Canadian International Trade

In April 2020, Canadian exports and imports fell respectively by 29.7 % and 25.1 %, compared to the previous month. Compared to the same period last year (i.e., April 2019), they declined respectively by 35.2 % and 30.6 %. These historic declines have more to do with the confinement than with the border closures during the COVID-19 pandemic. Border closures apply to the movement of people, but not to freight shipping. The confinement or the nationwide lockdown has affected the production and the sales of goods that were not deemed essential by the provincial governments. As a result, their supply and demand fell, which impacted on international trade.

Figure: Exports and Imports, Canada, 1997:M1-2020:M4

As it appears in the above figure, the trade balance of Canada (i.e., the difference between its exports and its imports) has become negative since December 2008. Even though, in April 2020, the decline in the exports or in the imports was unprecedented, the trade deficit occasioned was not. In April 2020, the trade deficit was 3 251 million versus 4 953 in December 2018.

There will not be any important fall in the Canadian gross domestic product (GDP) because of the decline in both exports and imports. There are two reasons for that. First, both exports and imports fell. Second, it is rather the balance of trade that contributes to the GDP.

The United States (US) are Canada's main trading partner (see the table below). In April 2019, 73.6 % of Canadian exports went to the US. In April this year, this share dropped to 68.4 %, as exports to the US decreased by 40.6 %. On the other hand, between these two periods, the share of China rose from 4.2 % to 6.3 % and the share of Japan rose from 2.2 % to 3.7 %. The increase in the share of China is mostly due to the decline in the exports to the US. Exports to China rose by 15.2 % between March and April, but they fell by 4.5 % compared to April 2019. On the other hand. exports to Japan rose by 8.1 % year-over-year and by 26.3 % between March and April.

Table: Canada's Main trading Partners by Shares of Exports and Imports, 1997:M1-2020:M4.

Country	Exports	Imports
United States	77.8 %	67.5 %
European Union	7.3 %	9.8 %
China	2.8 %	4.9 %
Mexico	1.4 %	2.6 %
Japan	2.4 %	2.6 %

Imports from the US, Mexico, and Japan also fell. Between April 2019 and April 2020, while the share of the US in Canadian imports was falling from 63.7 % to 56.1 %, the share of China rose from 7.4 % to 11.3 %. The imports from such other trading partners as Brazil, Peru. and Switzerland also rose. In April 2020, imports from these three countries respectively rose by 52.3 %, 36.9 %, and 24.1 %.

What makes life more expensive in Canada?

The consumer price index (CPI) for all items is a weighted average of the retail prices of some goods and services that are classified into eight product groups. In Canada, while the monthly CPI for all items declined by .66 % in April 2020, the CPI for some of its constituentindices grew (e.g., food by 1.12 %, household operations, furnishings and equipment by .24 %, alcoholic beverages, tobacco products and recreational cannabis by .12 %). The CPI for recreation, education and reading remained unchanged. So, the CPI for all items and its constituent indices do not behave the same way.

It appears in the table below that the CPI for all the product groups tend to rise every month, except for the one for clothing and footwear that usually declines during periods of recession (-.38 %). During periods of expansion, the CPI for clothing and footwear is also the one that tends to show the lowest growth rate (.04 %). So, to answer for the question addressed in title of this blogpost, one can exclude from the list this product group, straightaway.

Table: Expected Monthly Percentage Change in CPI, Canada, 1992:M2-2020:M4.

Product group	Expansion	Recession
Food	.20 %	.10 %
Shelter	.15 %	.12 %
Household operations, furnishings and equipment	.10 %	.10 %
Clothing and footwear	.04 %	-.38 %
Transportation	.17 %	.36 %
Health and personal care	.12 %	.10 %
Recreation, education and reading	.11 %	.12 %
Alcoholic beverages, tobacco …	.19 %	.63 %
All items	.14 %	.16 %

The monthly percentage change in the CPI for household operations, furnishings and equipment is expected to be the same during both periods of expansion and recession (.1 %). Furthermore, the expected percentage change in the CPI for this product group is below that of the CPI for all items. Therefore, household operations, furnishings and equipment is another product group to exclude from the list of what makes life more expensive in Canada.

On the basis of the values in the above table, the four candidate product groups are: (1) alcoholic beverages, tobacco products and recreational cannabis, (2) transportation, (3) food, and (4) shelter. Before drawing conclusions, here are two more observations from the above table.

The first other observation is that the expected monthly percentage change in the CPI for alcoholic beverages, tobacco products and recreational cannabis in a period of recession is the highest of all (.63 %). What could that mean? It could mean that people tend to drown their worries in drugs, during recessions, and the increase in the demand for this product group causes a rise in its price. The Gallagher family (who are some alcoholic fictional characters from the TV series Shameless) would retort: good times and bad, people drink and smoke. That is right, they just have to look at the above table to see that, during a period of expansion, the second highest monthly percentage change is that of the product group alcoholic beverages, tobacco products and recreational cannabis.

The second other observation is that the expected monthly percentage change in the CPI for shelter is lower during recession than during expansionary periods. This reminds that real estate crises often happen either when an economy is contracting or they cause this contraction, as during the 2007-08 subprime crisis.

The figure below shows the shares of the eight product groups in the monthly inflation rate during periods of expansion and recession. Shelter has the highest share during periods of expansion (28.8 %) and food has the highest share during periods of recession (26.7 %).

Figure: State-Dependent Shares of Eight Product Groups in the Monthly Inflation Rate

So, what makes life more expensive in Canada? All depends on the prevailing state of the business cycle. During periods of expansion, shelter followed by food and then transportation contribute the most to inflation. During this state of the business cycle, the expected percentage change in the CPI for shelter (.15 %) is lower than that of food and transportation, but its share in inflation is much higher. (To find the contribution of a product group the living cost, multiply its expected percentage change by its share in inflation.) During periods of recession, both shelter and food come after transportation and the product group alcoholic beverages, tobacco products and recreational cannabis. But, note that it is not everyone that consumes the later product group.

Dataset and Code