Monday, March 17, 2014

International Trade in Canada

Commodities produced in Canada are exported, i.e., sold to the rest of the world. Likewise, Canada imports, i.e., buy commodities from the rest of world. These transactions with the rest of the world are called international trade. International trade depends on agreements between countries.
Some trade agreements Canada concluded include the North American Free Trade Agreement with the United States (US) and Mexico that came into force on January 1, 1994 and the Canada-South Korea free trade agreement signed on March 11, 2014.

Canada is known as a trading nation since both exported and imported commodities represent more than half of its gross domestic product (GDP). Canada trades most with the US, its southern neighbor.  Commodities that Canada exports most are natural resources. Those it imports most include motor vehicles and parts and consumer goods.   

Canada, a Trading Nation
To measure the importance of trade in a country’s economic activity, Economists use the ratio of the sum of its exports and imports to its GDP. This ratio is called degree of openness to trade. The average degree of openness to trade for Canada is 63.5 versus 25 for the US over the sample period 1997:Q1-2013`Q4.

Figure 1: Degree of Openness to Trade, Canada and the US, 1997:Q1-2013:Q4, Data source: Statistics Canada (Canada), Federal Reserve Bank (US)
Figure 1: Degree of Openness to Trade, Canada and the US, 1997:Q1-2013:Q4, Data sources: Statistics Canada (Canada), Federal Reserve Bank (US)
Over the sample period, Canada’s degree of openness to trade reached a high of 67.15 at the beginning of 2000 and an off-peak of 56.38 in the second quarter of 2009 during the economic crisis.

Figure 2 below plots the evolution of the volume of commodities exported and imported by Canada. Canada’s trade balance is currently adverse, i.e., its imports exceed its exports.  

Figure 2: Commodity Exports and Imports, Volume Indices based on Balance of Payments Data (2007=100), Canada, 1997:Q1-2013:Q4, Data Source: Statistics Canada
Figure 2: Commodity Exports and Imports, Volume Indices based on Balance of Payments Data (2007=100), Canada, 1997:Q1-2013:Q4, Data Source: Statistics Canada

The Main Trading Partners
Canada’s main trading partners are: the US, the European Union (EU), and Japan. In the EU, the United Kingdom (UK) is its main trading partner. Most of the commodities Canada exports go to the US and most of its imports come from the same country. Besides, the US is Canada’s only main partner with whom its trade balance shows surplus.

Figure 3: Canada's Trading Partners, Percentage Shares in Total Exports and Imports, Monthly Averages, 1997:M1-2013:M12, Data Source: Statistics Canada
Figure 3: Canada's Trading Partners, Percentage Shares in Total Exports and Imports, Monthly Averages, 1997:M1-2013:M12, Data Source: Statistics Canada

The Main Commodities Traded
Commodities that Canada exports most are: energy and forestry products, and metal and non-metallic products. Gas, oil produced in the provinces of Newfoundland and Labrador, Alberta, and Saskatchewan as well as electricity produced in Quebec are sold to the US. The exports of metal and non-metallic mineral products include: gold, iron and steel, aluminium, coal, potassium, and copper.

Figure 4: Commodity Exports and Imports, Percentage Share, Quarterly Averages, 1997:Q1-2013:Q4, Canada, Data Source: Statistics Canada
Figure 4: Commodity Exports and Imports, Percentage Share, Quarterly Averages, 1997:Q1-2013:Q4, Canada, Data Source: Statistics Canada
 On the other hand, commodities Canada imports most are motor vehicles and parts, consumer goods, and electronic and electrical equipment and pars.

 The terms of trade
Terms of trade is the ratio of export price to imports price. Figure 5 below plots the terms of trade of Canada over the period 1997:Q1-2014:Q4. 

Figure 5: Terms of Trade, Canada, 1997:Q1-2013:Q4, Data Source: Statistics Canada
Figure 5: Terms of Trade, Canada, 1997:Q1-2013:Q4, Data Source: Statistics Canada

The terms of trade of Canada is increasing over time because the prices of natural resources, the commodities Canada exports most, are increasing whereas the prices of vehicles and electronic and electrical equipment, the commodities it imports most, are decreasing. The terms of trade of Canada reached a peak of 109.81 in the second quarter of 2008, in the midst of the economic crisis.