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Canada's State of Trade: Trade and Investment Update – 2009

IV. Overview of Canada's Trade Performance

The 2008 trade year was characterized by strong expansion at the beginning of the year. However, as financial turmoil expanded as the year progressed and a global economic downturn became entrenched, trade began to weaken towards the end of the year.

Canada exported $557.9 billion worth of goods and services in 2008 compared to $530.3 billion in 2007. Goods exports reached $489.9 billion, the result of strong price increases, as volumes fell 7.7 percent. Trade values were greatly influenced by rising commodity prices. Strong commodity prices also affected the value of the Canadian dollar, keeping it at near parity with the US dollar over the first half of the year. However, price increases were limited to the first three quarters of 2008, and fell in the final quarter as the economic crisis began to take hold. Services exports also posted a small gain in 2008, rising to $68.0 billion.

Goods and services imports into Canada reached $533.3 billion last year, up from $501.5 billion in 2007. Both goods and services posted separate increases, reaching $442.7 billion and $90.5 billion, respectively. Growth in goods imports was confined to the first three quarters of the year. Imports decreased in the fourth quarter because of volume declines. Import prices, which rose over the first three quarters in part because of rising commodity prices, increased in the fourth quarter, aided by the rapid depreciation of the Canadian dollar.

The following sections examine the performance of Canada's goods and services trade, starting with an overview of the developments in goods and services trade with major partners9 ,followed by examinations of goods trade and of services trade, and ending with a brief explanation of the current account balance.

Goods and Services

The value of Canadian exports of goods and services to the world climbed 5.2 percent last year, with prices for natural resources, especially energy, playing a central role in this performance. Goods exports led the gains, expanding by 5.8 percent, while services exports grew by 1.1 percent (Table 4-1). However, imports of goods and services outpaced exports by a fair margin, advancing 6.3 percent, with goods again leading the gains, growing by 6.7 percent, while services imports gained 4.7 percent. With total imports of goods and services expanding faster than total exports, the total trade balance for Canada narrowed by $4.2 billion to $24.7 billion in 2008. The bulk of the decline, some $3.4 billion, was experienced on the services side, where the deficit expanded to $22.5 billion. The surplus on the goods side narrowed by $0.9 billion to $47.2 billion.

Table 4-1a
Canadian Goods and Services Trade by Major Partners, 2008
Rest of World$84,810,000,00015.2%12.1%$124,415,000,00023.3%13.0-$39,605,000,000
Table 4-1b
Canadian Goods Trade by Major Partners, 2008
Rest of World$68,458,000,00014.0%16.8%$103,807,000,00023.4%14.1-$35,350,000,000
Table 4-1c
Canadian Services Trade by Major Partners, 2008
Rest of World$16,352,000,00024.0%-4.0%$20,608,000,00022.8%7.7%-$4,255,000,000

Source: Statistics Canada CANSIM Table 376-0001.

Exports and imports of goods and services to and from all major markets (the United States, the EU, Japan, and the rest of the world) increased, with the exception of imports of goods and services from Japan, which declined (Figures 4-1 and 4-2).

Figure 4-1
Exports of Goods and Services by Major Area, 2003-2008

Exports of Goods and Services by Major Area - Text Alternative

Source: Statistics Canada

Figure 4-2
Imports of Goods and Services by Major Area, 2003-2008

Imports of Goods and Services by Major Area - Text Alternative

Source: Statistics Canada

The Canadian dollar held up fairly well against the U.S. dollar over a good part of the year, placing pressure on exporters. With the U.S. economy already in recession in 2008 (see Chapter 3), it is not surprising that growth in Canada's trade with the United States lagged growth in its trade with the rest of the world. Canada's exports of goods and services to the United States grew by 3.8 percent last year, while imports grew by 4.6 percent (Figure 4-3). Notwithstanding slower growth, there was an absolute increase in exports, and Canada managed to widen its trade surplus with the United States by $0.5 billion to $74.7 billion in 2008. The United States is the only major trading partner with which Canada maintains a trade surplus. Moreover, that surplus was sufficiently large in 2008 to offset deficits with the other major trading partners and permit Canada to maintain an overall trade surplus with the world.

Figure 4-3
Growth in Exports and Imports of Goods and Services by Major Area, 2008

Growth in Exports and Imports of Goods and Services by Major Area - Text Alternative

Source: Statistics Canada

Diversification of Canada's Trade

Over the past five years, Canada's trade has become steadily more diversified. The share of the United States in Canada's trade has fallen sharply over 2004-2008, down 5.3 percentage points to 67.8 percent of total trade. The decline has been steeper on the export side (down 5.5 percentage points) than on the import side (down 4.7 percentage points). Nonetheless, the U.S. is Canada's largest trading partner by far. Japan's share in the total has also declined, as a result of slower growing imports. The EU has gained share, principally on the export side. The biggest gainer in share has been the non-OECD countries, who now account for 13.9 percent of total Canadian trade, up 3.6 percentage points over the past five years.

Regional Shares of Canada's Trade in Goods and Services, 2004 and 2008
 2004 Exports2008 Exports2004 Imports2008 Imports2004 Total Trade2008 Total Trade
Other OECD3.6%4.6%5.8%6.0%4.6%5.2%

Total exports to the EU grew by 3.1 percent in 2008, as weak growth in goods exports and declining services exports to the U.K. limited the gains. On the other hand, total imports from that region increased at the much faster rate of 6.8 percent, resulting in a $2.4 billion widening of the bilateral trade deficit, to $9.5 billion. This result erased some 60 percent of the $3.9 billion improvement in the deficit registered in 2007.

The deficit in goods and services trade with Japan fell nearly $2.9 billion to below the $1 billion mark ($943 million) in 2008. Imports of goods fell 3.0 percent while imports of services fell by 19.4 percent, for a combined decline in total imports of 6.5 percent. At the same time, 16.5 percent growth in Canadian exports to Japan represented Canada's strongest export performance among all its major partners recorded in the Balance of Payments. Goods exports to Japan jumped 18.9 percent while services exports edged down 0.2 percent.

Canada's trade with the rest of the world (i.e., the world excluding the United States, the EU, and Japan) was highly robust in 2008. Despite a 4.0 percent decline in services exports, total exports of goods and services advanced 12.1 percent while imports climbed 13.0 percent. The net result was a $5.1 billion widening of the trade deficit with this region, to $39.6 billion.

Sales Abroad by Canadian Foreign Affiliates

Sales abroad by affiliates of Canadian companies are an important means by which Canadian companies engage in international business and are equivalent to almost 85 percent of the value of exports of goods and services. The most recently released data shows growth in Canadian foreign affiliate sales outpacing growth in exports, by a growing margin. Canadian foreign affiliate sales grew in 2006 by over 6 percent, while exports, under pressure that year from the high dollar and other factors, grew less than 1 percent. Growth in sales has been strongest for affiliates located in non-OECD1 countries: a 40 percent jump in the global sales of these affiliates in 2006 brought the value of their sales to almost the same level as sales of affiliates in the EU. Meanwhile, the share of Canadian affiliate sales in the U.S. has declined to just over half of global Canadian affiliate sales. This pattern reflects stronger growth in recent years in Canadian direct investment in the non-OECD countries than in the United States, as well as the effect of the appreciation of the Canadian dollar on sales converted from U.S. dollars.

Sales of goods and services by majority-owned foreign affiliates of Canadian businesses rose to $441 billion in 2006. This was an increase of $26 billion (or 6.4 percent) over the previous year, the third consecutive annual increase following three years of decline. It brought total sales to their highest level since foreign affiliate trade statistics were first compiled in 1999.

Sales for both goods-producers and services producers advanced, with goods sales outpacing services sales (Figure 1). Strong growth in the mining and oil and gas extraction sector was the major driver for the expansion among goods producers. Among service producers, strong expansion in the non-bank financial and insurance sector was largely offset by a decline in the information & cultural industries sector - thus limiting the annual percentage growth among service producers to only about half of the rate of expansion in the two previous years.

Figure 1
Foreign Affiliate Sales of Goods and Services

Foreign Affiliate Sales of Goods and Services - Text Alternative

Source: Statistics Canada – Foreign Affiliate Trade Statistics, FATS (Table 376-0061)

Geographic Distribution of Sales and Employment

The share of total sales by affiliates located in the U.S. has declined from 64.3 percent in 1999 to 54.4 percent in 2006 (Table 1). Several factors can explain this development. First, Canadian direct investment abroad (CDIA) has been diversifying away from the United States. Second, the increase of the Canadian dollar relative to the U.S. dollar converts to lower sales values expressed in Canadian dollars. Third, growth in U.S. consumption has slowed in recent years.

Table 1
Geographic distribution of Canadian affiliate sales and employment, 2006
 SalesSales GrowthSales ShareEmploymentEmployment GrowthEmployment Share
United States$240,094,000,00027.0%54.4%595,000-4.8%54.9%
European Union$86,100,000,000-7.1%19.5%225,0001.8%20.8%
Other OECD countries$32,875,000,00010.9%7.5%73,0000.0%6.7%
Non-OECD countries$82,053,000,00040.1%1,806.0%192,00015.0%17.7%

A decline in sales by affiliates in the EU but outside the UK in 2006 caused an overall decline in EU sales, reversing an upward trend from prior years. Consequently, the share of affiliates in the EU in 2006 (19.5 percent) was in fact slightly lower than the 19.6 percent global share registered in 1999.

On the other hand, other OECD and non-OECD countries (the only other two regions outside the U.S. and EU for which foreign affiliate trade data is available) expanded their respective shares of sales over the same period. The combination of a decline in sales in the EU and a 40 percent increase in the sales of affiliates in the non-OECD markets over the previous year led to affiliates in the non-OECD markets capturing a share of foreign affiliate sales (18.6 percent) approximately equal to that of affiliates in the EU.

Canadian-owned foreign affiliates employed 3,000 persons less in 2006 compared with the previous year - reversing an upward trend in the prior years - bringing employment to 1,084,000 (down by 0.3 percent). Led by mining and oil and gas extraction, goods producers increased their employment by 10,000. However, a decline in employment in the information & cultural industries and management of companies constituted the major factors for employment declining by 13,000 among service producers in 2006.

All of the reduction in employment in 2006 occurred in the US, which lost 30,000 jobs over the year. Consequently, over 1999-2006, the share of the U.S. in employment by Canadian foreign affiliates has fallen from over 62 percent to about 55 percent. The EU and non-OECD countries have captured most of the employment share lost by U.S. affiliates of Canadian operations abroad.

Value of Foreign Affiliate Sales Compared to Exports

The recent growth in sales by affiliates in non-OECD markets means that these sales now represent 177 percent of Canadian exports to the non-OECD (Figure 2). Sales by affiliates in the EU are now just under twice the value of exports to the EU. As Canadian firms are much more likely to serve the U.S. market through exports than through affiliate sales, sales by affiliates in the U.S. total much less than Canadian exports to the U.S., but the percentage rose slightly in 2006 to just over 60 percent, as growth in affiliate sales outpaced export sales growth.

Figure 2
Foreign Affiliate Sales as Share of Total Exports (percent of Goods and Services Exports, 2006)

Foreign Affiliate Sales as Share of Total Exports - Text Alternative

Source: Statistics Canada – FATS (Table 376-0061), Balance of Payment (Table 376-0001)

1. Non-OECD refers to countries outside the EU, which are not members of the OECD.

Goods Trade

Goods comprise the largest component of trade, being more than seven times as great as services on the export side and about five times as great on the import side. Exports of goods expanded by 5.8 percent, to $489.9 billion in 2008, which amounted to a $26.9 billion increase over the 2007 level. The gains were widespread as exports to all major trading partners increased.

Slightly more than half of the overall gain in goods exports came from increased exports to the United States, which grew by 3.9 percent ($13.8 billion) for the year. Exports expanded over the first three quarters, but retracted sharply in the fourth quarter, falling 12.2 percent ($11.9 billion) compared to the third quarter. For the year as a whole, goods exports to the United States reached $369.9 billion.

With respect to Canada's overall increase in goods exports, the rest of the world category was next in importance. Exports to this region were up strongly—by 16.8 percent ($9.8 billion) to $68.5 billion—and accounted for just over a third of the total increase in goods exports.

Higher exports to Japan—up 18.9 percent ($1.9 billion)—and to the EU—up 3.4 percent ($1.3 billion)—accounted for the remaining gains.

Goods imports expanded by 6.7 percent ($27.7 billion) to $442.7 billion in 2008. As with exports, the United States and the rest of the world accounted for most of the gains, with smaller contributions from the remaining major trading partners. In contrast, with respect to imports, the largest gain came from the rest of the world, followed by the United States. Goods imports from the rest of the world increased by $12.8 billion to reach $103.8 billion, while goods imports from the United States rose by almost $11.0 billion to $280.7 billion.

Next in importance was the EU: imports from that region increased by $4.3 billion, to $46.6 billion. Imports of goods from Japan fell $0.4 billion in 2008, to limit the overall gains.

Notwithstanding the sizeable increase in exports to the United States last year, the U.S. share of Canada's total goods exports fell to 75.5 percent from 76.9 percent the previous year. Nonetheless, the United States remains the principal export destination by far for Canadian goods exports, followed by the rest of the world at 14.0 percent (up 1.3 percent), the EU at 8.1 percent (down 0.2 percent) and Japan at 2.4 percent (up 0.3 percent). On the imports side, the United States accounted for 63.4 percent of total goods imports (down 1.6 percent), followed by the rest of the world at 23.4 percent (up 1.5 percent), the EU at 10.5 percent (up 0.3 percent), and Japan at 2.6 percent (down 0.3 percent).

With goods imports advancing more than goods exports, the goods trade balance narrowed slightly by $0.9 billion to $47.2 billion in 2008. Over the past several years, Canada has traditionally run a surplus in its goods trade balance with the United States and deficits with all other major trading partners. However, last year that changed when Canada registered a small goods trade surplus of $0.3 billion with Japan.

Sectoral Performance of Goods Trade10

The effects of the strong price increases that dominated commodity markets over much of 2008 are reflected in the trade performance of the resource-based sectors—increases in exports were restricted to energy products, industrial goods and materials11, as well as to agricultural and fishing goods. The gain in exports was price driven as volumes fell 7.7 percent in 2008 compared with a year earlier (Figure 4-4). Export prices started declining in the second half of the year as commodity prices began to fall and the economic downturn set in.

Figure 4-4
Growth in Goods Exports by Major Groups, 2008 (annual percent change)

Growth in Goods Exports by Major Groups - Text Alternative

Exports of energy products rose 37.2 percent in 2008 compared with a year earlier, totalling $125.7 billion. While the United States continued to be the leading consumer of Canada's energy products, growing demand for coal in the Asia Pacific region boosted energy exports to that area. The supply of coal in the Asia Pacific region was disrupted early in the year because of snow storms and flash floods in that region's principal supply areas. Energy export prices, which rose 36.1 percent over the year, were behind most of the gains. Nonetheless, volumes expanded slightly by 0.8 percent.

Gains in barley, canola, and wheat helped raise exports of agricultural and fishing products by 18.9 percent over 2007 levels. The value of barley exports rose 42.8 percent to $693 million because of increased prices. A resurgence in canola exports was based on demand from the biodiesel industry. A record canola harvest and rising prices led to a 71.3 percent increase in exports to $3.9 billion. Price gains (up 58.6 percent) were also behind the 48.1 percent increase in wheat exports.

Industrial goods and materials recorded their fifth consecutive annual increase, as exports rose 6.3 percent to $111.3 billion in 2008. Nearly two thirds of the gains came from chemicals, plastics, and fertilizers, and metals and alloys. Chemicals, plastics and fertilizers exports advanced 8.2 percent to $35.9 billion, driven by increases in uranium and potash. The increases in potash exports were attributable to rising demand from the United States as well as from India, Brazil, China, and Malaysia.

Metals and alloys exports remained strong in 2008, rising 4.5 percent to $39.9 billion, as both prices and volumes increased. Exports of precious metals flourished because of high demand and rising prices—particularly for gold—on global markets.

Exports of machinery and equipment edged down 0.5 percent in 2008 to $92.9 billion. Decreases in exports of aircraft and other transportation equipment and of other machinery and equipment were attributable to volume declines. The smaller industrial and agricultural equipment machinery sector expanded its exports by 4.9 percent, as both prices and volumes increased.

For the fourth consecutive year, exports of forestry products fell in 2008, down 12.3 percent to $25.7 billion. Over 95 percent of the absolute decline came from lumber and sawmill products. These exports plunged 27.3 percent on weak demand and softening prices. Falling exports of wood pulp were partially offset by a rise in newsprint and paper exports.

In line with weakening consumer demand in the United States, Europe, and elsewhere, consumer goods exports fell 3.0 percent to $18.2 billion in 2008, as volumes fell 3.3 percent.

Exports of automotive products fell 21.0 percent in 2008 from a year earlier, to $61.1 billion. These products have been on a downward trend since 2002. The decline was attributable to a drop in volumes, as the economic crisis in the United States depressed car and light truck sales and left auto companies with growing inventories. Exports of passenger autos fell 14.8 percent, and exports of trucks and motor vehicle parts also declined (by 44.4 percent and 18.7 percent, respectively).

On the import side, most sectors recorded increases in 2008 (Figure 4-5). The growth was attributable to a combination of higher prices and volumes: prices advanced 6.2 percent over the year while volumes were up 0.5 percent. The increase in prices was a result of rising commodity prices in the first half of the year and the depreciating value of the Canadian dollar compared with the U.S. greenback in the latter half of 2008.

Figure 4-5
Growth in Goods Imports by Major Groups, 2008 (annual percent change)

Growth in Goods Imports by Major Groups - Text Alternative

Imports of energy products grew for the sixth consecutive year, increasing 44.9 percent to $53.0 billion as both prices and volumes rose.

Leading the gain was crude petroleum, which benefited from rising prices in the first three quarters of the year when imports increased 44.4 percent to $34.2 billion. Imports of petroleum as well as coal and other related products also increased due to a combination of prices and volumes. Also contributing to the rise in energy product imports were gasoline, diesel fuel and aviation fuel, as prices for refined petroleum experienced a strong increase over the first half of the year. Natural gas imports from the United States also rose in 2008.

Rising prices and increased demand led to an 11.8 percent increase in imports of agricultural and fishing products. Imports of fruits and vegetables were up by 8.8 percent last year, while those for other agricultural and fishing products advanced by 13.0 percent.

Rising prices for most of the year were behind the 7.6 percent gain in industrial goods and materials imports in 2008, as the volume of goods imported declined. Contributing to the growth was the increased value of precious metals and alloys imports, which increased by 30.6 percent to $5.5 billion, as the price of gold strengthened last year.

Metals and metal ores benefited from high prices in 2008. Prices were up 12.7 percent, while volumes advanced only marginally. The increases in prices and volumes led to a 13.3 percent increase in the value of metals and metal ore imports.

Imports of chemicals and plastics also increased, rising 4.6 percent to $31.6 billion. Much of the increase is attributable to the importation of active agents used in the production of various medications.

Imports of forestry products slipped from $3.0 billion to $2.9 billion in 2008, due to weaker demand and falling prices.

Consumer goods imports advanced on the strength of both price and volume increases. Demand for apparel and footwear products led the gains as volumes advanced 5.2 percent while those for other consumer goods increased by a more modest 2.1 percent. Prices for consumer products imports increased by 2.2 percent last year.

Finally, imports of automotive products declined 10.1 percent from a year earlier to $72.0 billion, halting four years of increases. Motor vehicle parts led the decline, falling 14.9 percent, partly due to a strike at a U.S. parts producer early in the year and a weak sales environment.

Imports of trucks and other motor vehicles dropped 13.5 percent, as rising gas prices in the first half of the year led to a slowdown in sales. Imports of passenger autos also slid on declining prices.

Services Trade

In 2008, Canadian services exports grew 1.1 percent to $68.0 billion while services imports increased 4.7 percent to $90.5 billion, yielding a services trade deficit of $22.5 billion for the year. This was $3.4 billion higher than the deficit in 2007. The increase was largely due to a $2.6 billion deterioration in the travel deficit and, to a lesser extent, a $0.8 billion widening in the transportation deficit. The trade deficit for commercial services declined slightly while the trade surplus for government services expanded.

Canada runs services trade deficits with all of its major partners (Table 4-2). The largest is with the United States, at $14.5 billion, followed by the rest of the world, at $4.3 billion. Deficits with the EU and Japan are smaller, at $2.6 billion and $1.2 billion, respectively.

Services Trade by Major Category, 2008

Table 4-2a
All Services
Rest of World$16,352,000,000-$686,000,000-4.0%$20,608,000,000$1,465,000,0007.7%-$4,256,000,000-$2,151,000,000
Table 4-2b
Travel Services
Rest of World$5,025,000,000$306,000,0006.5%$6,945,000,000$548,000,0008.6%-$1,920,000,000-$242,000,000
Table 4-2c
Transportation Services
Rest of World$3,655,000,000$495,000,00015.7%$7,600,000,000$450,000,0006.3%-$3,945,000,000$45,000,000
Table 4-2d
Commercial Services
Rest of World$6,646,000,000-$1,517,000,000-18.6%$5,638,000,000$463,000,0008.9%$1,008,000,000-$1,980,000,000
Table 4-2e
Government Services
Rest of World$1,027,000,000$32,000,0003.2%$425,000,000$5,000,0001.2%$602,000,000$27,000,000

Propped up by a relatively strong currency over much of the year, Canadian travel expenditures abroad grew by 8.2 percent in 2008. At the same time, foreign travel spending in Canada fell 2.5 percent, causing the widening in the travel deficit. Expenditures in the United States, which account for about 57.0 percent of total spending abroad, grew by 8.3 percent, while outlays in the EU and the rest of the world increased by 7.8 percent and 8.6 percent, respectively, and fell 2.5 percent for Japan. A 6.5 percent increase in spending by visitors from the rest of the world only partly offset a 7.7 percent decline in spending by U.S. visitors. European and Japanese visitors also reduced their spending in Canada last year compared with 2007.

Transportation services exports rose 7.1 percent last year. Exports to all major partners were up, led by the rest of the world (up 15.7 percent). However, the trade deficit increased in this category as imports of transportation services advanced at a faster pace (8.4 percent) than exports. Again, imports were up with all major partners, in this case led by the United States (up 12.4 percent).

Canada's commercial services trade is dominated by trade with the United States. In 2008, that country accounted for 64.1 percent of exports and 67.9 percent of imports in this category. Canadian trade in commercial services with the United States grew strongly last year, as exports to the United States increased by 6.6 percent and imports from that country rose by 5.4 percent. In contrast, commercial services trade with Canada's other partners fell, with exports dropping by 9.2 percent and imports by 8.6 percent. Small increases in exports to the EU and Japan were completely offset by an 18.6 percent fall in exports to the rest of the world. The opposite held true for imports, where large declines in imports from the EU and Japan (16.9 percent and 25.1 percent, respectively) were offset by increases in imports from the rest of the world.

With respect to travel services, the bulk of the deterioration in the deficit arose from falling exports in personal travel (down 3.9 percent) and a 10.0 percent rise in imports. Personal travel accounted for over 80 percent of both exports and imports of travel services. Business travel exports expanded 4.0 percent while imports fell 1.3 percent last year, to limit the growing deficit in overall travel services.

Within transportation services, exports were about $7.9 billion lower than imports in 2007. The deficit widened in 2008 as export growth lagged import growth. Canada registered deficits in water and air travel and a slight surplus in land travel and other modes of transportation. In 2008, water transportation advanced the fastest as exports rose by 15.3 percent while imports climbed by 14.1 percent. Imports and exports in air transportation each grew by 4.9 percent. For both water and air modes, export values were about half that of imports, so the absolute increases in exports were lower than for imports and the trade deficits for these two sub-categories widened. For land and other modes of transportation, a small increase in exports of 0.4 percent ($12 million) was less than the 1.5 percent increase in imports ($35 million), causing a small reduction in the $1.0 billion surplus in this category.

Performance was very mixed in commercial services with five of eleven sub-categories registering increases and the other six registering declines for both exports and imports, although not necessarily in the same sub-categories. As noted above, there was a small $49 million deterioration in the overall commercial services trade deficit in 2008.

Commercial services exports increased 0.4 percent ($130 million) last year as declines in management services (down 6.9 percent), other financial services (down 6.6 percent), royalties and licence fees (down 5.1 percent), communications services (down 4.9 percent) and computer and information services (down 4.0 percent) were completely offset by increases in construction services (up 64.8 percent), architectural, engineering, and other technical services (up 13.8 percent), research and development (up 9.6 percent), and audio-visual services (up 7.3 percent).

On the import side, increases that were largely centred on royalties and licence fees (up 9.8 percent) and management services (up 5.5 percent) were only partially offset by declines in other financial services (down 15.1 percent), computer and information services (down 11.9 percent), and research and development (down 9.6 percent). Overall, imports of commercial services in 2008 increased by 0.5 percent ($179 million) over 2007 levels.

It is notable that in the midst of the financial turmoil that characterized 2008, trade activities in finance and related services fell off, as credit conditions tightened and it became increasingly difficult to assess the risks associated with a variety of financial instruments. In 2008, aggregate exports for the insurance services and other financial services subcategories fell by $187 million while imports dropped by $603 million.

The Evolution of Canada's Trade Surplus

Of the seven major categories of goods, three products— agricultural and fishing products, forestry, and energy products—have consistently posted trade surpluses since 1990 and remain in surplus, while two other products—machinery and consumer goods—have always posted trade deficits. Industrial goods and materials have posted growing surpluses since 2002, although that surplus levelled off in 2008. Automotive products were in surplus until 2007 after which they went in into a deficit position that widened sharply in 2008. Canadian exports of automotive products have fallen for four straight years while imports continued to grow until 2008 when they finally turned downwards.

Trade Balance by Major Groups: 1990-2008

Trade Balance by Major Groups - Text Alternative

The Current Account

The current account records the flow of transactions between Canada and its commercial partners. The largest component of these transactions comprises the exchange of goods and services, as discussed above. The remaining two components of the current account capture the flow of payments and receipts of investment income and current transfers. In 2008, the current account balance narrowed by $3.4 billion to $10.2 billion. Although a surplus was recorded for the year, a deficit of $7.5 billion (on a seasonally adjusted basis) was recorded in the fourth quarter of 2008, the first deficit since the second quarter of 1999.

Goods and services accounted for all of the decline in the overall surplus in 2008, led by a wider deficit in services trade, most notably for travel. At the same time, the goods surplus continued to shrink, as imports rose more than exports.

There was a slight improvement in the investment income deficit, as it narrowed by $0.2 billion to $14.0 billion. A large drop in profits earned by Canadian direct investors was mostly offset by lower interest paid on banking positions. The deficit in current transfers contracted by $0.7 billion to $0.4 billion, down from $1.1 billion in 2007.

Intra-firm Trade Between Canada and the United States

The share of Canada-U.S. trade in goods that is intra-firm that is, trade that takes place between related firms operating on both sides of the border 1—has been steadily declining since the beginning of the 1990s. This suggests that the implementation of the Canada-U.S. FTA (1989) and NAFTA (1994), by facilitating cross-border trade, has lessened the need for U.S. and Canadian firms to have a presence across the border in order to do business. In other words, in a free trade environment supply chains can be built up reliably between unrelated companies. The influence of these two agreements on reducing intra-firm trade between the United States and Canada is further suggested by the much higher share of intra-firm trade between the United States and its other trading partners in the developed world. It is also notable that almost 90 percent of intra-firm trade between the United States and Canada takes place between U.S. parent companies and their affiliates, while the trade between Canadian parents and their subsidiaries is much smaller. In 2006, the latest year for which data is available, 28.7 percent of Canada-U.S. trade in goods was intra-firm, down from over 40 percent in the early 1990s. This was equivalent to bilateral trade of US$153.9 billion2 in both directions. Although the share of Canada-U.S. intra-firm trade has decreased, its value has doubled since 1990. The fact that bilateral trade in goods between Canada and the United States tripled over the same period explains the drop in the share of intra-firm trade.

In 2006, about 31.0 percent of all Canadian goods exports to the United States were intra-firm, while just over a quarter (25.6 percent) of Canadian goods imports from the United States were intra-firm. The bulk (87.5 percent) of intra-firm trade involves goods traded by U.S. parent companies rather than Canadian parent companies, and about half of this trade between U.S. parents and their Canadian affiliates was in transportation equipment. More than 80 percent of Canadian intra-firm exports involved Canadian affiliates exporting to their U.S. parents, while only 17.2 percent of Canadian intra-firm exports were shipped by Canadian parents to their U.S. subsidiaries. On the imports side, 95.2 percent of Canadian intra-firm imports involved Canadian subsidiaries importing from their U.S. parents, while only 4.8 percent of Canadian intra-firm imports involved U.S. affiliates shipping back to their Canadian parents.

Some 72.4 percent of Canada-U.S. intra-firm trade was in the manufacturing sector in 2006, down from 79.6 percent in 2000. The manufacturing sector is comprised of transportation equipment, chemicals, machinery and equipment, and other manufacturing. Almost half the overall Canada-U.S. intra-firm trade was in transportation equipment, primarily motor vehicles. The declining importance of intra-firm trade within the transportation equipment sector is responsible for much of the decline in the total share of intra-firm trade between Canada and the United States.

Share of Canadian Trade in Goods with the U.S. that is Intra-firm

Share of Canadian Trade in Goods with the U.S. that is Intra-firm - Text Alternative

Source: Office of the Chief Economist, DFAIT

Data: U.S. BEA

Canada-U.S. Intra-Firm Trade by Industry (2006)

Canada-U.S. Intra-Firm Trade by Industry - Text Alternative

Source: Office of the Chief Economist, DFAIT

Data: U.S. BEA

In 2006, wholesaling accounted for a significant share of intra-firm trade (16.7 percent); its share has been stable in recent years. Mining and "all other industries" together accounted for just over 10 percent of total Canada-U.S. intra-firm trade.

Share of Trade with the U.S. that is Intra-firm (2006)

Share of Trade with the U.S. that is Intra-firm - Text Alternative

Source: Office of the Chief Economist, DFAIT

Data: U.S. BEA

Among G7 countries, Canada had the second-lowest share of intra-firm trade with the U.S., after Italy. Japan had by far the highest share of intra-firm trade with the U.S. (89.1 percent), followed by Germany (66.3 percent). Japan's large share underscores the importance of wholesale trade affiliates, which accounted for nearly three quarters of Japan-U.S. intra-firm trade. The U.K.'s and France's shares were 52.2 percent and 42.8 percent, respectively. Notwithstanding its relatively smaller share, the absolute value of Canada's intra-firm goods trade with the United States is not small, but rather comes second only to that between Japan and the United States because of the sheer size of Canada-U.S. trade.

1 For a more detailed explanation of intra-firm trade, see Canada's State of Trade, Trade and Investment Update - 2008, p.44.

2 Data comes from the U.S. Bureau of Economic Analysis and covers the operations of foreign multinationals in the U.S. and U.S. multinationals abroad.

9. "Major partners" is a term used in the Balance of Payments (BOP) to break out international transactions at a more detailed partner level than the aggregate, or total, all-countries level. Within this chapter, the major partners comprise the United States, Japan, the European Union, and the rest of the world (ROW).

10. This section is based on analysis included in Statistics Canada Catalogue 65-208-X (2009), International Merchandise Trade, Annual Review 2008.

11. Industrial goods and materials comprise metal ores, chemicals, plastics, fertilizers, metals and alloys, and various other basic products and materials.