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Canada's State of Trade: Trade and Investment Update 2011

IV. Overview of Canada’s Trade Performance

Canada’s trade in goods and services followed a path quite similar to that for world trade described earlier. That is to say, there was a rebound, but trade values remained below their 2008 peak levels. Moreover, like global trade, the gains were mostly attributable to increased volumes, while price growth was weak. In fact, import prices into Canada declined last year due to the appreciation of the Canadian dollar.

On the export side, advances were led by industrial goods, driven by strong demand and commodity prices. Both automotive products and forestry products registered their first increases in exports since 2004. However,machinery and equipment exports were down for the third consecutive year. Gains in services exports were widespread.

With Canada having weathered the global recession better thanmost of its counterparts in the advanced economies, it was better positioned to absorb imports. Imports rose as global activity picked up, bolstered by businesses restocking inventories that were depleted during the recession. Consumers also contributed to the rebound, particularly for automotive products.

In 2009, Canada registered its first trade deficit in 15 years; in 2010, the trade deficit widened by $4.6 billion.

The increase in the shortfall between exports and imports on the trade side further widened the current account deficit, which moved to a $50.0-billion deficit last year froma $43.5-billion deficit a year earlier. The increase in the trade deficit accounted for about three quarters of the deterioration in the current account balance, with the bulk of the remainder coming from an increase in the investment income deficit.

Goods and Services

In line with the global recovery, Canadian exports of goods and services to the world rebounded 8.7 percent ($38.0 billion) to $474.6 billion in 2010. At the same time, Canada’s imports of goods and services were up 9.2 percent ($42.6 billion) to $506.5 billion (Table 4-1). As such, the trade deficit widened to $31.9 billion, the second consecutive trade deficit registered by the country after a 15-year string of trade surpluses. The $4.6-billion deterioration in the balance last year followed the massive $51.2-billion decline of the year before.

For 2010 as a whole, Canadian 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 (ROW)—increased (Figures 4-1 and 4-2).

Table 4-1
Canadian Goods and Services Trade by Region, 2010 ($ millions and annual percent change)
 Exports of Goods and ServicesImports of Goods and ServicesG&S
20102010 share% growth over 200920102010 share% growth over 20092010
Rest of World80,80617.06.9127,32825.112.8-46,522
Table 4-1a
Exports and Imports of Goods by Region, 2010 ($ millions and annual percent change)
 Exports of GoodsImports of GoodsGoods Balance
20102010 share% growth over 200920102010 share% growth over 20092010
Rest of World62,04815.38.1103,25825.015.1-41,210
Table 4-1b
Exports and Imports of Services by Region, 2010 ($ millions and annual percent change)
 Exports of ServicesImports of ServicesServices Balance
20102010 share% growth over 200920102010 share% growth over 20092010
Rest of World18,75926.83.124,07025.83.8-5,311

Source: Statistics Canada CANSIM Matrix 376-0001.

Figure: 4-1
Canada’s Exports of Goods and Services by Major Area, 2006-2010

Canada’s Exports of Goods and Services by Major Area, 2006-2010 Text Alternative

Source: Statistics Canada.

The gains in goods and services exports were led by Japan, the EU and the United States, with advances of 10.5 percent, 10.4 percent, and 8.8 percent, respectively. Overall, Canadian exports to the United States increased by $27.1 billion to $333.6 billion in 2010, to account for 70.3 percent of total exports of goods and services. This was up from a 70.2-percent share the previous year. Similarly, the EU increased its share in total exports to 10.4 percent last year compared to 10.2 percent in 2009. Exports to the EU advanced $4.6 billion to $49.2 billion last year. Exports of goods and services to Japan were up $1.0 billion to almost $11.0 billion, or 2.3 percent of total exports.With the shares of United States, the EU and Japan increasing, the share of the ROW fell. The ROW comprises all remaining OECD countries not already mentioned (i.e., those OECD countries apart from the United States, the EU and Japan) and all non-OECD countries. The ROW accounted for 17.0 percent of total Canadian exports (or $80.8 billion) in 2010, down from 17.3 percent a year earlier.

For imports, the situation was much the opposite. The exception was Japan, whichmanaged to hold its 2.3-percent share of total Canadian imports. Imports of goods and services from the United States and the EU increased, albeit at a slower pace than the 9.2 percent registered for overall imports. Hence both economies lost share. The U.S. decline was marginal, down from 61.7 percent to 61.6 percent, as Canada’s imports from the United States were up 9.0 percent last year. For the EU, where Canadian imports only increased by 2.4 percent in 2010, the share drop was somewhat larger, falling 0.7 percentage point to 10.9 percent last year. Picking up share in total Canadian imports was the ROW, as imports from that region were up 12.8 percent over the year. As a result, the share of the ROW in Canada’s overall imports increased from 24.3 percent to 25.1 percent in 2010.

Figure: 4-2
Canada’s Imports of Goods and Services by Major Area, 2006-2010

Canada’s Imports of Goods and Services by Major Area, 2006-2010 Text Alternative

Source: Statistics Canada.

The $31.9-billion trade deficit in goods and services in 2010 was some $4.6 billion more than the $27.2 billion registered in 2009. Improvements in the trade balance for the United States, the EU and Japan were more than offset by an enlarging trade deficit with the ROW.

Exports to and imports from the United States grew at a similar pace last year to the previous year, leading to a $1.2-billion increase in the bilateral trade surplus. For Japan, it was a case of faster-growing (but smaller) exports expanding a bit more than slower-growing (but larger) imports as the trade deficit with that country narrowed by $32 million to $786 million. With the EU, fast-growing exports (up 10.4 percent) outpaced slow-growing imports (up 2.4 percent) to narrow the bilateral trade deficit by $3.3 billion to $6.1 billion. However, offsetting these gains was a $9.2-billion deterioration in Canada’s trade balance with the ROW. Canada exports less to this region than it imports: in 2010, growth in Canadian exports to the region, at 6.9 percent, was considerably lower than the 12.8-percent pace of imports into Canada from the region. This resulted in a widening of the bilateral trade balance. Thus, the $4.6 billion in gains to the trade balance with the United States, the EU and Japan offset the $9.2-billion deterioration in the trade balance with the ROW to yield the $4.6-billion net increase in the overall 2010 trade deficit.

Goods Trade

Much of the recovery in total trade (some 92.2 percent) came fromthe goods side. This is because goods constituted a much larger share of total exports and grew faster than services last year (9.5 percent versus 4.4 percent). This can partly be explained by the smaller decline in services during the recession in 2009 (down 6.9 percent compared to 24.6 percent for goods), which implies less need for faster-than-average growth to catch up to earlier trends.

The largest increase in goods exports occurred with the United States. Exports to Canada’s southern neighbour were up $25.3 billion out of the overall $35.0-billion expansion in goods exports last year. At the same time, some $23.3 billion more in imports (out of a total increase of $39.0 billion for all imports) flowed into Canada from the United States. With exports up more than imports, the goods trade surplus with the United States widened by $2.0 billion to reach $36.9 billion in 2010.

Next in importance in terms of the gains in goods trade for Canada in 2010 was the rest of the world (ROW) region. This region represented roughly half the remaining gains, apart fromthose accounted for by the United States. Canada’s exports of goods to the ROW grew 8.1 percent in 2010, to $62.0 billion, a $4.6-billion increase over the previous year. However, imports of goods fromthe region were up evenmore (advancing 15.1 percent, or $13.5 billion) to $103.3 billion. This difference generated an $8.9-billion widening of the overall trade deficit with the region.

Canadian exports of goods to the EU registered the strongest growth of all the regions last year, rising 13.4 percent ($4.3 billion) to $36.4 billion. At the same time, imports of goods from the EU posted the weakest growth at 3.9 percent ($1.5 billion) to $40.3 billion. With these developments, Canada’s trade deficit in goods with the EU retreated to $3.9 billion last year.

Lastly, goods exports to Japan grew slightly faster than the rate of goods imports in 2010, up 9.5 percent compared to 7.3 percent for imports. As a result, goods exports reached $9.7 billion while imports attained $10.0 billion, and the deficit narrowed to $303 million from $462 million in 2009.

Sectoral Performance of Goods Trade

While trade levels reboundedmodestly from the unusually large drop registered in 2009, they remained below pre-recession levels at the close of 2010. A closer examination of trade by the major sectors reveals that not all of the weakness on the export side was related to the recession—some of it reflects longer-termstructural changes. On the other hand, imports in certain sectors fully recovered while most other sectors approached their pre-recession peaks. The exception was the price-sensitive energy sector, which remained far below the heights reached just a few years back when the price of crude petroleum hit US$150 a barrel.

The overall 9.5-percent rise in Canadian goods exports in 2010 was the result of rising volumes and modest price increases.1 Export volumes rose 8.3 percent over 2009 levels, while export prices advanced 1.1 percent. Notwithstanding these gains, the value of exports remained below those levels registered over the years 2004 through 2008.

Industrial goods and materials became Canada’s largest export sector last year, as exports rose 21.9 percent, or $17.4 billion, to $96.5 billion. At this level, the sector accounted for 23.9 percent of total Canadian goods exports. Metals and alloys led the advances (up 39.8 percent to $39.2 billion) along with metal ores (up 26.0 percent to $13.0 billion). Higher prices were behind much of the gains for metal ores, while price and volume increases were responsible for the gains in metals and alloys. The price gains were particularly strong for nickel, copper and zinc—for both ores and metals. A mix of price and volume gains also helped raise the levels of chemicals, plastics and fertilizers exports, which advanced 17.6 percent to $30.1 billion. For fertilizers, strong volume increases offset an 18.8-percent fall in prices to help pull exports up by 29.4 percent, by value.Miscellaneous industrial goods and materials accounted for the remainder of the increase in industrial goods and materials, with exports up some 13.4 percent. Declines in asbestos and other non-metallic mineral basic products limited the export gains in this category.

Lower price hikes and virtually stagnant volume growth were behind the smaller increase in energy products, as energy slipped from the largest export category in 2009 to the second spot last year. Overall, energy exports were up 13.5 percent to $90.7 billion in 2010. Prices for crude oil recovered somewhat in 2010 after a 31.2-percent correction the previous year. However, a 1.8-percent decline in the volume of exports partly offset the price increases. A 3.0-percent increase in the volume of natural gas exports was not enough to offset a 4.9-percent decline in natural gas prices and resulted in a 2.1-percent decline in the value of natural gas exports.

Machinery and equipment exports fell for a third consecutive year, down $4.5 billion, or 5.5 percent, to just under $76.0 billion. This was nearly 20 percent off the peak export level registered in 2007. Losses were widespread throughout the category. Over 40 percent of the losses, or $1.8 billion, occurred in aircraft and other transportation equipment, with the bulk of the decline coming from aircraft. Telecom equipment and office machinery exports both declined in 2010 to account for much of the $1.4-billion loss in other machinery, while industrial equipment and agricultural machinery exports fell $1.2 billion as exports of both of the principal groups that make up this category declined.

After five years of declines, exports of automotive products reversed the trend and registered an increase. Exports were up $13.0 billion, or 29.6 percent, to $56.8 billion. Most of the gains came frompassenger vehicles, with exports up $11.3 billion on the strength of a 55-percent increase in the volume of automobiles exported. At the same time, exports of auto parts were up by over a fifth in value terms and by over a quarter in volume terms. It was the first increase in parts exports after seven straight years of declines. Trimming back the gains was a 38.6-percent, or $1.5 billion, decline in truck exports.

Agricultural and fishing products exports fell for the second straight year in 2010, this time down by $329 million, or 0.9 percent, to $36.9 billion. The declines were concentrated in wheat (down $1.4 billion), barley (down $128million), andmeat (down $150 million) while gains were mostly moderate across the other agricultural commodities, with the exception of the other cereal preparations category, which was up $1.1 billion.

As was the case for automotive products, forestry products halted a five-year slide in exports by recording a $2.3-billion increase (12.0 percent) last year. Forestry product exports returned to $21.8 billion in 2010. Exports of pulp and lumber accounted for the gains, up $1.7 billion and $1.3 billion, respectively, while newsprint and other paper exports were off by $0.7 billion.

Also on a downward trend in 2010, exports of other consumer products fell $1.5 billion, or 8.4 percent, to $16.4 billion. This represented the third consecutive annual decline in exports of these products, which include home furnishings, sporting goods, and apparel.

Imports by major product categories were up across the board in 2010. In aggregate, a 4.5-percent decline in import prices combined with a 15.5-percent increase in the volume of imports to raise the value of exports by $39.0 billion, or 10.4 percent, to $413.1 billion.

With the rebound in auto exports, automotive product imports were also on the rise. They were up by $13.3 billion to $68.6 billion, a 24.1-percent gain. Auto parts, some of which were likely used in the production of vehicles that were subsequently exported last year, led the advance, up $5.8 billion. Truck and passenger vehicle imports were also up strongly last year, rising by $4.0 billion and $3.5 billion, respectively.

Imports of industrial goods and materials rose by $11.8 billion, or 15.7 percent, to $86.9 billion. Some 70 percent of the increase was accounted for by metals andmetal ores, which advanced $8.3 billion, led by preciousmetals. The remainder of the gains were fairly evenly split between chemicals, plastics, and rubber (led by plastics) and other industrial goods (wheremetal fabricated basic products were responsible for about half the gains).

Energy imports were up $6.2 billion, or 18.3 percent, to $40.2 billion last year. Petroleum and coal products (up $3.0 billion) and crude petroleum (up $2.3 billion) accounted for most of the increase.

Imports of machinery and equipment, Canada’s largest import category, were up by amodest 5.3 percent, or $5.8 billion, to $113.7 billion. All import categories advanced, except for aircraft and other transportation equipment. Miscellaneous machinery and equipment, particularly communications equipment, led the gains (up $3.7 billion) while imports of aircraft and other transportation equipment declined $1.2 billion.

Forestry products imports had been declining since 2003, but in 2010 that trend reversed and imports increased. Imports of forestry products were up $259 million, or 10.9 percent, to $2.6 billion.Wood fabricated materials accounted for the increase, up $289 million, while imports of crude wood products declined by $31 million last year.

After recording a rare decline in 2009, consumer goods imports resumed growth in 2010, up $237 million, or 0.4 percent, to $57.7 billion. This represented an increase of about 0.3 percent over the pre-recession peak, registered in 2008. Televisions and household furnishings accounted for much of the gains.

Agricultural and fishing products was the only major category to avoid a decline in imports during the 2009 recession and imports continued to expand in 2010. Imports have been continually expanding since 2004 and last year were up $226 million, or 0.8 percent, to $29.6 billion. For the most part, gains were widespread, with notable declines in dried fruits, fruits, and fruit preparations (down $127million), other cereals and cereal preparations (down $125million), and corn (down $101million).

Services Trade

Like goods, trade in services rebounded in 2010 fromthe declines brought about by the recession of the previous year. And like goods, the rebound was not sufficiently robust to recover all of the ground lost. In 2010, services exports rose 4.4 percent to $70.1 billion while services imports were up 4.0 percent to $93.4 billion, resulting in a $23.3-billion deficit for the year, or $646 million more than the deficit posted for 2009. Growing deficits in travel and transportation services along with a small deterioration in the government services balance were only partly offset by the elimination of the commercial services deficit to cause the increase in the deficit.

Regionally, Canada runs trade deficits for services with all of its major partners (Table 4-1). The largest is with the United States ($15.3 billion), followed by the ROW ($5.3 billion) and the EU ($2.2 billion), while that with Japan is the smallest ($0.5 billion). Last year, the increase in the services trade deficit came from a widening of the deficits with the United States, Japan and the ROW, while Canada narrowed its services trade deficit with the EU.

Activity in the travel and tourism sector picked up in 2010. The strong Canadian dollar helped create favourable conditions for Canadians to travel abroad, with the result that Canadian travel expenditures abroad were up 9.7 percent in 2010 (Table 4-2). Both personal travel expenditures (up 9.4 percent) and business travel expenditures (up 11.7 percent) posted strong gains. At the same time, foreign travel spending in Canada also rose, but not by as much as Canadian spending in the outward direction. Foreign personal travel expenditures in Canada were up by 4.5 percent and foreign business travel expenditures in Canada advanced 6.3 percent. The net result was that Canadians increased their travel expenditures abroad more than foreigners increased their expenditures in Canada, causing the travel services trade deficit to widen by $1.9 billion to $14.1 billion.

In line with the recovery in goods trade with allmajor partners, trade in transportation services to all regions was on the rise in 2010. The sole exception was for transportation services imports fromthe EU. This was likely related to the weak increase in goods imports from the EU.

Transportation services exports rebounded by 12.3 percent ($1.2 billion) as exports to allmajor trading partners were up by double-digit figures. Exports of land transport services rose by 8.7 percent, those for water transport by 11.7 percent, and those for air transport by 15.1 percent. Imports of transportation services were also up across the board, except with the EU (down 1.9 percent) as noted above. Overall, imports of transportation services increased 9.4 percent, most notably with the United States (up 16.0 percent). Again, those for land transport posted the slightest rebound (up 6.6 percent); this was followed by air transport (up 9.4 percent) and water transport (up 10.1 percent).

Canada traditionally runs a commercial services trade deficit; however, in 2010, that changed and the country posted its first surplus at $477million. Exports of commercial services advanced 2.5 percent ($1.0 billion) and imports fell 2.3 percent ($0.9 billion), moving the trade balance from a $1.5-billion deficit in 2009 to last year’s surplus. Exports of commercial services were up to all major partners, except to the ROW. At the same time, imports of commercial services were also down across the major partners, with the exception of Japan, where imports were up 40.3 percent. However, because Japan only accounted for 2.2 percent of total commercial services imports, the increase with that country was not sufficient to offset the declines posted with the other trading partners.

Table 4-2
Services Trade by Detailed Sectors, 2009 and 2010 ($ millions and annual percent change)
 20092010growth20092010growth20092010$ change
Total, all services67,14370,0904.489,80793,3994.0-22,664-23,309-645
Business travel2,5282,6876.33,5203,93211.7-992-1,245-253
Personal travel12,99213,5764.524,17226,4509.4-11,180-12,874-1,694
Water transport2,7073,02411.78,6999,57510.1-5,992-6,551-559
Air transport4,4095,07415.18,7189,5359.4-4,309-4,461-152
Land and other transport3,0043,2658.72,2382,3856.6766880114
Commercial services39,68140,6842.541,15440,209-2.3-1,4734751,948
Communication services2,6502,7232.82,0892,2015.4561522-39
Construction services298268-10.1351235-33.0-533386
Insurance services4,3404,283-1.36,4116,289-1.9-2,071-2,00665
Other financial services2,6363,15619.74,0393,468-14.1-1,403-3121,091
Computer & information services4,8735,0413.42,4352,374-2.52,4382,667229
Royalties and licence fees3,6733,7050.98,8018,569-2.6-5,128-4,864264
Management services5,8815,081-13.64,7225,0066.01,15975-1,084
Research and development3,4573,90112.81,185892-24.72,2723,009737
Architect., eng., & oth tech. services4,8765,51313.13,2433,111-4.11,6332,402769
Oth. Misc. services to business4,8614,9672.25,4995,300-3.6-638-333305
Audio-visual services2,1372,044-4.42,3812,76216.0-244-718-474
Government services1,8241,777-2.61,3041,3160.8520461-59

Source: Statistics Canada CANSIM Matrix 376-0035.

In several instances, the combination of rising exports and falling imports led to improvements in the commercial services trade balance. In particular, the trade balance for other financial services improved themost ($1.1 billion), followed by architectural, engineering, and other technical services ($769 million), research and development ($737 million), and other miscellaneous services to business ($305 million). On the other hand, formanagement services and audio-visual services, falling exports and rising imports combined to limit the overall improvement in the trade balance.

The Current Account

The current account records the flowof transactions between Canada and its commercial partners. The exchange of goods and services, as discussed above, is the largest component of these transactions. The remaining two components of the current account capture the flow of payments and receipts of investment income and current transfers.

The current account deficit widened from $43.5 billion in 2009 to $50.0 billion last year, a $6.5-billion deterioration in the balance. The bulk of the decline in the current account balance between 2009 and 2010 came largely from the $4.6-billion widening of the deficit in goods and services trade. The $4.0-billion decline in the goods trade balance accounted for roughly 62 percent of the overall decline in the current account balance, while the $0.6-billion decline in the services trade balance was responsible for another 10 percent.

Canada has always run an investment income deficit. Growth in investment income payments was slightly greater than that for investment income receipts (7.8 percent for payments and 7.1 percent for receipts). As a result, there was an overall $1.5-billion widening in the investment income deficit. Profits earned by Canadian direct investors were up by $7.6 billion in 2010, while dividend and interest receipts to portfolio and other investment holders were down by $2.7 billion and $0.9 billion, respectively. At the same time, Canadian payments to foreign direct investors rose by $5.4 billion and those to portfolio investors increased by $2.4 billion compared to 2009, while payments to other investment holders were down by $2.3 billion.

Current transfers are the smallest of the three main components of the current account. In 2010, current transfer receipts were up $93 million to $8.7 billion while current transfer payments increased to $11.2 billion. The net result was a $290-million increase in the current transfer deficit to $2.4 billion in 2010 from $2.1 billion the previous year.

1 Statistics Canada Catalogue 65 208 X (2011), International Merchandise Trade, Annual Review 2010.