Thursday, November 8, 2007

Study: Trading with a giant: An update on Canada-China trade

Canada's merchandise exports to China in the first seven months of 2007 have grown at more than twice the pace of its imports on the strength of the Asian giant's demand for Canada's natural resources, according to an article published today in the Canadian Economic Observer.

Between January and July 2007, Canada's exports to China surged 43% from the same period in 2006, while its imports from China rose only 17%.

This rate of growth in exports in 2007 surpassed that of any other G7 country, and put China neck-and-neck with Japan as Canada's third largest export market.

Canada's exports to China rose sharply between 2002 and 2006, from $4 billion to nearly $8 billion. In 2005 and 2006, gains were subdued after a surge in 2004.

The sharp rise in exports during the first seven months of 2007 was the result of several factors. Accelerating Chinese demand, combined with higher world prices for metals, potash and canola, boosted industrial goods and agricultural exports. China also became Canada's number two export market for crude oil.

Canada is clearly benefiting from the magnitude of China's demand for natural resources. The nation of more than 1.3 billion people is expanding its manufacturing base and building massive infrastructure projects, from ports and bridges to facilities for the 2008 Olympic Games.

This demand has propelled world commodity prices to unprecedented levels. In 2007, metals prices were over three times higher than in 2002, and crude oil prices quadrupled to over $90 US per barrel. By pushing prices higher, China has boosted Canada's natural resource exports to other countries.

Increasing exports to Europe and Asia, combined with relatively little growth in exports to the United States, resulted in a sharp increase in the share of Canada's exports held by countries other than the United States.

Nearly one-quarter (24%) of Canada's exports headed to non-US destinations in 2007, compared with 16% just five years earlier.

Export surge concentrated in industrial goods

Canada's exports of industrial goods to China, which include metals, fertilizers (potash), and chemicals (ethylene glycol), are set to triple their 2002 values in 2007. These exports make up just over half of Canada's shipments to China.

Forestry and agricultural exports, notably wood pulp and grains, comprise 16% and 14% of Canada's exports respectively, with machinery (12%), energy (3%) and consumer goods (1%) rounding out the total.

Canada's metal exports to China between 2002 and 2006 registered faster growth than those to any other major market. During that period, exports surged from $300 million to $2 billion. So far in 2007, metal exports to China have been running 70% higher than in 2006, a much faster pace than in previous years.

In addition, potash exports from Saskatchewan so far in 2007 have already surpassed 2006 values, and are on track to match the record set in 2005. The province supplies more than 40% of the world's exports of potash. After spiking in 2005, potash shipments to China fell in 2006 during protracted contract negotiations.

Total canola exports to China advanced in 2007, making it the third largest market for these products behind the United States and Japan. China now accounts for 20% of Canada's canola exports.

Energy exports have never been a large component of Canada's shipments to China. However, in the first seven months of 2007, the value of crude oil exports to China surpassed $150 million, as China and Canada tested out the logistics of shipping Alberta oil through the Port of Vancouver.

While still not a significant share of all of Canada's oil exports, China opened up a potentially large market for Canadian crude oil.

China leads Canada's trade diversification

In recent years, exports to countries other than the United States have outpaced those to the United States. Given higher commodity prices pushed up by Chinese demand, exports of industrial goods to several European countries and China accounted for the major part of the shift in exports. Aircraft and other machinery, which are in high demand overseas, also had an impact.

As a result of this sharp gain in exports overseas, Canada's exports have become increasingly diversified. Between 2002 and 2006, the United States' share of Canadian exports fell from its peak of 84% to 79%. During the first seven months of 2007, this share declined to 76%.

Conversely, between 2002 and 2007, the share of Canada's exports to countries other than the United States rose sharply from 16% to 24%.

The recent shift to increased trade with the rest of the world was well-timed, given the onset of the housing-induced slowdown south of the border. All regions of Canada have benefited from this shift in exports toward non-US countries.

Since 2002, all provinces have shown strong export growth to non-US destinations. In the cases of Ontario, Quebec, Nova Scotia, Prince Edward Island, and Newfoundland and Labrador, the growth was more than sufficient to offset declining exports to the United States.

For British Columbia, Manitoba, Saskatchewan and New Brunswick, exports to non-US countries boosted overall exports beyond the more moderate growth in shipments to the United States.

Alberta was the only province not to show an increased share of its exports shipped to countries other than the United States. This is because Alberta's exports south of the border are growing as fast as those to non-US countries, thanks to crude oil, Alberta's main export to the United States.

Ontario's exports to countries other than the United States posted the largest gain of any province, rising nearly $20 billion since 2002. Ontario's auto sector may have slowed, but the overseas demand for its nickel, gold, and uranium resources, as well as aircraft, high-tech and other machinery, is on the rise.

In 2002, 7% of Ontario's exports went to non-US destinations; by 2007, this share more than doubled to 17%.

Import growth from China in 2007 more restrained than exports

Canada's sources of imports have also diversified. So far in 2007, a record-high 35% of imports have come from countries other than the United States, compared with about 25% in 2002. Over half of the increase in the market share from non-US countries is attributable to China.

Since 2002, China's share of Canada's imports has tripled to nearly 10% of total imports. Canadian imports from China more than doubled between 2002 and 2006 to $35 billion, a slightly faster pace than Canada's exports to China. Imports from China were more than Canada's combined imports from Japan and Mexico.

Canada's imports from China grew only 17% over the first seven months of 2007 compared to the same period in 2006.

Canadian import values have been dampened by the stronger Canadian loonie vis-à-vis the Chinese currency, lowering Canada's import bill with China.

Essentially, this means that Canadian companies can import the same quantity for less. The increase of 17%, which occurred in spite of lower prices, suggests a large increase in imported volumes.

The study, "Trading with a giant: An update of Canada-China trade", is included in the November 2007 Internet edition of the Canadian Economic Observer, Vol. 20, no. 11 (11-010-XWB, free), now available from the Publications module of our website. The monthly paper version of the Canadian Economic Observer, Vol. 20, no. 11 (11-010-XPB, $25/$243), will be available soon.

For more information about the Canadian Economic Observer, click on the banner ad from the Publications module of our website.

For more information, or to enquire about the concepts, methods or data quality of this release, contact Diana Wyman (613-951-4181; ceo@statcan.ca), Current Economic Analysis Division.

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