11-010-XIB
Canadian Economic Observer
November 2007

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

by Diana Wyman*

While Canada’s burgeoning imports from China are frequently in the spotlight, Canada’s exports to China are often overlooked. From 2002 to 2006, Canada’s exports nearly doubled to $8 billion, and in the first seven months of 2007¹ they soared 43% over the same period in 2006. This 2007 gain was the largest posted by any G7 country and put China neck and neck with Japan as Canada’s third largest export market. Moreover, while the level of imports in 2007 remained well above exports ($21.7 billion as of July compared to $5.5 billion), export growth outpaced imports by a large margin, with shipments from China up only 17% so far in 2007.

Figure 1

China’s economy, five years after integrating into the global economy by joining the World Trade Organization, continues to transform itself. It is renewing cities, expanding factory production, building up logistical networks to move products in and out and providing the infrastructure such as ports and roads that supports these networks. As China consumes more resources in growing quantities to feed this makeover, prices have soared. Canada, which houses and processes these products in abundance, has been an important supplier to China. Indirectly, by pushing prices higher, China has also boosted Canada’s natural resource exports to other countries. This has resulted in a commodity boom in Canada, reflected in strong labour markets, higher incomes, healthy housing and financial markets and rising consumer spending in Canada. Increasing exports to Europe and Asia combined with relatively little growth in exports to the US also have resulted in a sharp drop in the US share of Canada’s exports.

Figure 2

This paper will offer a short discussion of China’s global trade and will examine Canada’s growing relationship with China in more detail. It will also review Canada’s recent diversification away from the US, with particular emphasis on provincial trends.

China’s global imports of natural resources on the rise

China’s overall imports have surged over the past five years, with 2007 on pace to triple the US$300 billion levels of 2002. China’s import values are the third-highest in the world, behind the US and Germany. A driving force behind this import growth has been China’s demand for natural resources to fuel the country’s massive infrastructure projects and manufacturing. Given the scale of China’s demands, from running its factories to preparing for the 2008 Olympic Games, the rise in demand for these products has helped push world commodity prices to unprecedented levels. In 2007, metals prices were over three times higher than in 2002 and crude oil prices have quadrupled to pass US$90 a barrel.²

Figure 3

China’s natural resource imports are dominated by metals and energy. Metals such as copper, iron ore, nickel and aluminum are China’s top natural resource imports and are set to quadruple from 2002 to reach $120 billion in 2007. Nickel has been particularly strong so far in 2007, with ores and alloys already surpassing 2006 totals of $4.0 billion, and seven times greater than their imports in 2002.³

Energy imports, the next largest component at $100 billion, are running five times higher in 2007 than in 2002. Crude oil accounted for three-quarters of these imports. Also of note are minerals, which have tripled since 2002 on  the strength of uranium, chemicals (such as styrene and ethylene glycol) and oilseed imports (primarily soybeans from the US and Brazil but also canola from Canada).

Canada’s exports to China surge in 2007

As a result of Canada’s natural resources endowment, its exports to China rose sharply between 2002 and 2006 from $4 billion to nearly $8 billion. Growth had been subdued in 2005 and 2006 but picked up again in the first seven months of 2007, running 43% ahead of the same period in 2006.

Resources dominate Canada’s exports to China. Exports of industrial goods make up half of these shipments. This sector has registered the largest gains, tripling since 2002, led by metals, fertilizers (mostly potash), and chemicals (largely ethylene glycol). Forestry products (notably woodpulp) are Canada’s second largest export to China, comprising 16% of exports, followed by agricultural exports (at 14% of exports). Machinery exports accounted for 12% of exports to China while energy accounted for 3% and consumer goods 1%.

Figure 4

Several things came together to push export values to China forward in 2007. Industrial goods received a boost from accelerating Chinese demand for metals and a further 32% increase in metal prices. As well, strong demand for potash coupled with producers and importers agreeing on a contract early in 2007 lifted exports well ahead of 2006.⁴ An increased appetite for Canadian canola seed and oil mixed with higher prices pushed up agricultural exports to China. And numerous tankers of crude petroleum sent to China to explore shipping from the Pacific Coast to Asia meant that China became Canada’s number two export market for crude.⁵

Canada’s metal exports to China during 2002 to 2006 registered faster growth than to any of the other major market. During that period, exports advanced from $300 million to $2 billion. Thus far in 2007, metal exports to China were running 70% higher than the year before, a faster increase than any of the previous years.

Nickel is our largest metal export to China, not surprising given that China is the world’s largest customer for nickel. Chinese firms need the metal as a key component in stainless steel production (which in turn is in high demand for infrastructure building as well as the production of machinery and electronics). In 2006, nickel exports to China were 2.5 times higher than in 2005, reaching $600 million. In 2007, year-to-date nickel exports were $600 million, three times 2006 values for the same period. Manitoba exports the most nickel to China, followed closely by Alberta and then Ontario.

Copper and iron ore come next, followed by aluminum. Copper exports were over five times higher than their 2002 level at $500 million in 2006, and continued to show increases of 30% so far in 2007. They originate mostly in BC, Quebec and Ontario. Iron ore exports, mostly from Newfoundland as well as a small quantity from Quebec, climbed to $275 million in 2006, up from $30 million four years before. Aluminum exports, also a combined effort from Quebec, BC and Ontario, weighed in at $100 million in 2006, a five-fold increase since 2002. Iron ore and aluminum are both showing slower growth in 2007, up about 7%.

Saskatchewan, which supplies more than 40% of the world’s exports of potash, has seen its potash exports so far in 2007 surpass 2006 values and are on pace to match the record set in 2005. After spiking to over $400 million in 2005, potash shipments to China fell in 2006 during protracted contract negotiations, as China drew on domestic inventories.⁶ In 2007, contracts were negotiated quickly and exports have soared. Potash, a key nutrient for crops as it replenishes soil after intense farming has taken its toll, is also posting record sales to the US and India. After the US and China, Brazil is the largest importer of fertilizer (the reason behind a recent decision to invest in a potash mine expansion project in New Brunswick).⁷

Chemical exports to China are concentrated in ethylene glycol, which is produced in Alberta. This chemical is employed in the manufacture of a wide variety of household goods, notably polyester used in China’s clothing industry. Canada’s exports of the chemical tripled between 2002 and 2006 to $900 million and are up 25% in 2007.

Energy exports have never been a large component of Canada’s shipments to China. But crude oil exports to China rose to over $150 million so far in 2007, as China and Canada tried out the logistics of shipping Alberta oil out of the Port of Vancouver. While still not a significant share of all our oil exports, China’s receipt of Canadian oil opens a potentially large market.

Total canola exports to China advanced in 2007, making it the third largest market for these products behind the US and Japan. China accounts for 20% of Canada’s canola exports, with the US and Japan each chipping in a quarter of export demand. Seed exports from Saskatchewan and Alberta climbed to $255 million for the January to July period already, above the total 2006 value of $90 million. Canola oil exports from Alberta to China reached $150 million year-to-date 2007, a level unseen since 2004. Canola exports were strong enough in the first seven months of 2007 to lift agriculture to near its total for all of 2006.

Exports of woodpulp (BC and Quebec) and machinery (primarily from Ontario) are also contributing to the 2007 gain. Woodpulp exports, an input to China’s paper and cardboard production, were up 20% in the first seven months of 2007. This follows a near-doubling between 2002 and 2006 to $1.1 billion. Machinery exports to China have also increased to $1.1 billion between 2002 and 2006, a 44% increase. Rising machinery exports, up a further 14% in 2007, were spread among many diverse products, from pulleys and pumps to taps and valves, and parts for paper production machinery.

In addition to Canada’s exports to China growing faster than other G7 nations, they also outpaced other suppliers of natural resources such as Australia, Brazil and Russia. However, the country with the highest export growth to China in 2007 has been Chile, which is also a major supplier of copper and woodpulp, with exports doubling 2006 values.

China leads Canada’s recent trade diversification

In recent years, exports to countries other than the US have outpaced the US. Given higher commodity prices pushed up by Chinese demand, industrial good exports to several European countries and China⁸ accounted for the majority of the shift in exports. Aircraft and other machinery, which is in high demand overseas, also had an impact.

Figure 5

Exports to countries other than the US climbed 68% between 2002 and 2007. In comparison, exports to the US rose just 5% during that same period, as higher crude and metal exports were nearly offset by lower earnings from forestry and autos. As a result, Canada’s exports have become increasingly diversified.

Between 2002 and 2006, the US share of Canadian exports fell from its peak of 84% to 79%. This decline accelerated in 2007, dropping to 76% of total exports. Conversely, between 2002 and 2007, the share of Canada’s exports to countries other than the US rose sharply from 16% to 24% of Canada’s exports. This contrasts with the years following the introduction of the Canada-US Free Trade Agreement. During the 1990s, Canada’s exports to the US registered faster growth than with the rest of the world and, as a result, the US share expanded from 75% to 84%.

While diversification may not be an end in itself, the recent shift to increased trade with the rest of the world has been well-timed, given the onset of the housing-induced slowdown in the US. This begs the question if all regions of Canada have been included in this shift in exports toward countries other than the US: the short answer is a resounding yes.

Figure 6

All provinces have shown strong export growth to non-US destinations since 2002. In the cases of Ontario, Quebec, Nova Scotia, PEI and Newfoundland, the growth was sufficient to more than offset declining exports to the US. For BC, Manitoba, Saskatchewan and New Brunswick, exports to countries other than the US boosted overall exports beyond the more moderate growth in shipments to the US. Alberta was the only province that has not shown an increased share of its exports shipped to countries outside the US. The reason behind this was that Alberta’s exports to the US are growing as fast as those to countries other than the US. This mostly reflects that crude oil is Alberta’s main export to the US.

It’s well known that Ontario’s auto sector has slowed, but often ignored is that demand for nickel, gold, and uranium as well as aircraft, high-tech and other machinery have pushed up Ontario’s exports to countries other than the US more than any other province. Since 2002, exports to non-US destinations rose by nearly $20 billion to an annual rate of $31 billion in 2007. This led to a 3% rise in overall exports since 2002 despite a 8% drop in shipments to the US. Rising metal exports from Ontario accounted for more than half of this increase, running nearly six times their 2002 value of $2.0 billion in 2007. In 2002, 7% of Ontario’s exports went to countries other than the US. In 2007, 17% were exported to these countries.

Slumping forestry exports contributed to an export decline of 5% from Quebec to the US and stagnant shipments from BC. But exports from Quebec to non-US destinations were the second-fastest growing of all the provinces between 2002 and 2007, adding $5.1 billion worth of business to reach $16 billion in 2007. BC export receipts have increased from $9 billion in 2002 to an annual rate of $13 billion in 2007. Quebec’s exports to other countries now account for 23% of total exports, up from 16% in 2002; they represent 39% of BC’s exports, up from 32%.

While not currently a big seller to China, Canada’s wheat sales are up to a wide variety of Asian, African and South American buyers, pushing up Saskatchewan’s non-US exports. Uranium shipments to Europe are also driving up Saskatchewan’s export receipts. Saskatchewan’s overseas exports accounted for 43% of its total in 2007, up from 38%. Manitoba’s exports to outside the US now account for 20% of exports (up from 16%) on the strength of metals and wheat.   

Exports from the Atlantic Provinces to non-US destinations expanded between 2002 and 2007 by $2.1 billion to an annual rate of $5.4 billion. Newfoundland alone accounted for two-thirds of the jump as ore exports of iron, nickel and copper increased. By 2007, 23% of Atlantic Canadian exports headed to countries other than the US, up from 17% in 2002.

Figure 7

Canada’s sources of imports also have shifted, with a record-high 35% of imports from countries other than the US in 2007. This was up from 25% in 2002. This advance resulted from imports from countries other than the US in 2007 rising 41% since 2002 while imports from the US rose only 4%. For Canada’s imports, over half of the increase in market share from countries other than the US reflected China.

These overseas imports are entering primarily through the Port of Vancouver but also Eastern Canada, notably Montreal, followed by Halifax and St. John’s. The Vancouver Port authority indicated that container imports in 2006 were 30% more than 2005, and that this growth was China-driven. Discussions of an Atlantic Gateway are moving forward on how to facilitate the arrival of these rising imports (and the outflow of increasing exports). In the West, a new terminal in Prince Rupert, the closest North American port to China, opened in September, ready to ease congestion in Vancouver. The Prince Rupert container terminal is complete with cutting-edge cranes ready for unloading the new generation of mega ships from China (the cranes themselves were imported from China).⁹

Machinery and autos dominate China’s global exports

Like imports, China’s total exports are the third highest globally behind Germany and the US. Exports have tripled since 2002, nearing the US$1 trillion mark in 2006 and continued to grow at a steady rate (29%) in the first seven months of 2007.

China’s top exports remain machinery and equipment, more than tripling from US$115 billion to US$400 billion in 2006 and accounting for 40% of total exports. Consumer goods and autos and auto parts continued to gain ground, with the latter nearly quadrupling since 2002 to reach US$22 billion in 2006. While auto parts remain the major export, car exports reached US$1.5 billion in 2006, heading primarily to Russia and the US.

In order to fuel China’s thriving manufacturing export sector, large volumes of parts are imported from China’s neighbours, which often handle the knowledge-intensive aspects of production before turning this over to China’s manufacturers for assembly and global distribution.

As a result of manufactured products exiting via China, China’s export values to North America and Europe continue to gain momentum while their Asian neighbours register only moderate export gains overseas. As of 2003, the share of foreign parts and components in China’s exports to the US was estimated at nearly 60%.¹⁰ Given this level of integration, it is advisable to examine trade with China as a part of overall trade with Asia.

Canada’s imports from China shift toward machinery and industrial goods

In 2002, the year following China’s WTO accession, China took the title of second largest source of imports for Canada, surpassing Japan and Mexico, behind the US.  Since 2002, China’s share of Canada’s imports has tripled to nearly 10% of our total. Canadian import values more than doubled between 2002 and 2006 to $34.5 billion, just a slightly faster pace than Canada’s exports to China. This is more than our combined imports from Japan and Mexico.

Canada’s import growth from China has been much more restrained in 2007 than that of exports, rising 17% over the first seven months of 2006. Canadian import values have been dampened by our stronger loonie vis-à-vis the Chinese currency, lowering Canada’s import bill with China. Essentially, Canadian companies can import the same for less. Given the 17% rise despite lower prices, a large increase in volumes imported can be inferred.¹¹

The composition of our imports from China continues to change as our trade relationship with China deepens and as the variety of products manufactured in China increases. Machinery and equipment eclipsed consumer goods as Canada’s leading import from China in 2004. While machinery continues to hold top spot at 43% of total imports, its share has fallen back slightly as imports of industrial goods, notably iron and steel products, and auto parts have advanced.

Figure 8

Machinery and equip­ment imports, primarily com­puters, electronics and telecommunications, more than doubled to $16 billion between 2002 and 2006. This import growth was the result of Canadian retailers sourcing an increasing quantity of mp3s, laptops, printers, video games, digital cameras, small and large appliances, and LCD and plasma monitors from this manufacturing one-stop shop (Mexico remains Canada’s main supplier of LCD televisions). The sector was limited to only a 4% increase in 2007, however, as a result of falling prices.

Consumer goods expanded by 57% from 2002 to 2006, making them the slowest growing sector. That said, at $12 billion in 2006, they accounted for 34% of total imports. Clothing was the major component within this sector, with $3.5 billion of imports in 2006, twice the value of 2002. Imports in the first half of 2007 followed a similar trend, rising 22% above 2006 values. As of 2007, over half of Canada’s clothing imports originated in China, compared to one-third in 2004.¹²

Other consumer goods, such as toys, games and sports equipment, are also primarily sourced from China, which supplies 60% of these imports to Canada. In 2006, imports of toys, video games and sports equipment were worth $1 billion each.

Industrial good imports are the third largest import sector and iron and steel and related products are one of the fastest growing areas for China, with exports worldwide equalling $52 billion, $2.0 billion of which was demanded by Canadian companies. 

Imports of automotive products, mostly parts, hit $1.5 billion as of July 2007, already surpassing the 2006 total of $1 billion. This compares to imports of $200 million in 2002.

Conclusion

China’s demand for natural resources as its infrastructure and manufacturing sector expands has helped world commodity prices reach new heights. This has benefited Canada directly by boosting exports to China, which have risen more than twice as fast in 2007 as the growth of imports from China. It has also inflated Canada’s exports around the world, as importers now pay more for Canada’s resources. Increasing exports of energy, metals and agricultural goods to the US have largely been offset by declines in forestry and to a lesser extent autos. In contrast, export growth to countries other than the US has picked up momentum and export share, with 24% of our exports now heading to non-US destinations, compared to 16% only five years ago. This trade diversification may be contributing to the current decoupling of the US and Canadian economies. Certainly it has provided growth opportunities for several provinces whose exports to the US had weakened.

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Notes