Canada's Trading Partners over the Past 10 Years: Does the Changing Landscape Matter?

A Look Back in Time—1997 to 2007

In 1997, the Canadian dollar stood at 72.2 U.S. cents, and Canada's top exporting countries were the United States, Japan, and the United Kingdom. The share of Canadian exports to the United States stood at 81.8% and total trade (imports plus exports) with the United States was valued at $428.3 billion. The Canadian economy was firing on all cylinders, beginning four years of robust economic growth. Canada's auto sector was on solid footing, with auto exports making up a healthy 12.2% of total exports.

Flash forward 10 years, and Canada's trade landscape has changed. The Canadian dollar has risen to average 93.5 U.S. cents in 2007, a 30% appreciation, diminishing Canada's trade balance with the United States. Total trade with the United States, however, has grown 36% since 1997, reaching $580.9 billion in 2007. At the same time, the share of Canada's total exports to the United States has fallen to 79.0%, after peaking at 87.1% in 2002. While the United States is still Canada's biggest export trading partner, the United Kingdom has surpassed Japan for second spot. Crude petroleum oil just edged out autos as Canada's top export year-to-date in 2007, at 9.2% of total exports.

Growth of exports to other countries has outpaced that to the United States for most of the past five years. With the U.S. economy heading toward a likely recession, along with a relatively strong Canadian dollar, this trend will continue throughout 2008.

But what about China's insatiable demand for Canada's natural resources pushing up commodity prices over the last few years? Should we be more concerned with our exports to China? To put this into perspective, Canada's share of exports to China was just 0.8% in 1997 and has since doubled to a still-small 2.0% in 2007. China is Canada's fourth-largest exporting partner, and total trade with the country has grown almost 450% since 1997, which is markedly better than the 350% jump in U.S. total trade with China over the same period. Nevertheless, trade with China has many years to go before it can replace the United States as a major trading partner. The most exports to China can do is support Canada's positive trade balance, not determine which side of the balance sheet it will firmly land on. In the long term, however, China's growing middle class means that a greater share of the population will be able to afford a greater number of goods, resulting in upward demand pressure for Canada's goods. Canada would be wise to further explore and exploit those demands to promote extensive trade, creating a positive impact on Canada's future export growth. A recent example of this is British Columbia's lumber industry, which reduced its reliance on the U.S. housing construction market by turning to China, providing lumber to build parks.

What Are We Exporting?

Until recently, goods from the auto industry (autos, auto parts, and trucks)—the top exported goods to the United States—dominated Canadian exported goods. However, the value of energy exports (crude oil and natural gas) displaced autos as of 2005, and the gap is widening. The main reason for the widening of the gap is due to the steady climb in oil prices ($100/barrel) and the financial woes of the Detroit Big Three automakers.

As the U.S. economy starts to recover from the recessionary pressures brought on by the housing credit crunch and U.S. consumer confidence climbs starting next year, the demand for Canadian auto exports to the United States will recover. In addition, Global Insight is forecasting oil prices to fall from above $90/barrel to the high-$70s/barrel range. A supply shock to oil prices or a failure of the U.S. economy to recover, however, would potentially cause the gap to widen further.

What to Expect For the Future of Canadian Trade over the Short Term?

With the likelihood of the United States entering a recession gaining momentum, U.S. domestic demand will wane, leading to a decline in the demand for Canadian export goods. Therefore, exports will contribute little to overall economic growth in 2008, which is forecasted to come in at 1.9%. Auto exports will definitely drag down total exports, and the value of energy exports will decline if oil and natural gas prices fall to forecasted levels. Canada will not be able to depend on the trade sector to contribute much growth, but instead, will rely on the still relatively healthy consumer sector to prop up the economy. Canada will have to rely on non-U.S. exports to keep overall export growth at decent levels throughout 2008.