price of staples and fuel have resulted in threats of starvation, violence, and political turmoil.

While the economists may continue to debate if the US economy is in recession, a quick glance of the international financial markets suggests that we are indeed living in recessionary times.  Therefore, the focus of the debate, at least in Canada, should shift from the state of the US economy to the opportunities and threats presented by the global markets.

Recent reports suggest that the Canadian economy has made significant improvements in diversifying its linkages with the global markets.  Current trade statistics reveal that Canada's economy has established new links with global value chains.  However, there still exists room to expand Canada's linkages with the efficient supply chains in Asia and Latin America.

While the US continues to be Canada's most dominant trading partner (79% of Canadian merchandise exports and 55% of Canadian imports are US-based), Canada's trade with the rest of the world has increased significantly.  For instance, Canadian imports from China increased by 11% in 2007, and Canadian exports to China increased by 21% during the same time.

Given the economic uncertainties that plague the American economy, it may be prudent for Canada to explore new markets for its goods and services.  The proximity to the American consumer markets and the cultural affinity of American consumers may be behind the fact that 80% of Canada's exports are destined to the United States.  However, as the American consumers tighten their purse strings, the future of Canadian exports to the US becomes less certain.

The consumer markets in the Far East, India, and Latin America may seem far, however the emerging middle classes in these economies may offer lucrative opportunities for Canada's merchandise exports.  Consider that the retail market in India alone is projected to grow to US$400 billion in the near future.

The important lesson to learn here is that Asia means much more than China.  While it may appear from the trade statistics that China is emerging as Canada's significant trading partner, these numbers are in fact hiding much more than they reveal.  

A recent report by the Conference Board of Canada reported that Canada's imports from China in fact hide the true extent of Canada's trade with the rest of Asian economies.  While China may indeed be the final assembly and shipping point of goods produced in Asia, the value added of such goods is spread across the Asian economies.  Consider that an iPod shipped from China to the United States may add $150 to the US trade deficit, only three dollars of the iPod’s value is actually created in China.  The remaining 50% of its value is created in the US, and another 49% in the rest of Asia.

In summary, the true opportunity for Canada lies in establishing direct linkages with the efficient value chains in Asia rather than relying solely on China.  This will help diversify Canadian trade with Asia and it may also avoid transiting freight through the congested ports in China and Hong Kong.