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 %.

Is the Depreciation of the Canadian Dollar Beneficial?

The Canadian dollar has sunk to 88 cents US, last week. That is a level unobserved since June 2009. An economic indicator much followed and commented, in Canada, at the beginning of this year is the exchange rate [here]. All started when the Canadian dollar lost 2.8 % of its value in the second week of the year.  Up to now, the Canadian dollar has been below its levels last year.

Figure 1: 1 Canadian Dollar in terms of US Dollars, Jan 2 - Oct 15, Source: Bank of Canada

Is this situation beneficial to Canada? In February, March, May, and July this year, the growth rates of Canada’s exports to the US were high compared to the same periods last year. The weakness of the Canadian dollar could explain this. Commodities made in Canada have become cheaper in the US, which benefits to the manufacturing sector.

Figure 2: Canadian Trade of Commodities with the US, Balance of Payments Data, January-August 2013 and 2014, Source: Statistics Canada

The depreciation of the Canadian dollar had, as expected, a negative effect in January 2014 on imports from the US as commodities bought from the US became more expensive.   It also slowed down imports from March to May. The growth rates of imports from the US are lower in January, April, and July compared to 2013 due to the lower level of the exchange rate this year. Since the Canadian economy is experiencing economic growth, the effect of the depreciation of the Canadian dollar on imports is offset by the increase in the gross domestic product. The import of expensive goods from the US contributes to inflation.

As far as tourism is concerned, the depreciation of the Canadian dollar is not attracting US travelers as expected [here].  

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 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

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

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

 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

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.