An article in the June 2004 Canadian Economic Observer described the sharp increase in trade between Canada and China over the last 15 years. China’s opening to trade with the world economy and its entry into the World Trade Organisation was followed by a quintupling of its exports, making it the third largest exporter in the world in 2004, pushing Japan into fourth place. China accounted for 6.5% of global exports, not far behind Germany at 10% and the US at 9%.

China’s growth in trade is particularly important to Canada. Since 1998, both exports to and imports from China have at least tripled¹, while trade flows with the rest of the world slowed in both directions after 2000 (Figure 1). This paper examines in more detail trade with China, and why Canada was one of the few countries whose export growth to China last year surpassed import growth. Still, Canada’s trade deficit with China grew last year to $17.5 billion.

Figure 1

This paper also looks at direct investment flows between China and Canada. While our trade with China is representative of its dealings with many nations, investment flows are not. Direct investment in either direction remains minimal, with Canadian enterprises more active in China than Chinese companies in Canada. The investment Canadian firms make in China was led by our traditional areas of expertise in resources and finance. This is in marked contrast with US and Asian companies, which are often moving manufacturing plants to China.

Imports

While China continued to account for a larger part of global trade in 2004, it was even more dominant in Canada’s imports. Canada’s imports from China rose nearly twice as fast than in 2003 and slightly more than their average yearly increase from China since the early 1990s. Canada’s imports from China in 2004 rose more than most other top trading countries (Table 1). China trailed only the US as a source of our imports, bumping Japan and Mexico to third and fourth places. Rapid growth was sustained into the first quarter of 2005.

Table 1: China's Exports by Country, 2004

The composition of our imports from China also has changed markedly. Machinery and equipment surpassed consumer goods for the first time early in 2004, and were 20% larger by the first quarter of 2005. Over half of last year’s increase was for computers and telecommunications equipment. The remainder was mostly industrial machinery and measuring and control instruments. Lower prices for investment goods made them more affordable for Canadian firms looking to boost their productivity.

Industrial good imports also rose sharply last year. The $1 billion rise was led by petrochemicals (hydrocarbons and nucleic acids), plastics as well as iron and steel and aluminum. Canada imported $300 million more steel products. About half of the increase in pipes and tubes was used in the oil and gas industry.

Autos (mostly parts)² constitute the fourth largest and fastest growing group of imports last year. These imports have risen sharply from nearly nothing 10 years ago, especially motors and parts. Our imports of motors alone jumped from $2 million to $300 million between 2003 and 2004, and are on track early in 2005 to rise by another quarter. In the first contract of its kind between Canada and China, the Canadian firm CAMI (a GM affiliate) and Shanghai GM Co agreed in November 2003 that China would manufacture American-designed motors for a new Chevrolet line built in Ontario in 2004. Shanghai GM is to supply 180,000 V6 motors and 75,000 L4 motors a year.

In the auto sector, China’s production rose sharply after it abolished a 50% limit on foreign participation in local business ventures, thereby conforming with WTO regulations on foreign investment. While auto production in China was slightly below Canada’s in 2001, it jumped by 1 million units in 2002 alone to surpass Canada’s total by 50%. By 2003, its 4.4 million assemblies were twice Canada’s. China ranked sixth in the world in auto output, after the US, Japan, Germany, France and South Korea. Most of these gains were at the expense of Japan. Almost all of China’s auto output is for the domestic market, but it is already planning to enter the global market soon³.

Imports of consumer goods have played a shrinking role in Canadian-Sino trade since the early 1990s. Consumer goods recorded the smallest increase last year of all the other groups of imports. Clothing’s share of all imports from China fell from a third in 1993 to less than 15% in 2004, despite the abolition of quotas in four stages over this period. China’s share of our toy imports levelled off at just over a half. Conversely, photographic equipment has risen in importance, while furniture imports from China jumped nearly one-third last year alone.

The breakdown of our imports from China closely resembles China’s exports to the rest of the world. Machinery and equipment (including transportation equipment) contributed close to half of China’s export growth between 1990 and 2000, followed by even stronger gains so far this decade.

The evolution of China’s exports by commodity group also reflects the trend in foreign direct investment in China. In the 1980s, most foreign direct investment within manufacturing was concentrated in labour-intensive industries such as clothing and textiles, which at that time dominated their exports. In the 1990s foreign investment shifted to investment goods such as machinery, transportation equipment, electronics and communication.

Since the second half of the 1990s, the information technology sector a focal point of foreign direct investment in China. China’s Trade Ministry reports that in 2002 electronic and communications equipment garnered one-quarter of foreign investment in manufacturing. These goods also took the lead in export growth, with foreign firms generating about 80% of these shipments. Firms investing in this sector come mostly from Hong Kong, Japan, the Virgin Islands, the US and South Korea. Only 1% of foreign direct investment comes from Canada.

Exports

While our imports rose rapidly in 2004, our exports to China grew even faster. Canada and Australia were the only major OECD nations to post above-average growth, reflecting their large resource content. Other leading exporters to China were Asian nations shipping parts to China for assembly, then re-exported to the world. The 40% hike in Canada’s exports to China last year was one of five occasions since 1990 that export growth surpassed imports. Since 1990, our exports to China have risen by an annual average of 12.5%, while imports averaged 22.8%. Early in 2005, year-over-year export growth remained high at 20%.

The recent trend in the composition of exports continues the trend that began early in the 1990s. At that time, wheat was our major export to China. Now shipments are more diversified, especially for industrial goods, some natural resources and machinery and equipment.

Canada’s exports to China rose over $1 billion between the first quarters of 2004 and 2005, driven by industrial goods as a result of both the volume of shipments directly to China and the indirect effect of rising commodity prices produced by China’s industrialisation. Industrial goods rose 66% last year, their largest increase in the past decade (before which shipments were negligible). They were up again 57% in the first quarter from a year ago.

Figure 2

Organic chemicals and metals and minerals led industrial goods, contributing nearly a third of all Canadian goods exported to China in 2004. Organic chemicals, almost all ethylene glycol, saw remarkable growth in shipments to China. Ethylene glycol rose four-fold, by over $0.5 billion, and is on track to reach $1.4 billion in 2005. China uses ethylene glycol (produced almost entirely in Alberta) primarily to produce polyester for textiles and clothing. The implication is that Canada has made much more money supplying a basic input to China burgeoning textile and clothing exports (mostly to the US and EU) than it lost in domestic clothing and textile output to these imports.

The rapid growth of China’s economy has also led to a sharp increase in demand for the handling and transport of goods as well as energy. These sectors account for more than one-quarter of investment spending in China. This is partly why our exports of machinery and equipment to China have rebounded by nearly 40% to $1 billion in the first quarter of 2005 (at annual rates). The largest increases were for industrial machinery (notably construction and mining) and transportation equipment (mostly aircraft).

China’s economy uses coal as its primary energy source (67.1% of all its energy consumption in 2003). With coal consumption rising a further 12% in 2004,⁴ coal explained the doubling of our energy exports to China in 2004. This growth should continue at a torrid pace in 2005, as coal remains in short supply pending a number of new projects coming on line over the next few years.

Figure 3

While energy currently represents only 1% of our shipments to China, this sector led our direct investment in China. Alberta-based firms played a leading role in building several projects, notably in the province of Heilongjiang⁵ and offshore. Heilongjiang is the hub of exploration and development of oil and gas in China. Canada is also transferring technology designed to reduce CO2 emissions from burning coal. Overall, Canada’s direct investment in China totaled less than $1 billion last year.

Figure 4

Canada’s food exports to China early in 2005 gave back a little of the ground gained in 2004. The Canadian Wheat Board expects demand to recover later in 2005, as prices and markets are liberated and stocks are rebuilt. Our wheat exports to China fell sharply in the second half of the 1990s when demand slumped as the Chinese varied their diet, refrigeration spread and China favoured domestic production. Feed consumption also plummeted due to the outbreak of avian flu at the end of 2003, which decimated poultry stocks.

Consumer goods and forestry exports to China have slowed recently, contrary to other commodity groups. This is partly due to China’s growing capacity to produce these goods. Consumer goods (mainly autos) fell 50% in 2004 and so far in 2005 were only 30% of last year’s first-quarter level. Meanwhile, forestry products reversed the 20% increase recorded in 2004. China’s government helped finance the modernisation of several state-run paper mills between 1998 and 2002. The government also supported a sharp expansion of pulp capacity in 2005.

Table 2: Canada Trade with China

Conclusion

China’s integration into the world economy is one of the most important developments of the last decade. For most countries, this has meant increasing imports of lower priced goods, often made by Asian or US firms investing in China.

Canada’s relationship with China is unique. Imports have risen rapidly, with machinery and equipment and more recently auto parts displacing consumer goods as the source of this growth. But Canada was one of the few countries in a position to take advantage of export opportunities arising from China’s development, because of our resources as well as our expertise in transportation and communication infrastructure. So far, few Canadian firms have invested in China outside of these sectors.

Our trading relationship with China is still in its early stages, and is changing rapidly. Just last year, our imports of auto parts from China rose significantly, a precursor to China’s entry into the global market for vehicle sales. Meanwhile, our energy exports doubled in one year, even before China made several moves to access our oil.

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