Trade with China
by F. Roy*
China is now the world’s second largest economy after the
United States, as measured by the purchasing power of GDP. Its export
sector represents about one-quarter of GDP1,
five times more than in 1978 when economic reform began to progressively
open it up to the rest of the world. In 2003 alone, it rose three
places in the World Trade Organization’s (WTO) ranking to
third with 5.3% of global imports, behind only Germany (7.7%) and
the US (16.8%). China’s growth has contributed to the recovery
of its Asian neighbours, and more recently to rising exports from
North America. At the same time, China continued to meet most of
North America’s growing appetite for imports. This boosted
it to fourth place in global exports with a 5.9% share, behind Japan
(6.3%), the US (9.7%) and Germany (10.0%).
This article documents how Canada’s
trade with China has evolved over the last 15 years in the context
of the broad shifts in China’s trade with the world.2
Canada has benefited both from the direct effect of higher exports
to China and indirectly from the upward pressure on commodity prices
from China’s rapid industrialization. Meanwhile, our imports
from China have shifted from toys and trinkets to productivity-enhancing
China is not only an exporter, but also consumes
and imports at an increasing rate. Chinese imports took off in the
second half of the 1990s, culminating in China’s entry into
the WTO in December 2001.4 After
rising 8.2% in 2001, China’s imports jumped 21.2% in 2002
and 39.9% in 2003, even as global trade stalled. As a result, the
Chinese trade surplus fell $4.9 billion (US) to $25.5 billion in
2003 and then swung into a deficit of $8.4 billion in the first
quarter of 2004, its first shortfall in 10 years. The growth of
imports was driven by lower tariffs on imports, rising domestic
demand and an increasing need for raw materials and energy.5
Recently, China has become a growing source of export demand for
the recovery of its neighbours, particularly Japan, many of whom
suffered severely from the Asian currency crisis in 1997. Closer
to home, US exports to China doubled between 1999 and 2003, led
by electronic equipment. Our exports also have risen sharply, more
than recouping a 30% drop between 1995 and 1997 when commodity prices
collapsed (especially for forestry products). Canadian exports to
China are driven by resource products, which year in and year out
account for about 80% of our shipments to China.
Wheat used to dominate our exports to China up to the early 1990s;
as recently as 1992, it accounted for 60% of our shipments to China.
Since then, the share of wheat has slipped to just a little over
10%, supplanted by rapid gains for industrial materials (which rose
to 45%) and forestry products (24%). Capital goods are about 11%,
a share which has changed little over the last 15 years. Exports
remained much smaller for autos (2%), energy (2%) and consumer goods
(0.1%) over this period.
Within agricultural products, the drop in wheat masked sharp gains
for our exports of seafood, meat and oilseeds from practically nothing
in 1990. Seafood led the way, rising from $3.2 million to $250 million
in 2003, equivalent to half of agricultural exports to China. This
follows the dietary trend in China: between 1990 and 2002, its per
capita consumption of grain in urban households fell 40% while meat
rose 30% (chicken alone tripled) and seafood increased 70%. Total
Chinese imports of seafood grew from $1.8 to $4.1 billion in 2001.
Our exports of industrial materials accelerated with the surge
of Chinese industrial production starting in the 1990s. Metals led
the increase, rising to 15.8% of our shipments to China at the start
of 2004. Iron and steel, and nickel dominate, with shares of 6.3%
and 4.1%. The shares of copper and aluminum were negligible, although
they have risen sharply in 2003 and early in 2004. Chemical products
and fertilizer represented 11.7% and 6.8% of exports, benefiting
in part from China’s shift from importing wheat to growing
its own grain.
Forestry products also have seen rapid gains, raising their share
of resource exports to China from only 9% in 1992 to close to one-third.
China is now the largest importer of pulp in the world, and Canada
the largest supplier in the world (and the second largest supplier
to China after the US). Pulp alone accounted for nearly one-fifth
of all our exports to China in 2003. The increase would have been
even more spectacular if prices had maintained their 1995 level,
instead of falling 40% between 1995 and 1997 and staying around
that level ever since.
Lumber in 2003 remained only a fraction of
the importance of pulp, but exports have risen ten times since 1999.
China has become one of the largest importers in the world, equalling
the United Kingdom in 2002 behind only Japan and the United States.
This increase followed better forestry management in China after
severe floods6, which lowered supply
just as demand took off (banking reforms increased the supply of
household credit7 and homeownership,
while rapid urbanisation continued–cities grew 6% annually
after 1995, double the rate between 1990 and 1995). China’s
National Bureau of Statistics reported that housing was up 34% in
the first quarter compared to a year ago.
China’s appetite for raw materials has
risen so fast in recent years that, along with leading the world
in pulp imports, it now stands behind only Japan and the US as a
market for wood and is second only to the US for iron and steel
and crude oil. Rapid growth in Chinese demand has been an important
factor behind the recent boom in commodity prices, especially metals
as well as fats and oils, which have risen 54% and 28.8% respectively
in the year ending in May 2004.8
This reversed the downward trend of commodity prices from 1980 to
2001. Canada, as a large net exporter of resources, has benefited
from this surge in demand.
Table 1: Canada Trade with China
|Agricultural and fish products
|Machines and equipment
|Agricultural and fish products
|Machines and equipment
|* First three months.
China has supplanted Japan as the leading Asian exporter to the
US (although China has also boosted imports from Japan). This shift
in trade between China and Japan explains the stability of the overall
US trade deficit with Asia (2.5% of GDP in 2000 and 2.4% in 2003).
China has supplied nearly all of the increase in US import demand
since the turn of the decade. In 2003, China overtook Mexico as
the second largest supplier to the US, behind only Canada.
As a share of GDP Canada’s trade balance with Asia is almost
the same as the US, with our overall deficit moving from 2.7% in
2000 to 2.6% in 2003. At $13.8 billion (Canadian) last year, Canada’s
trade deficit with China was the same percentage of GDP (1.1%) as
the $124 billion deficit of the United States. Our imports from
China have risen as rapidly as the US’s, also surpassing Mexico
but two years earlier in 2001. By 2003, our imports from Mexico
had slipped to just 66% of those from China, partly as the absolute
level of imports from Mexico has levelled off since 2000 while that
of China has soared.
In 2003, goods from China represented 5.5%
of Canada’s imports. Every one of the 21 major commodity group9
contributed to this increase. But capital goods have dominated,
reflecting increased investment by firms. Capital goods represented
44.8% of all imports from China early in 2004, up from 19.5% in
1993. Early in 2004, imports of Chinese capital goods passed consumer
goods for the first time ever, despite falling prices for most capital
goods. Electronic equipment and mechanical machinery led the way.
Conversely, the share of consumer goods in imports from China fell
from 65% in 1993 to 40% in 2004. Toys dominate this group. The rest
of our imports are spread among the following groups, all of which
have changed little since 1993: industrial goods (9.5%), agricultural
products (2.8%), autos (1.9%), forestry products (0.9%) and energy
Our bill for imports from China also has risen because of the
drop in our exchange rate over the last decade (China maintains
a fixed exchange rate against the US dollar, and the depreciation
of the Canadian dollar before 2003 would have raised the cost of
imports). At the same time, we have turned to markets that produce
at a lower cost. For example, in 2003, around 50% of our footwear
imports and more than 40% of leather imports came from China.
The composition of US imports from China is very similar to Canada’s.
Electronic equipment and mechanical machinery have soared over the
last 15 years to dominate their imports from China. Toys are in
second place, followed by clothing and footwear.
China’s increasing integration into the world economy has
been a textbook example of the benefits of trade. Its increasing
exports have raised incomes in China while supplying a new source
of low-priced goods, especially to firms in North America investing
in machinery and equipment. As a result, China has surpassed Japan
and Mexico as a source of imports for both Canada and the United
At the same time, China’s increased demand for imports has
opened up new markets for a wide range of goods. Canada has taken
advantage by diversifying our exports to China away from our traditional
dependence on wheat to industrial goods and forestry products. Prices
for our commodity exports also have benefited from the boost from
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* Current Analysis, (613) 951-3627 or email@example.com.
1. World Development Indicators,
The World Bank, various issues.
2. All data for Canada –
China trade is on a customs basis, from International Trade Division.
A world of caution is in order here. Customs based merchandise trade
statistics are more accurate at measuring imports than exports.
Customs based data for exports to non-US destinations often understate
the actual value of trade for various reasons, including misallocation
and undercoverage. For a brief discussion of the problem, see ‘Canadian
Merchandise Trade – Customs Basis: Data Quality Statement’,
Statistical Data Documentation System Reference Number 2201, available
free of charge at Statistics Canada web site (www.statcan.ca).
3. See Jean-Marc Siroën,
“L’OMC et la mondialisation des économies,”
working paper of EURIsCO, no 98-02, juin 1998.
4. In becoming a member, China
undertook to open its economy and trade to the rest of the world;
most China trade commitments were to be completed by the end of
5. People’s Daily online,
April 21 2004.
6. See D. Lague, “Felling
Asia’s Forests”, Far Eastern Economic Review, December
7. Mortgages came into more
general use only over the past few years, auto loans since 2001,
and credit cards in 2002. China has allowed some commercial banks
to make more consumer loans on a trial basis since the late 1990s.
8. Using the CRB price indices
for 23 sensitive basic commodities.
9. Using 2-digit merchandise
detail in the Harmonised System.