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Canadian Economic Observer
March 2006

Feature article

Canada’s Place in World Trade,

by F. Roy*

In the last 15 years, world trade has grown as much as it did in the previous century.1 This new era for trade was ushered in by the proliferation of trade agreements to reduce tariffs and quotas, falling transportation costs and new technology like the Internet that encouraged the free flow of information and ideas.

This article paints a portrait of Canada’s place in world trade during this period of rapid growth. It shows how the composition, the direction and the magnitude of Canada’s trade has changed to respond to global shifts in demand, especially for our natural resources, and to Canada’s changing need for imports. This is important because of the large role trade plays in Canada’s relatively small economy, which affects most of us either as consumers or producers. Canada’s trade per capita is over $5,000, one of the highest of any nation. Through its indirect impact on the terms of trade and prices and profits, our trade also has important implications for the structure of final demand.

Figure 1

This article begins by analyzing exports. It shows how the share of natural resources in exports is increasing and dominates exports to most of our main trading partners. Meanwhile, the resources boom has made the Canadian dollar more attractive, and this rapid appreciation has lowered the cost of imports. As a result, our imports have grown substantially and become more diverse. The US and Japan are not as dominant in imports as the early 1990s.

Figure 2

Exports are more concentrated

Starting with the fur trade, Canada’s resource-based economy has always been open to foreign trade.2 Up to the beginning of the Second World War, two-thirds of its exports were grain and lumber. Even today, our resources play a prominent role in world trade. On average, resources have accounted for about half of our exports over the last 15 years. In 2005, the proportion jumped to 57%, with energy exports to the US leading the way. Exports of industrial goods to China have also contributed to this increase. The upswing has been moderated by a weakness in forest products. Consumer and investment goods have slowed.

Our exports are also highly concentrated by country of destination, dominated by the US at 84.0%. The US and other large export markets like Japan (2.1%), China (1.6%) and Mexico (0.7%) mostly consume our resources. Resources led exports to all four countries: 57% for the US, 56% for Mexico, 78% for China, and 86% for Japan. The EU was an exception at just 43%, instead importing mostly consumer goods and machinery. However, Europe accounts for only 6% of our exports.

Figure 3

In 2005, energy became our top export, accounting for more than 80% of our trade surplus. Energy is also one of our least diversified exports in terms of trading partners and it became even less diversified after 2000. Roughly 95% of our energy exports went to the US in 2005, compared with 84% in 1990. In 2005, energy made up one quarter of our shipments to the US, double their proportion in the 1990s. Canada exports mainly oil and natural gas, each of which earned at least $30 billion in 2005. The development of Hibernia, the start of gas exports from Sable Island to New England, and the opening of the Alliance pipeline connecting Alberta to Chicago all contributed to the increase. Electricity exports generate between $2 billion and $3 billion.

Canada exported more coal to Europe and China after 2000, and to Japan last year. In many countries, coal is primarily used for steel production. Iron and steel demand has strengthened due to stronger global economic growth. Even Japan’s economy is recovering as its GDP posted its highest rate of growth in a decade in the fourth quarter of 2005, which helped an increase in Canadian coal exports to that country. While Australia’s coal fields are closer to Asia, it has been unable to keep pace with its demand. Canada will be able to export even more coal when mines in Cape Breton, north-eastern British Columbia and Alberta are reopened. In 2005, only 1.3 million tonnes of coal were shipped out of Prince Rupert’s terminal, which has a capacity of 16 million tonnes.

Industrial goods have nearly matched the strong gains made by energy in recent years. China’s exports increased the most. The US was slightly less dominant as a market than energy, with 79% of industrial goods’ exports compared with 83% in 2002 (but up from 64% in 1990). Europe maintained its share of our export market, despite growing competition from Eastern Europe.

China accounts for only 4% of our exports of industrial goods, but their share of our exports to China jumped 10 percentage points last year, from 36.5% to 47.1%, the most for any country. The increase was largely due to fertilizers (58%) and various metals: aluminum (58%), zinc (36%) and iron and steel (29%). Metal exports accounted for nearly 4% of our GDP in 2005, up sharply from less than 1% in 1995. Meanwhile, our exports of ethylene glycol, which are used to make textiles, have continued to increase after jumping by about $0.5 billion in 2004. As a result, Canada’s balance of trade in chemicals was positive for the first time since 1988.

Forestry products are the only natural resource to have declined in the past few years. Still, they have the largest share of global markets of any of our exports (13% in 2003). Forest products declined steadily as a share of our exports from 1990 to 2005. They have also declined as a percentage of total exports for all of our main trading partners except China and Korea. The drop was particularly large for pulp. In 2005, 81% of our forestry product exports were shipped to the US, 6% to Europe and 4% to Japan. But they make up the largest part of our exports to Japan (more than 25%).

Agricultural exports have not fared much better than forestry exports, in part because of low prices on world markets. They are the most diversified group in terms of country of destination. The US takes about two-thirds, while 10% of our food exports go to Japan, 6% to the Europe, 4% to China, and 3% to Mexico. More than one-third of our exports to Japan are agricultural products. Canada met about 6% of world demand for grain imports in 2003.

In contrast to resources, exports of finished products fell sharply after 2000. This drop was led by auto products, which hampered our overall exports to the US since it is the destination for 96% of our auto exports. The decline affected only North American manufacturers, as foreign automakers with operations in Canada have increased their exports appreciably3. Auto exports to Mexico also have grown, particularly in 2005. More than a quarter of Mexico’s imports from Canada in 2005 were automotive products, an increase of more than 10 percentage points from 2004 and the highest proportion since before 1991. Still, auto trade with Mexico is only 1% of Canadian auto exports. Trade between Canada and Mexico has been generally lacklustre despite the North American Free Trade Agreement, displaced by growing trade with China over the last 15 years.

Exports of investment good declined sharply after the high-tech bubble burst. The US now imports the bulk of its high-tech products from China rather than Canada, a shift reflected in the US trade deficit with that country. Canada also exported less to Europe and Mexico. However, Canada has been exporting more investment goods –notably high-tech products and machinery – to China and the rest of Asia; such exports were worth $4.6 billion in 2005, nearly double their value in 2000.

Imports diversify

Imports are becoming much more highly diversified than our exports. A breakdown of imports by country reveals that the share of the US and Japan has declined in recent years, while that of China, Korea, Europe, Mexico and OPEC has grown. About 40% of our imports in 2005 came from countries other than the US and Japan, an increase of more than 10 percentage points from the 1990s.

The same diversification by country is evident for most product groups. The US now clearly leads only for autos and a few resource products. Japan has lost market share in every sector, even autos as manufacturers have opened plants in Canada. Instead, Canada imports more machinery and equipment and consumer goods from outside the US and Japan (about half in 2005). Half of our energy imports are from OPEC and the North Sea regions.

The marked drop in the US share of imports in recent years is unprecedented in the history of Canada-US trade. The US share of our total imports declined every year from their peak in 1997. In 2005, they made up only 56.6% of our total imports (on a customs basis), the lowest since the 1930s. Even in absolute levels, US imports remain below their 2000 peak. These trends reflect the diminished role generally of the US in global exports.

Figure 4

The US share of our imports dropped primarily because of machinery and equipment, our largest import. The US accounted for about 54% of these imports in 2005, down from about 68% in 1990, displaced by China (up to 11% in 2005) and Mexico (6% in 2005). Our imports of electrical and electronic products alone from the US shrank by $10 billion (or 40%) between 2000 and 2005.

Canadian imports of electrical and electronic products from countries other than China also declined. Between 2000 and 2005, these imports grew by nearly $4 billion from China (+300%) and dropped by more than $3 billion from Japan (-30%) and the rest of Asia (-30%). We are also buying other types of investment goods, such as industrial machinery, from China rather than Japan and the rest of Asia; these imports from China total almost $5 billion, up $4 billion from 2000.

Like the US, Asia is a special case. While our overall trade deficit with China has grown considerably, it stopped growing with Asia, after rapid increases in the 1990s. Our deficit for electronic goods levelled-off at $11.4 billion since 2000. That is because we imported less directly from Japan and other countries that supply the inputs for China’s computer industry, such as Hong Kong, Taiwan and Singapore. We now import much cheaper computer products that have been assembled in China, often from parts made throughout Asia. Consequently, our overall deficit with Asia did not deteriorate as it did during the 1990s. The growth of imports from China embodies a large content from the rest of Asia.

Figure 5

These developments have changed the composition of our imports from China. In the early 1990s, we imported mostly toys and trinkets from China; in 2004, investment goods made up the largest share of our imports for the first time. The trend intensified in 2005. Machinery and equipment now accounts for a larger share of our total imports China than from the US and Europe.

The shift of imports toward China and away from the US and other Asian countries has substantially reduced prices, thereby curbing the growth of the trade deficit in investment goods. The nominal deficit was nearly unchanged from the previous decade, whereas the volume of imports was up by half. This accompanied the recent shift in the growth of Canada’s economy to investment.

Canada imports fewer consumer goods than investment goods, but the shift away from the US as a source of imports was even more pronounced for consumer goods. The US accounted for only 34% of these imports in 2005, compared with 52% in 1997 and 45% in 1990. The beneficiaries of this trend were China and Europe. More than a quarter of our imported consumer goods now come from China (clothing, sports equipment, furniture, watches, etc.); the value of these imports was about $10 billion in 2005, compared with $5 billion in 2000. Roughly two-thirds of the increase in Canada’s spending on household appliances in 2005 went to imports from China, while retail prices for such goods fell to their lowest levels in 20 years. Europe was Canada’s leading source of pharmaceutical imports in 2005, supplying about $4.5 billion worth of such products, more than the US. Mexico and other countries continued to have a marginal share of our consumer goods imports.

Since 2000, Japan has fallen behind China to third place on the list of our largest trading partners. It is often overlooked that our trade deficit with Japan, and Asia as a whole, has moderated considerably, especially when compared with our overall trade surplus. This is hardly surprising, since Japan lost much of its competitive strength, which left it in recession for much of the 1990s when the yen rose 70% (and remains high today). Another factor is the construction of Japanese car manufacturing plants in other countries. In 2005, nearly 40% of Canada’s vehicle output was made by foreign manufacturers, up from 25% just five years earlier. Only Korea has been gaining market share since 1990, partly because it closed the only plant it had in Canada. One-third of our imports from Korea in 2005 were automotive products.


Canada has been in the vanguard of the rapid growth of world trade since 1990, continuing our long-standing tradition as a trading nation. The increasing integration of Asia, especially China, into the world economy suggests this will continue in the foreseeable future.

The surge in Asian demand has been a boom to our resource exports, especially industrial goods such as metals and chemicals. Still, the US remains our dominant export market, because it is the destination for almost all our energy and auto exports.

Our imports have diversified away from the US, mostly due to increases from China which has made inroads into many of our consumer and investment goods. But some of the growth in China is illusory, reflecting its role in assembling parts manufactured in other Asian countries.

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* Current Analysis Group (613) 951-3627.
1 Data after 1950 come from the World Trade Organisation. Pre-1950 data are from Angus Maddison, Monitoring the world economy. 1820-1992. OECD; 1995.
2 Resources are grouped together in the following economic use classification: agricultural products; industrial goods (including metals and chemicals); energy; and forestry products.
3 Japan Automobile Manufacturers Association of Canada.

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