2. Transportation and the Economy

A solid performance of the Canadian economy, and a dynamic trade sector, increased both the level of activity and the relative importance of transportation.

This chapter begins with a comparison of the importance of the transportation sector in Canada with the sector's importance in other countries. Then it moves to major influences of recent years on transportation demand, examines general economic conditions in 1997, and assesses transportation's contribution to the economy in terms of the sector's gross domestic product, employment and spending. Finally, the chapter looks at linkages between transportation and trade.

Canadians are very dependent on transportation. For most, transportation is key to doing business and for moving from place to place. For many others, transportation is employment.

Canada's size dictates that people and goods generally travel considerable distances to reach their destination. Per capita, Canada ranks second in passenger travel among major industrialized countries, far behind the US. Canada is significantly higher, (20 per cent), than Western Europe.

Over 90 per cent of all passenger travel is done by automobile in Canada, compared with 84 per cent for the US and just over 80 per cent for the other countries. Figure 2-1 illustrates domestic passenger travel in Canada.

In terms of freight transportation, the divergence is even greater. As shown in Figure 2-2, Canada's per capita tonne-kilometres is more than twice as high as in Western Europe, but almost 25 per cent lower than in the US.

Structural Changes and Transportation

Since the early 1960s, Canada's economy has experienced ongoing structural changes. These changes are evident at the aggregate and industrial levels, and include changes in transportation services. Figure 2-3 shows the relative importance of services and goods production over the last 16 years. Some traditional sectors - primary resources, manufacturing and construction - are losing ground to the service sector. The production of goods, which accounted for 35 per cent of total production in 1981, accounts for only 33 per cent now.

Whether they rank low or high on the scale of structural change, some industries within these aggregates are experiencing more structural changes than others. In the transportation sector, this trend can be witnessed in freight transportation services. While total freight transportation went up by 66 per cent since 1981, trucking increased by 109 per cent, marine transportation by only 13 per cent, and rail by 42 per cent. These changes indicate a shift away from rail and marine toward trucking.

Table 2-1 gives a brief overview of how the relative share of each transportation mode has changed over the last 16 years.

During this period, freight transportation has shifted significantly, with trucking making the most dramatic gains. There are two main reasons for this. First, the structural changes to the overall economy have resulted in a shift in goods production, which in turn means changing freight transportation needs. For example, the current trend is to keep inventories low, and the "just-in-time" delivery system now in fashion is best suited to trucking. Second, transportation prices have had low increases, prompting shippers to use better quality services, such as door-to-door delivery, for which the truck mode is well equipped.

Figure 2-4 shows how, over the last 16 years, the three traditional goods-producing sectors of the economy - manufacturing, primary resources, and construction and utilities - have seen their relative importance fluctuate.

In 1997, goods production increased by 4.8 per cent, compared with 3.9 per cent for the economy. The sector regained the ground lost during the 1990 - 1991 recession, reaching about 33 per cent of total production in 1997. The service sector, lost slightly from the traditional sectors.

Equally relevant, the type of goods produced is shifting away from raw materials to finished or semi-finished products. The most significant gain observed in 1997 was in manufacturing, which rose by over six per cent, compared with the primary resources sector, which increased by less than three per cent.

Many industries make products for export, which means business for the transportation sector. For example, almost 76 per cent of non-electrical machinery, 89 per cent of electrical equipment and 84 per cent of transportation equipment are exported. Imports of commodities are also important in terms of domestic demand for transportation.

Because it touches almost every economic transaction, transportation is vulnerable to variations in the business cycle, as well as to long-term structural changes. The transportation sector's performance and prospects are related to those of the economy.

With its derived demand, transportation grows when the economy grows, and likewise slows down with the economy during downturns.

Since the 1970s, however, growth in the economy has differed from that in the transportation sector for two reasons: the increased relative importance of services; and greater productivity in the transportation sector.

Figure 2-5 plots the growth cycles of goods production and freight transportation, revealing the periods when they are synchronized and when they are not.

The transportation sector is tied more closely to the production of goods than to total economic activity, with the movement of goods accounting for about two thirds of all transportation activity. For its part, goods production is more affected by business cycles than is the service sector. It follows, therefore, that freight transportation changes are more closely related to changes in goods production than to total economic activity.

1997 - A Good Year for Transportation

Gross Domestic Product

Gross Domestic Product (GDP), the total value of the goods produced and the services provided in a country in one year, is a key element in understanding the impact of any one factor on the economy. By comparing the overall economy's GDP to the transportation sector's GDP, it becomes easier to understand transportation's role in and contribution to Canada's economy.

Canada's GDP increased by 3.9 per cent in 1997, up dramatically from 1.6 per cent in 1996. The total GDP increase resulted from a 4.4 per cent rise in domestic demand and a 8.6 per cent increase in exports. This surge in domestic demand is the strongest since 1988.

Just as Canada's GDP rose in 1997, so did transportation's GDP - by a significantly higher figure of 5.4 per cent. In fact, during the recovery and expansion period of 1993 to 1997, transportation services regularly grew faster than total economic activity, due largely to the strong impetus of trade in Canada's growth.

Freight modes increased by 8.3 per cent, spread across rail and truck modes. Passenger transportation increased only in the air sector, by 5.9 per cent. Urban transportation, however, continued to post negative growth rates, maintaining a downward trend that began in the early 1980s.

Table 2-2 shows Canada's GDP and the transportation sector's GDP in 1997, as well as giving the change between 1996 and 1997 and the average annual per cent change over the previous six years, 1991 to 1997.

Trade Activity

Merchandise exports were up by 9.1 per cent in 1997, with strong showings in manufactured goods, crude oil and natural gas. Among the manufactured goods, the most notable increases were in paper and allied products; chemicals; and machinery and equipment, including office equipment.

Fueled by a strong domestic demand, merchandise imports soared by almost 15.9 per cent. Imports of machinery and equipment, primary metals, and petroleum and coal products increased significantly, followed by automobiles and automobile parts. Agricultural product import increases were below average.

Expenditures

There were a number of notable showings on the expenditure front. Consumer spending was up by 3.9 per cent. Likewise, spending on commercial transportation services by consumers totaled two per cent more. Total transportation spending (including auto purchases and related expenditures) was up three per cent. Private fixed investment rose by 14.5 per cent, with its largest component, machinery and equipment, soaring by close to 20 per cent.

Non-residential construction, which influences freight transportation activity, posted a hefty 9.1 per cent increase in 1997, the highest in almost a decade. Residential construction, also an influencing factor, enjoyed a strong growth rate for the second consecutive year.

In the overall economy, lower interest rates meant lower interest payments on corporate debt, which saw profits rise by 17 per cent in 1997. Transportation benefited in particular, being a sector where capital/output ratio is high and debt servicing is important.

With inflation at 1.6 per cent, transportation prices dropped by 0.5 per cent. In general, transportation prices have shown almost no increase since 1991.

The lower Canadian dollar helped exports growth, also good news for the transportation sector. The increase in employment and lower interest rates helped consumers finance increased spending, including transportation spending.

Transportation's Contribution to the Economy

By moving people and goods, and by generating profits and paying salaries, transportation contributes to the economic well-being of Canadians. Apart from its strategic role, the size of the transportation service industry in terms of GDP is significant. This sector is larger than the agriculture, fishing and trapping, logging and forestry industries combined.

Transportation accounted for 3.7 per cent of total GDP in 1997. Figure 2-6 charts how transportation's GDP has declined almost continuously over the last 13 years.

However, strong economic growth in 1997 pulled transportation activity to a higher level. Compared to 1996, transportation GDP in 1997 increased by 5.4 per cent in real terms. On a modal basis, truck and rail have shown the largest increase with 9.3 and 9.0 per cent respectively, followed by air and marine with 5.9 and 3.2 per cent. Table 2-3 shows how transportation's GDP has improved.

In many OECD countries, including Canada, the transportation sector has been growing at a slower rate than total GDP. Overall, the ratio of transportation GDP to total GDP has fallen, due to higher productivity and lower prices. Wages, profits, interest payments and rent in transportation have increased at a slower rate than the average increase in the economy. This has translated into a relative decline in the overall cost of transportation, compared with costs in the economy. Consequently, transportation's share of the economy has declined.

Table 2-4 compares how much transportation has contributed to the overall economy, or the ratio of transportation GDP to total GDP, for Canada and selected major industrialized countries over the last 15 years.

Transportation as an Employer

In 1997, transportation employed approximately 472,000 people, with twice as many people in road than in all other modes combined. At least that many more people are also indirectly dependent on the transportation sector for employment. In fact, transportation accounts for 3.4 per cent of all jobs in Canada. Trucking is the biggest employer, with 158,000 jobs, and marine is the smallest, with 31,000.

Since 1992, changes in the number of jobs in transportation have varied greatly between the modes. Total employment increased by 63,000 jobs. The largest increase, in both relative and absolute terms since 1992, occurred in trucking - an increase of 45,000 jobs. Air employment increased by 12,000 and water by 8,000. Streamlining of rail operations has cut 10,000 jobs over the last five years.

Table 2-5 displays the growth and decline in employment in the transportation sector, mode by mode.

Investment

Investment in transportation includes government spending on transportation infrastructure, such as building roads; and business and government spending on machinery and equipment, such as cars and trucks. In transportation, investment usually occurs at irregular intervals and involves large sums of money.

From 1992 to 1995, transportation investment accounted for 18.9 per cent of total investment in the economy in an average year, with equipment accounting for

12.2 per cent and infrastructure for 6.7 per cent. Significantly, road dominates investment in transportation, accounting for 16.5 of the 18.9 per cent, while all other modes accounted for less than one per cent each. Table 2-6 compares investment in transportation to investment in the economy (less residential construction, which is considered a non-productive investment).

Transportation Demand

In 1996, the domestic demand for transportation represented 17 per cent of Canadians' total domestic demand, an increase from the 15.7 per cent in 1991, reflecting an annual growth rate of 4.5 per cent (Table 2-7). This rate exceeded the growth rate for overall demand, which explains transportation's increasing share of total domestic demand. If total indirect taxes and fees are subtracted from government expenditures, aggregate domestic spending on transportation in 1996 would represent 15.6 per cent of total domestic demand, compared to 14.2 per cent in 1991.

Domestic demand for transportation is composed of many segments, the largest being private transportation sales, which accounted for 10.5 per cent of total domestic demand in 1996. The largest component of private transportation sales - retail vehicle sales - accounted for 6.5 per cent of overall demand, while the other components - gasoline service stations, retail vehicle parts and repairs, and rental agencies - accounted for two, 1.5 and 0.3 per cent, respectively.

The second largest segment of domestic demand in 1996 was for-hire carriers, representing 4.5 per cent of overall demand. Trucking was the most significant sub-segment, at 1.5 per cent, followed by air at 1.2 per cent, while all other modes were less than one per cent each. Except for rental agencies, the components of private transportation sales were larger than or equal to any individual mode in the for-hire carriers group.

The demand for urban transit is declining steadily, reflecting the ongoing trend of using private vehicles.

Government accounted for the smallest segment of domestic demand for transportation, at two per cent of total domestic demand in 1996. The largest sub-segments were road construction and maintenance, at 1.4 per cent, with urban transit subsidies and other subsidies and administration at 0.3 per cent each.

Household Spending on Transportation

The dependence of the average Canadian consumer on transportation is another indicator of the sector's importance. In 1997, the average household spent 15.2 per cent of its budget on transportation, of which over 80 per cent was put towards buying and using an automobile. The average Canadian household also spent 12.6 per cent of its transportation budget on public transportation. Air dominated this spending, accounting for 68.9 per cent of the budget. Table 2-8 itemizes the transportation budget for the average household, including the item purchased, the cost, and what percentage of the total budget the item accounts for.

Transportation and Trade

The transportation system plays a critical role in Canada's trade, both domestically and internationally. As an open economy, Canada relies on transportation to get goods to foreign markets.

Transportation is also important for domestic trade. In addition to trade within each province, trade between provinces is vital to regional economies. Each province is unique in its economic makeup, with its own specific industrial structure. Where one may be dominated by natural resources, the other may be dominated by specific manufacturing activities, making transportation a crucial link.

In recent years, the flow of commodities has altered significantly. For the purposes of comparison, it is useful to look at domestic trade flows versus international trade flows. Total flows increased by 40 per cent between 1988 and 1996. During the same period, the total output of goods (intra-regional and inter-regional flows plus exports) increased by 30 per cent, while domestic demand (intra-regional and inter-regional flows plus imports) increased by 27 per cent.

Domestic flows saw an increase of eight per cent between 1988 and 1996, the result of an 11 per cent increase in intra-regional traffic and a five per cent decrease in inter-regional movements of goods. Clearly, domestic transportation activities have not benefited from the increases registered in domestic production and demand. The gains have come mainly from international trade. Table 2-9 shows the flow of trade between 1989 and 1996.

Since 1988, Canada's exports of goods to the US have increased by 114 per cent, while exports to the rest of the world have increased by 33 per cent. Similarly, Canada's imports of goods from the US have risen by 85 per cent, while imports from the rest of the world have increased by 67 per cent.

Canada's trade traffic with the US is the most significant. In 1988, Canada's export business to the US represented 15 per cent of all goods moved in Canada - today, that figure is at 23 per cent. Similarly, our import business from the US has risen from 13 to 17 per cent of total traffic. Table 2-10 illustrates these trade levels. Between 1988 and 1996, Canada moved fewer goods within regions, and the share of intra-regional trade fell from 47 to 37 per cent of total trade activity. Likewise, the share of trade movements between regions also declined, from eleven to eight per cent of the total.

Relative importance of trade can be measured in terms of domestic production, that is, domestic flows plus exports to the US and the rest of the world. The share of intra-regional trade dropped from 59 to 51 per cent of Canadian production of goods, while inter-regional traffic fell from 14 to ten per cent of production. While overseas exports maintained their share at seven per cent, US exports rose from 19 to 32 per cent. Table 2-11 shows these traffic shares of total output.

Canada exports close to 40 per cent of what it produces, and imports slightly less than it exports. Over the past decade, these proportions have almost doubled, which demonstrates that growth of the Canadian economy is directly related to our participation in the global economy.

Since 1988, total exports have increased by 8.8 per cent per year in current dollars. Exports to the US more than doubled. Table 2-12 illustrates these changes in Canada's exports.

During the same period, imports grew at 8.4 per cent per year. Notably, imports from countries other than the US, the European Economic Community and Japan more than doubled. Table 2-13 illustrates these changes in Canada's imports.

The US is by far Canada's major trading partner. Trade with the US features access to the world's largest market. For this trade, shippers, receivers and business people can benefit from the two countries' increasingly integrated transportation systems.

In 1997, the US alone received 83 per cent of Canada's merchandise exports, compared to 73 per cent just ten years earlier. Over the same period, the share of Canadian imports from Europe and Japan dropped, benefiting the US and the rest of the world. In 1997, over two thirds of our imported goods came from the US. Table 2-14 charts Canada's merchandise trade.

Almost half of Canada's exports were shipped by road. Rail accounts for 20 per cent, followed by water at 17 per cent and air at six per cent. For imports, road is by far the most used method of shipping, at 62 per cent, followed by water and air with 17 and 13 per cent respectively. Table 2-15 shows by which mode Canada's trade was moved.

For exports, transportation equipment is the largest commodity group. Within that group, automobiles are the single most important export good, followed by fabricated materials and electrical equipment. Most of the goods were shipped by road, although rail moved about 26 per cent, mostly transportation equipment and fabricated materials. Table 2-16 shows Canada's exports to the US and Mexico by major commodity grouping and mode.

For imports, transportation equipment is again the largest commodity grouping at 32 per cent. Almost 80 per cent of imports enter Canada by road and less than ten per cent by rail. Table 2-17 shows Canada's imports from the US and Mexico by major commodity grouping and mode.

The two largest provinces, Ontario and Quebec, dominate provincial trade with our NAFTA partners, the US and Mexico, and account for almost 75 per cent of exports and 83 per cent of imports. Because foreign trade is so critical to Canada's economic growth, an efficient, affordable transportation system is essential to help Canada compete globally. In fact, without its transportation system, Canada would not have undergone the growth it has experienced in recent years. Table 2-18 shows Canada's merchandise exports to and imports from the US and Mexico by province in 1996.