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Canada’s international trade during the recession

by Philip Cross 1 

The year-long slowdown in the global economy accelerated sharply after September 2008, when conditions in financial markets deteriorated following the bankruptcy of the Lehman Brothers investment bank in the US. While GDP in most countries contracted rapidly during the following three quarters, the largest declines were in trade flows. In the four months after September 2008, the World Bank estimated that global exports swung from year-over-year nominal growth of 19% to a drop of 31%. The peak rate of decline was strikingly similar in North America, Europe and Japan. The much faster drop in trade than global GDP reflects several factors. These include the reliance of trade flows on credit, a sharp drop in commodity prices and larger declines in output of goods than services (services have a larger role in GDP than trade).

The drying-up of finance had a particularly severe impact on trade overseas for some countries. At the height of the crisis, banks and other financial institutions were unwilling to extend credit to firms on the other side of the globe, no surprise given that they were already unwilling to finance some of the largest and best-known firms at home. 2  One estimate put the shortfall of trade finance world-wide, which is needed for 90% of trade, at $100 billion. 3  Trade within multi-national corporations would not be affected by the problems in trade finance, which may explain why the drop in trade was concentrated in a few sectors.

It is unclear whether the integrated nature of trans-national supply chains, where a particular component or part may cross the border more than once as a good is assembled, amplified the drop in trade relative to production. For example, steel made in India could be stamped and pressed in Mexico, made into an auto part in the US, put into a finished car in Canada and then shipped for sale in the US. In this hypothetical example, the steel would cross five borders. The reversal of this process as production was cut helps explain the remarkable synchronisation of the drop in trade around the world. 4  However, while global supply chains raised the share of trade in GDP, their unwinding during the recession did not necessarily lead to a faster drop in trade than output. 5 

Canada was no exception to the global slump in trade, as exports and imports shrank faster than any other sector of demand. The relatively large share of trade in Canada’s GDP amplified the impact on our economy. Most importantly for Canada, sharply lower commodity prices aggravated the underlying drop in the volume of shipments.

The rapid decline in trade led Canada into recession, through both its direct impact on incomes and output of goods (notably manufacturing and mining) and the indirect impact on related services industries. While most services in Canada escaped relatively unscathed from the recession that ravaged goods industries, goods-handling services did not. Transportation and wholesale trade saw output fall by 5% and 10% respectively, due mostly to the slump in cross-border trade.

Since international trade was at the epi-centre of the ensuing recession, this paper provides a simple exposition of how Canada’s exports and imports were affected.

From its peak in the third quarter of 2008 to its recent low in the second quarter of 2009, Canada’s export earnings fell by 32% while nominal imports dropped 22%, according to data on merchandise trade from the National Accounts. (By comparison, nominal GDP fell 7.4% and real GDP by 3.3%.) The larger drop for exports than imports entirely reflects lower prices, as the volume of both fell by about 20%. Export prices fell 12%, reflecting the greater role commodities play in our exports than in imports. Import prices were unchanged over the last three quarters, as the upward pressure from the record drop of the exchange rate in the fourth quarter of 2008 on manufactured goods prices offset lower prices on world markets for commodity imports.


Imports fell by $25.1 billion, or 22%, between the third quarter of 2008 and the second quarter of 2009. The largest declines, in terms of both the first difference and the percentage drop, were posted by energy products, autos and industrial goods, in that order: together they fell by nearly $20 billion, contributing 80% of the overall drop in merchandise imports.

Chart 3.3

Energy imports fell nearly in half, shrinking by $7.0 billion (or 48%) in the last three quarters. Most of this retreat reflected lower prices and volumes for imported petroleum products. While oil imports began to recover in the second quarter as prices firmed, overall energy imports continued to retreat due to a sharp drop for coal, especially after extensive shutdowns in the iron and steel industry in the spring.

Auto imports fell by $6.8 billion (or 37%) after the third quarter of 2008. The largest drop ($3.0 billion) was for passenger cars, as sales dried-up in the fourth quarter when consumer confidence hit bottom. Imports of auto parts also dropped by $2.4 billion, reflecting the tumble in assemblies in Canada.

Imports of industrial goods decreased by $6.1 billion, or 26%, from their peak in the third quarter of 2008. Almost half of this decline originated in a $3.0 billion drop for metals. This reflected both sharply lower industrial demand by Canadian producers and falling imports of metal ores for refining in Canada (before their re-export to world markets). Demand for other industrial products was particularly weak for iron and steel, which fell by a half in just the past two quarters. Plastics and chemicals also posted a large drop.

The slump in energy and industrial goods reflected the sharp drop in commodity prices. Following a 7-year boom that tripled natural resource prices, commodity prices fell by half between their peak early in the third quarter of 2008 and early in 2009. While commodity prices have always been cyclical, the latest swing was the largest on record. The largest declines were for energy products and metals. Metals prices fell by 53%, aggravated by the global retreat from industrial demand. 6 

Machinery and equipment imports were the only other sector to record a notable decline, falling $4.2 billion or 14% between the third quarter of 2008 and the second quarter of 2009. This decrease was almost exactly in line with the 13% drop in nominal business investment, notably in mining and manufacturing over this period as the recession deepened. The reduction in imports was most pronounced for industrial machinery and office equipment (such as computers). These declines were mitigated by stable demand for agricultural machinery and aircraft.

Nominal imports of consumer goods and agricultural products were little affected by the recession. However, the volume of consumer goods initially fell 15% between the third quarter of 2008 and the first quarter of 2009, as retail sales slumped and the lower Canadian dollar raised the cost of imports by about 10% (the same as the increase for imported autos and machinery and equipment). Consumer goods imports began to recover in the second quarter, however, as retail sales firmed in Canada. Imports of agricultural products were steady, not too surprising given that staples such as coffee, fruits and vegetables dominate this category.

Chart 3.4


Merchandise exports fell by $41.1 billion (32%) over the last three quarters. As with imports, over 80% of the decrease was concentrated in energy, autos and industrial products, which fell by 49%, 40% and 39% respectively. However, because of the larger share of exports accounted for by energy and industrial goods after the surge in commodity prices over the previous five years (and the slump in autos), they contributed much more to the drop in overall exports than autos.

Exports of energy products contracted by $17.0 billion between the third quarter of 2008 and the second quarter of 2009. Nearly all of the drop was due to a 46% slump in energy prices. The largest retreat occurred for petroleum products, reflecting the rapid drop in oil prices as well as lower volumes. While oil prices rebounded in the second quarter of 2009, energy exports continued to slide because of the deepening slump in natural gas exports, where prices have tumbled since last summer by nearly two-thirds.

Export earnings from industrial goods fell by $11.7 billion over the last three quarters. Over half ($6.7 billion) of this loss originated in metal ores and alloys. Most of the drop in metal exports reflected lower volume, as prices fell about 20%. The fastest decline was for nickel ore, which fell nearly 75% (or nearly $1 billion) in just two quarters. Other large drops of 50% or more occurred for copper and aluminium. Precious metals like gold were a notable exception, posting only a small loss as prices rallied in the spring.

Chart 3.5

Auto exports fell by 40%, but after steady declines since 2004 this represented a drop of $6.1 billion in export earnings, much less than the losses for energy and indusial goods. The decrease in the volume of auto exports surpassed 50%, by far the most of any major export sector, as prices rose 10% in response to the lower exchange rate. Passenger cars led the decline, as they have come to dominate vehicle production in Canada (trucks accounted for only 15% of vehicles assembled in the first half of 2009).

The nearly 40% decline for both exports and imports in auto trade was mutually reinforcing. Since roughly half of vehicle assembly in Canada comprise imported parts, the sharp drop in vehicle exports inevitably lowered auto imports, with the large decline in auto output in the US also reducing demand for parts made in Canada.

As with imports, exports of machinery and equipment fell by 15% (or $3.4 billion) during the last three quarters, less than half the rate of decline for the three worst-hit sectors of exports. As a result, by early 2009 machinery and equipment had reclaimed the mantle as Canada’s leading export, a title it last held in 2005 (when it was surpassed first by industrial goods and then by energy products). While industrial machinery and office equipment suffered from cutbacks in business spending abroad, aerospace and telecommunications equipment (such as mobile phones) were relatively unscathed.

The smaller drop in machinery and equipment trade than in some other sectors is notable for at least two reasons. First, business investment in machinery and equipment posted the largest drop of any sector of GDP outside of exports. Second, while machinery and equipment is the second-largest user of imported parts (after autos), this did not reinforce the drop in direct demand for machinery and equipment (since the simultaneous drying up of the export market for machinery and equipment lowered demand for imported parts by the same proportion). The same result was found for autos. There was little evidence for Canada that vertical disintegration of global supply chains heightened the drop in trade flows, contrary to what many analysts expected.

Forestry products saw exports fall by 27%, but following years of steady losses (notably as the US housing sector turned down in 2006) this translated into a loss of $1.8 billion in exports, less than 5% of the drop in total exports in the last three quarters. The slump in exports earnings was evenly-spread among lumber, pulp and newsprint. The drop in forestry and auto exports in 2008 came after a slump of nearly 40% over the previous four years (both forestry and auto exports reached a high in the second quarter of 2004).

Chart 3.6

Like imports, exports of consumer goods and agricultural products were little affected by the recession, with each posting declines of just 1% between the third quarter of 2008 and the second quarter of 2009. Agriculture was buoyed by higher wheat exports, reflecting a good crop which offset a retreat in grain prices from their record highs earlier in 2008.

Regionally, the largest drop in exports in the last three quarters was a 35% decline in shipments to the US. This reflects the severe drop in US demand for exports such as natural gas and autos. Exports to Europe and Japan fell nearly 30%, due to large declines in demand for industrial goods (notably metals).

Exports to non-OECD nations have declined by only 13% since the third quarter of 2008. There are several reasons for this relatively good result. A large portion of exports to emerging nations is agricultural products (notably grains), where demand has remained firm and finance is often facilitated by governments. As well, the economies of emerging nations were less-affected by the global recession (for a variety of reasons beyond the scope of this paper). The best example is China, where real GDP growth remained near 8% in the second quarter. As a result, Canada’s exports to China have risen 11% so far in 2009, following a 10% gain in 2008.


Three sectors accounted for over three-quarters of the record drop in both exports and imports between the third quarter of 2008 and the second quarter of 2009: energy, autos and industrial goods. This was due to falling prices for energy and metals, as well as the severe drop in auto sales in North America. Conversely, trade in consumer goods and agricultural products was little changed during the recession.

Exports and imports contracted faster than any other sector of the Canadian economy. This partly reflected sharply lower prices for commodities which are an important part of cross-border trade. Unlike other countries, the faster drop of trade than output or demand in Canada appears to be driven more by lower demand than problems in trade finance or a response to global or cross-border production chains.

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