Findings

Canada's total trade with the European Union (EU) has increased considerably. From 1995 to 2004, our exports have risen 36% for an annual compound average of 3.5%, while imports from the EU have increased by more than 86%, for an annual average of 7.1% during the same period.¹ These differing rates of growth have resulted in an increasing trade deficit with the EU.

At 86% the growth of imports from the EU since 1995 has eclipsed that of several of Canada's other leading trade partners, including the United States. Canadian imports from the U.S. have increased by 39% during the last decade, while Canadian imports from Japan increased by just 11% during the same period. Only Canada's imports from China have grown at a greater pace than that of the EU.

Since 1995, Canada's trade position relative to the EU has deteriorated significantly. While most of Canada's major import commodities from the EU have remained the same, the emergence of imports of pharmaceuticals has had a significant impact on Canada's trade position. Imports of pharmaceuticals have increased at an annual rate of 23% since 1995, reaching $4.2 billion in 2004. It is important to note, however, that Canada's trade deficit with the EU has narrowed since 2002, based, primarily, on the strength of exports of diamonds from the Northwest Territories. Without this increase in exports, Canada's trade deficit with the EU would have reached a record level in 2004.

Two way trade between Canada and the EU accounted for 8% of Canada's total trade in 2004, identical to a decade earlier. The proportion of total Canadian exports destined for the EU declined steadily, while the share of Canadian imports originating in the EU has increased. Canada's exports to the EU represented 6% of our world exports in 1995 and by 2004 this had decreased to 5%. At the same time, the EU's share of Canada's total imports has increased from 10% in 1995 to 12% by the end of 2004.

Imports: driven by increasing pharmaceutical products
Emergence of diamond exports
Canada's trade deficit with the EU has increased significantly
Nova Scotia exports greatest proportion to the EU

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Imports: driven by increasing pharmaceutical products

Canada's import mix from the EU varied little over the 1995 to 2004 period. Canada imports primarily finished goods. Mineral oils and organic chemicals are the only non-finished goods to have cracked the top five import commodities at any time during the period under review. In fact, all of the top three commodities with positive trade balances in 2004 were natural resource commodities, while the top three negative trade balances were all manufactured goods.

Canada's primary import from the EU is machinery (dominated by aircraft engines) and this commodity has recorded the highest value of imports for every year from 1995 to 2004. Imports of this commodity reached a record $7.5 billion in 2004. This increase has not only been in absolute terms, but in relative terms as well. The EU's share of Canada's total imports of machinery has increased from 11% in 1995 to 13% in 2004.

Canadian imports of pharmaceutical products from the EU surged during the period under review registering an almost 7-fold increase from just over $630 million in 1995 to $4.2 billion in 2004. In addition, the share of Canada's total imports of pharmaceutical products originating in the EU has increased from 31% in 1995 to 49% by 2004. This increase was likely due to a surge in demand for age- related drugs caused by shifting demographics.

The EU accounted for 4% of Canada's total imports of vehicles and accessories in 1995; this increased to 6% a decade later. The relative importance of vehicles to total imports from the EU increased as well, moving to 9% in 2004 from 7% a decade earlier. At over $64 billion in 2004 vehicle imports are the single largest commodity imported into Canada.

Both the overall level of imports of mineral fuels and oils into Canada and the level of imports from the EU have increased from 1995 to 2004. However, the rate of increase in total imports of these goods has vastly outpaced that of imports from the EU and, as a result, the EU share of the total has decreased. Imports of mineral fuels and oils from the EU have more than doubled, to $4.4 billion in 2004, but the EU share of Canada's total imports of mineral fuels and oils have declined from 21% of total imports of mineral fuels and oils in 1995 to just 17% in 2004.

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Emergence of diamond exports

In 2004, three of the top five Canadian exports to the EU were finished goods, including machinery, electronic equipment and aircraft. These same commodities were also included in the top imports from the EU to Canada and, combined, produced a Canadian trade deficit of $6 billion.

The value of wood pulp exports to the EU declined by 54% from 1995 to 2004. This commodity fell from the highest export value, representing 18% of total exports to the EU in 1995, to just 6% of total exports a decade later. While the overall level of exports of this commodity fell, exports of wood pulp to the EU recorded an even greater drop in their share of exports, falling from 28% of Canada's total exports of this commodity in 1995, to just 19% in 2004. The bulk of the decline occurred in 1996, when the value of exports fell by almost half from 1995 levels.

Canada's total world exports of wood and wood products surged from 1995 to 2004, but our exports to the EU declined, driving down the share of exports of this commodity from 6% of the total in 1995 to just 2% by 2004. This commodity was driven down, principally, by a drop in exports of softwood lumber.

The picture for exports over the period would have been significantly worse were it not for our diamond exports from the North. Canadian exports of precious stones and metals increased from just under $200 million in 1995 to a staggering $3.3 billion by 2004, of which diamonds accounted for half this value. Companies have exported more than $6 billion worth of diamonds since 1998 from mines in Canada's North. Production is expected to surge with two additional mines to come on-line by 2006. The EU is the principal destination for Canada's exports of diamonds, as most of the worlds supply are sorted and sold through either Antwerp (Belgium) or London.²

While Canada's export mix to the EU has changed over the period under review, the commodities driving our trade deficit have remained quite similar. Indeed, in 2004, the highest trade surplus of any finished manufactured good was ships and boats, in 10th place. Primary industry commodities such as oils seeds and grains, ores, cereals, nickel and wood pulp, have enjoyed a positive trade balance for the entire decade. Based on balance of trade, Canada's top five commodities included no manufactured goods and accounted for a combined positive trade balance of $6.5 billion in 2004.

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Canada's trade deficit with the EU has increased significantly

Over the last decade Canada has seen its trade deficit with the EU increase significantly. From 1995 to 2004, Canada's exports to the EU increased by a modest annual growth rate of just 3.5%. During the same period, however, the level of imports from the EU had almost doubled, resulting in an annual growth rate of 7.1%, more than double the growth rate of exports.

The annual rate of increase in imports from the EU (7.1%) is second only to the explosive growth seen in imports from China. Imports from the U.S., Canada's leading source of imports, increased by an annual average of only 3.7% by comparison.

Since 2002, exports to the EU have increased at a significantly faster rate than imports, resulting in a reduction in the trade deficit to approximately $19 billion in 2004. While imports from the EU have increased every year since 1995, reaching $42 billion in 2004, the growth has slowed considerably since 2000, with yearly increases in imports sliding from 16% from 1999/2000 to just 8% from 2003/2004.

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Nova Scotia exports greatest proportion to the EU

Nova Scotia's exports to the EU accounted for 11% of their total exports in 2004, the largest percentage of all provinces. In terms of dollar value, however, Quebec and Ontario were the biggest sources of exports to the EU, accounting for over half of total exports for every year from 1995 to 2004. These two provinces also dominate the import side of Canada's trade with the EU, accounting for approximately 80% of total imports for each year from 1995 to 2004. Quebec relies more on exports to the EU than does Ontario (9% of their total exports versus 4% for Ontario).

In nearly all provinces, the proportion of exports destined for the EU declined from their 1995 levels. The lone exception was Ontario, which saw a small increase of 0.4% over the period.

Exports from Ontario to the EU have increased at an annual rate of 6%, the highest of any province. However, this was not the largest growth, as the Northwest Territories, on the strength of the burgeoning diamond trade, saw their exports increase at an annual rate of 26%. At the opposite end of the spectrum is British Columbia, where exports to the EU fell by $650 million from 1995 to 2004 and were concentrated in wood pulp exports. In proportional terms, New Brunswick recorded the largest percentage decline, with an average annual decrease of 5%.

Of all provinces, only British Columbia and Saskatchewan recorded annual surpluses in trade with the EU for each of the ten years under study. The trade surplus in British Columbia was just over $1.8 billion in 1995 and has been deteriorating throughout the period. By 2004, the balance had shrunk to $367 million. In Saskatchewan, there was little variation in the trade balances over the period, with most coming in at around the $500 million mark. This difference in variation between the two provinces is attributable to the different commodities that make up the bulk of trade from the provinces. In British Columbia, imports were driven by the manufacturing based commodities, and exports by the more volatile resource commodities, while in Saskatchewan, the main engine of exports were resource industries and imports were spread evenly across commodities.

Prior to 2000, Ontario recorded the largest trade deficit with the EU. This trade deficit was concentrated in the manufacturing sector, specifically, machinery and equipment. While Ontario's exports of machinery and equipment to the EU have changed little from 1995 to 2004, staying at around the $1 billion level, imports from the EU have increased considerably. In 1995 Ontario imported approximately $2 billion of this commodity and by 2004, imports had jumped to over $3.5 billion. The result is an average annual increase of 6.5%.

Footnotes

1. The term 'annual average' used in the text refers to a compound annual average.

2. Diamonds: Adding luster to the Canadian economy, Publication # 11-621-MIR2004008, Statistics Canada. January 2004.