Canada’s State of Trade: Trade and Investment Update – 2018

Canada State of Trade – Message from the Minister

The Honourable François-Philippe Champagne MP
Minister of International Trade

As Canada’s Minister of International Trade, I’m delighted to present the State of Trade Report for 2018. The past year has been a record one for Canadian trade successes across the globe as we continue to expand Canada’s trade footprint to new markets and new opportunities.

From the Comprehensive Economic and Trade Agreement (CETA) between Canada and the European Union, which came into force in September 2017, to the historic signing of the 11-country Comprehensive and Progressive Trans-Pacific Partnership Agreement (CPTPP) in March of this year, Canada has led the way in making trade fair and accessible to more citizens from almost every corner of the world.

When the CPTPP is fully in force, Canada will have preferential market access via 14 trade agreements to 51 countries with nearly 1.5 billion consumers and a combined GDP of US$49.3 trillion.

Trade is in Canada’s DNA and it’s vital to our economic prosperity.

To ensure our continuing prosperity, we are diversifying our markets and pursuing a progressive trade agenda. This past year, the momentum for Canada’s trade diversification continued with the launch of negotiations for new free trade agreements with the Pacific Alliance trade bloc in October 2017 and the Mercosur member countries in March 2018.

Our government’s ongoing commitment to expanding and diversifying Canada’s trade and investment ties with countries around the world is reflected in this year’s State of Trade Report.

In 2017, Canada’s merchandise exports rose 5.7 percent to an all-time high of $546.7 billion, which was $29.2 billion above the 2016 level. With merchandise imports also rising to record levels, total merchandise trade also reached another all-time record of $1,108 billion. Canada’s exports to countries such as Japan, India, South Korea, Germany and the United Kingdom rose in 2017, as did those to China.

More trade and more investment means more economic growth and more good-paying jobs to help further strengthen Canada’s middle class.

Our government’s approach is to ensure that increased trade and investment are about a march to the top, rather than a race to the bottom, when it comes to consumer rights, environmental protection, labour standards, and the rights of government to regulate in the public interest.

Canada has led the way in advancing gender equality and women’s empowerment through our international engagement, including during our G7 Presidency this year. Our government is also playing a leading role in helping more Indigenous people, members of the LGBTQ2 community, and youth succeed in today’s economy.

This year’s State of Trade Report includes an analysis that illustrates the differentiated labour market impacts of trade agreements in Canada by gender and complements previous analysis of women-owned exporting businesses. We know that advancing gender equality and the empowerment of all women and girls is the most effective way to foster prosperity, create lasting peace, and achieve sustainable development.

All over the globe, we are making headway in securing better terms for trade and in fostering crucial progressive ambitions on gender, for workers, and for the environment. Canada’s progressive trade agenda is positioning us to accomplish this and much more in the years ahead.

The Honourable François-Philippe Champagne Minister of International Trade

Executive Summary

Ten years after the outbreak of a global financial and economic crisis, a long-delayed synchronized global recovery in manufacturing, trade and investment made an appearance in 2017. While long expected, it still exceeded expectations, as the global economy grew 3.2 percent^{Footnote 1} in real terms. In particular, economic growth in the eurozone, Japan, the United States and China was notably above expectations. Russia and Brazil came out of recession, with the surrounding regions benefiting from their recovery.

The advanced economies are now closing the books on the economic cycle associated with the Great Recession, with labour and investment markets once again approaching normality and the economic slack almost drained out of the system. Global financial conditions will remain accommodative in the short term, with growth picking up from 2.3 percent^{Footnote 2} in 2017 to 2.5 percent in 2018. In the long term, aging populations and relatively weaker productivity growth will remain key challenges.

Growth in the emerging and developing economies finally picked up after failing to grow substantially for six consecutive years, and more good news is expected in the short term. Rising commodity prices are helping commodity exporters (the majority of this group) to shore up their balances and let their private consumption recover. The IMF expects economic growth to accelerate from 4.8 percent in 2017 to 4.9 percent in 2018, and above 5 percent next year.

Rising confidence under favourable fiscal, monetary and external conditions was behind the rebound in investment, which in turn boosted global trade volumes. World merchandise trade recorded its largest increase in six years, expanding 4.7 percent. Supporting trade activity is a continuing upward push in commodity prices, backed by strengthening consumer demand. Large exporters such as Germany, Japan, the United Kingdom and the United States made key contributions to global trade growth.

The largest trade volume gains in 2017 were in imports from developing economies, which soared 7.2 percent. Developed economies’ imports also grew well at 3.1 percent. Real exports by developing economies grew 5.7 percent and 3.5 percent for developed economies. Trade recovery was broad across all regions, with emerging Asia leading the way. In nominal terms, world imports expanded 10.7 percent in 2017 after two years of declines and reached US$17.6 trillion. China recaptured its status as the world’s greatest merchandise trader, lost to the United States in 2016. World imports of commercial services also rose 6.5 percent in value in 2017, to US$5.1 trillion. The WTO expects world trade growth to level off slightly to 4.4 percent in 2018 and to moderate to 4.0 percent in 2019.

Conditions differed among the economies and regions that are key to Canadian commercial interests. The United States’ economy was slow out of the gate early in 2017, but made up the lost ground and accelerated strongly for the remainder of the year with 3.0-percent average annualized growth in the last three quarters, and 2.3 percent overall in 2017. Unemployment is close to historic lows, fiscal stimulus is in play and strong consumer spending and investment is expected to propel the economy to 2.9-percent growth in 2018.

Mexico’s economy slowed down to a 2.0-percent pace in 2017, as activity was close to recession levels in the second half of the year. Fiscal pressures and high inflation, which prevented the government and the central bank from coming to the rescue, were largely responsible. The NAFTA renegotiation process remains the gravest threat to the economy, with total investment contracting 1.0 percent in 2017 and FDI declining 0.2 percent partly due to the uncertainty. Mexico’s near-term outlook is clouded due to uncertainty emanating from the United States, but this also represents an opportunity for Canadian business and governments to forge stronger ties in various areas. The IMF expects a quick improvement in 2018 while other forecasters indicate it may take longer. Mexico is the third-highest import supplier to Canada, providing as much merchandise as Germany and Japan combined, and its products are crucial for several of Canada’s key industries: automotive, electric and electronic machinery, and mechanical machinery.

Economic growth in the eurozone pleasantly surprised, coming in at 2.3 percent—the best performance since the Great Recession. Its political risks certainly look less threatening than in 2016, and current projections call for an acceleration to 2.4-percent growth in 2018. Germany and Spain saw strong economic performances in 2017; these were likely their peak numbers this cycle, as growth is expected to moderate. The United Kingdom is projected to slow down to 1.6 percent in 2018, affected by continuing uncertainty surrounding Brexit, high inflation and strengthening currency. Canada’s historical commercial association with this region became stronger than ever with the provisional application of the Canada-European Union Comprehensive Economic and Trade Agreement (CETA). It is now in force and is replete with excellent opportunities for Canadian businesses and consumers, especially in the area of services.

Emerging Asia remained the growth champion among the world’s regions. China’s economy continued its transition from investment-based to domestically driven growth; it also pledged to tackle advanced economic issues such as pollution and anti-poverty measures, while not skipping a beat in the growth department. China’s economy expanded 6.9 percent in 2017, faster than planned, and will maintain a strong pace in the short term. Canada continues to tighten commercial ties with China, including the talks on a potential free trade agreement. India is expected to continue on its growth path that is to peak around 8 percent before sloping down gently. Throughout this region, dynamic economies are specializing as large export platforms in electrical and electronic machinery, apparel, services and other areas, and could be excellent partners for Canadian businesses and foreign affiliates.

Canada’s economy recorded excellent growth in 2017, expanding by 3.0 percent. This strongest performance in six years benefited from the cyclical recovery in manufacturing and trade that began in mid-2016 across the developed economies. Canada’s economy added nearly 340,000 new jobs in 2017, bringing the labour market close to the equilibrium and reducing unemployment from 6.9 percent to 5.8 percent at year-end. With inflation stable, the economy is now operating close to its capacity. The resource sector continues to benefit from a progressive upturn in commodity prices, and the existing federal stimulus is expected to be supplemented by additional fiscal expansion in the provinces of Ontario and Quebec. Most of 2017 growth was realized during the first two quarters of the year, when it reached the scorching pace of 4.0 percent and 4.4 percent, respectively; it returned closer to potential growth with 1.5 percent in the third and 1.7 percent in the fourth quarter. Growth performance is expected to moderate to 2.1 percent in 2018 and to 2.0 percent in 2019. The Canadian dollar spent most of the year just below the US 80¢ mark. Over the course of the year, the loonie appreciated in value against the U.S. dollar and the Japanese yen, but depreciated against the European euro and the British pound.

The consequences of the shift in commodity prices reverberated through Canada’s trade during the year. Overall export prices rose 22.7 percent in the energy sector and 4.4 percent overall; meanwhile, the price index of Canada’s imports rose only 1.1 percent. The result was a substantial improvement in Canada’s terms of trade index, which rose from 91.6 in 2016 to 94.3 in 2017. Nevertheless, this value of the index is still historically low (third-lowest in the past 11 years). These changing terms of trade sent exports of resources and resource-based goods soaring—in particular, energy products, metal ores and minerals, and metal and mineral products; meanwhile, the strengthening Canadian dollar and relative prices rolled back exports in the manufacturing sectors—particularly automotive products and consumer goods. Canada’s overall trade deficit in goods narrowed, but that was nearly offset by a greater deficit in services trade due to the expanding travel and transportation services deficit. As a result of these and other developments, Canada’s current account deficit narrowed somewhat, declining from $65.4 billion in 2016 to $63.9 billion in 2017.

The volume of exports of goods increased 1.0 percent while the volume of imports expanded 3.6 percent. Nominal values of goods exports increased by 5.4 percent, strongly supported by prices, while nominal values of goods imports increased by 4.8 percent, partly supported by prices. Exports of services rose 3.6 percent, with imports growing 4.3 percent. Exports of commercial services grew just 0.7 percent in 2017, primarily due to a contraction in exports of financial services. Commercial services have run a surplus for 15 years (starting in 2003), but after declining for several years it has now shrunk to just $0.9 billion. Trade in services with the United States was perfectly balanced, with 54.5 percent of Canada’s exports going to the United States and 54.5 percent of its imports arriving from there. Of note was the high growth of 20.3 percent in Canada’s travel exports to non-OECD destinations, which could indicate a further strengthening in education, immigration and business travel to Canada from those countries.

Detailed examination of Canada’s merchandise trade shows substantial growth in both exports (up 5.6 percent, or $29.2 billion) and imports (up 5.2 percent, or $27.8 billion). Exports reached an all-time high of $546.7 billion, and so did imports with $561.1 billion. Stronger energy export revenues (up 33.1 percent) were behind the rising exports; volumes also contributed for exports of all energy components to the United States, which was the destination for 91.1 percent of Canada’s energy exports. Notably, the four next top destinations for Canada’s energy exports were all in Asia; exports to each grew by over 50 percent, and the main energy product exported to all of these (Japan, South Korea, China and India) was coal.

The proportion of exports destined for the United States declined for the third consecutive year, reaching 76.0 percent of the total. Nevertheless, there was no increase in overall export diversification, as the share of Canadian exports for the top 10 destinations remained stable at 90.8 percent. The U.S. import share decreased 0.8 percentage point to 51.3 percent, which led to an overall increase in diversification for the top 10 destinations, as their share fell from 83.7 percent in 2016 to 83.3 percent in 2017. Exports to China, Japan and South Korea saw double-digit growth; Latvia was the highest-growing major export destination with 129.7-percent growth. Imports from China and Japan grew by double digits also.

Among notable trade developments, automotive exports declined by 4.9 percent, partly explained by the increased domestic consumption, production losses and interruptions. Exports of mechanical machinery and equipment grew 5.7 percent, mostly to the United States, and aluminum exports soared by 19.0 percent. After a long and sustained growth of at least five years, exports of pharmaceutical products stumbled in 2017, losing over a quarter of their value.

Global FDI flows declined to US$1.5 trillion in 2017, after reaching in 2015 their highest level since the global crisis. FDI inflows into developed economies decreased 27.0 percent during the year (and by one-third into North America) and accounted for 53.4 percent of the total, while inflows into developing economies rose slightly in 2017. Cross-border M&A contracted by 23 percent, mostly due to lower activity in developed countries; global greenfield FDI also declined.

FDI inflows into Canada declined by 36.4 percent in 2017, to $31.5 billion. Inflows from the United States dropped by 14.4 percent, while inflows from the rest of the world dropped by 63.0 percent. The overall reduction in investment flows was due to a combination of sharp overall declines in global FDI flows (particularly in developed countries, particularly in North America) and large ownership changes of oil sands assets from foreign to Canadian hands (divestment). Foreign inflows also decreased in management of companies and enterprises, as well as into finance and insurance and other industries, but almost doubled in manufacturing.

The stock of foreign investment in Canada rose 1.9 percent to $824.0 billion, with the proportion of that stock originating in the United States at 49.1 percent. While the manufacturing sector and the management of companies and enterprises sector were the two largest overall FDI targets in 2017, FDI stock increased considerably in finance and insurance, wholesale trade, transportation and warehousing and real estate and rental industries.

Canada’s direct investment abroad (CDIA) outflows increased for the seventh consecutive year in 2017 and nearly reached $100 billion. For the second straight year, CDIA flows increased considerably in trade and transportation, which accounted for over half of total outflows. Flows also increased in management of companies and enterprises and finance and insurance; a greater share of flows went to the United States than usual. Canada’s stock of investments abroad also rose in 2017, with the appreciation of the Canadian dollar offsetting some of the activity, and reached $1.1 trillion. Canada’s net direct investment position expanded by $22.1 billion in 2017, to the highest surplus on record ($297.1 billion).

Foreign affiliates continued to be a significant part of Canadian economy, accounting for over half of Canada’s total merchandise trade.^{Footnote 3} These also accounted for 17.2 percent of Canada’s corporate assets, 27.1 percent of total operating revenues, employed 1.9 million Canadians and 34.5 percent of total R&D conducted in Canada. Meanwhile, Canadian foreign affiliates abroad sold more goods and services than was generated by Canada’s conventional exports, helping their Canadian parent firms stay competitive, gain access to technology and other inputs, and concentrate on headquarters activities.

Special Feature on Canada’s Services Trade Performance

Services are becoming a more important share of Canadian exports, reaching 17.0 percent in 2017 and even more on a value-added basis, due to the high domestic content of services and to the indirect contribution of services to the value of goods exports. Yet services still account for a smaller share of Canadian exports than they do for most other advanced countries. Canada performs well in a number of services sectors that rely on skilled people and on innovation, most notably research and development, finance, professional services and education. Services are important for Canada’s international competitiveness more broadly as they are important inputs into the production process and help facilitate trade. Increasingly, they are also bundled alongside goods as part of a trend towards “servicification”, and in many cases may be the largest component of goods trade.

1. Global Economic and Trade Performance^{Footnote 1-1}

The Great Recession struck almost a decade ago, but until 2016 the recovery from it was delayed, incomplete and desynchronized. In the second half of 2016 a widespread cyclical pickup of multiple indicators finally began, and by 2017 developed into a global recovery in manufacturing, trade and investment across the world. Economic growth in the last year exceeded most expectations. Business and consumer confidence, strong investment and generally favourable financial, fiscal and monetary conditions have mutually reinforced each other and built a great deal of momentum that will not be easy to quench. Global trade has been buoyed as a result, rebounding in both volume and values on the scale of the early post-recession years (2010-2011). Commodity prices have continued pushing upward from the lows of early 2016, now more firmly based on higher consumer demand, strengthening the balances of commodity exporters in the process. If the pace of expansion could be kept up for a few more years, the world would have a Great Recovery to match the Great Recession.

Alas, the prospects of that are slim. The above-trend growth is rapidly drawing the post-recession slack out of the system. The strings of the labour markets are being pulled ever more firmly across the developed world, the central banks are tightening warily, listening to the first signs of the incipient inflation pressures, and the business pundits across the world are back to forecasting the date of the next recession. Sometime in 2018, the excess growth in most developed countries is expected to begin moderating and start approaching potential growth numbers – which haven’t grown any prettier while the world dealt with the legacy of the Great Recession.

Demographics dictate bland performances under 2 percent, and it is to the Sphinx of technology that we look to break the deadlock, but its promises are as ambiguous as its riddles. Yet if the upside potential failed to increase, the downside risks have certainly swelled. Never has the rules-based trading system been under such strain as in 2017, and things are expected to get worse in 2018 before they can get better. Geopolitical tensions and tighter hold on power by the world’s many autocratic regimes point in the same direction, and it may be some time before the setting sun of the economic growth of 2017 across the world is approached in brilliance once again.

Following the upswing that began in the previous year, the world economy grew 3.2 percent in real terms during 2017 (aggregate on the basis of market exchange rates).^{Footnote 1-2} This was a major acceleration from the 2.5-percent growth in 2016 and the fastest that the world economy has expanded since 2010. In many areas, economic performance during 2017 exceeded expectations – in particular the eurozone, Japan, the United States and China. The two key drivers of the strengthening in global growth during the year were the recovery in investment spending in advanced economies and the end of investment contraction in commodity-exporting economies. Strong momentum, market and investor confidence, favourable financial conditions and a partial recovery in commodity prices fuel the expectations of an even stronger growth in the short term.

Figure 1-1
Real GDP Growth in Major Economies, 2012-17

Source: Statistics Canada, Table 380-0064

Figure 1-1 Text Alternative

Real GDP Growth in Major Economies, 2011-16

Country	2012	2013	2014	2015	2016	2017
Brazil	1.93	3.01	0.51	-3.55	-3.47	0.98
Canada	1.75	2.48	2.86	1.00	1.41	3.00
China	7.90	7.80	7.30	6.90	6.72	6.86
Germany	0.69	0.60	1.93	1.50	1.86	2.51
India	5.46	6.39	7.41	8.16	7.11	6.74
Japan	1.50	2.00	0.38	1.35	0.94	1.71
France	0.18	0.58	0.95	1.07	1.19	1.85
United States	2.22	1.68	2.57	2.86	1.49	2.27
World	3.52	3.47	3.58	3.45	3.23	3.76

Preliminary estimates indicate that global foreign direct investment (FDI) inflows^{Footnote 1-3} decreased considerably in 2017, after reaching in 2015 their highest level since the start of the global crisis. FDI inflows targeting developed economies fell by over a quarter, with inflows into North America dropping by one-third. FDI inflows to developing economies increased marginally. Cross-border mergers and acquisitions (M&A) contracted, mostly due to lower activity in developed countries; global greenfield FDI also declined.

Overview and Prospects for the Global Economy

Aggregate Growth Trends

In purchasing-power parity (PPP)-adjusted terms, world growth accelerated to 3.8 percent in 2017, which was 0.5 percentage point faster than in the previous year. Growth in the advanced economies accelerated by 0.6 percentage point relative to 2016 to reach 2.3 percent, and the increase was due almost entirely to investment spending. This process was braced by generally accommodative monetary policy, stronger balance sheets and improved confidence. Strengthening investment brought about a strong recovery in global trade with large exporters such as Germany, Japan, the United Kingdom and the United States contributing significantly to it.

Most of the advanced economies were characterized by still-low core inflation, but edging up due to rising demand. The United Kingdom, where core inflation is still above the Bank of England’s target, is the single exception. Continued weakness in real wage growth across these economies points to some slack remaining in the labour markets, although there are signs of labour market firming in the United States. The cycle of monetary tightening is under way in most advanced economies, though overall it is still in a broadly stimulative mode. Output gaps are now closing faster than expected, and the economic growth is lining up with the estimated potential growth. The U.S. dollar has weakened modestly in real effective terms in the second half of 2017, and the euro has strengthened, while the Japanese yen remained broadly stable.

Figure 1-2
PPP-Adjusted Growth by Major Regions,
2014-2017 and Forecast 2018-2019

Source: Statistics Canada, Table 380-0064

Figure 1-2 Text Alternative

PPP-Adjusted Growth by Major Regions, 2014-2017 and Forecast 2018-2019

Year	World	Advanced	Developing economies
2014	3.58	2.09	4.70
2015	3.45	2.30	4.30
2016	3.23	1.67	4.36
2017	3.76	2.34	4.76
2018	3.94	2.48	4.94
2019	3.94	2.22	5.10

Source: WTO Press Release, April 2018

Growth in the emerging and developing economies finally picked up after failing to grow substantially for six consecutive years, up 0.4 percentage point to 4.8 percent. As usual, performance was more uneven among this group, and the composition of growth varied greatly. Strong growth in emerging Asia continued, with China and India drawing strength from net exports and strong private consumption, while cutting back their investment growth. Among the rest of the group, on the contrary (particularly among the commodity-exporting countries), the investment effects were the main positive contributors. Fixed investment stopped contracting in Brazil and Russia as well as several commodity exporters. Growth in inventory investment was also an important growth factor, while a recovery in imports among commodity exporters helped private consumption recover, but also made net exports the largest drag on economic growth in the emerging and developing economies. Currencies were mostly stable or increasing against the U.S. dollar, helping to keep the core inflation low in Brazil, Russia and China. On the other hand, core inflation has risen in India and remained high in the Middle East and Africa. Financial conditions remained generally supportive, with monetary policy easing further in Brazil and Russia and equity markets generally strengthening.

Economic Growth and Outlook: Major Countries

The United States’ economy grew 2.3 percent in 2017, rebounding from the sub-par 1.5-percent growth of 2016, its weakest economic performance since 2009. Private consumption, non-residential fixed investment, and exports made significant positive contributions to the increase in real GDP in 2017. The acceleration in real GDP from 2016 to 2017 reflected upturns in nonresidential fixed investment and in exports and a smaller decrease in private inventory investment. These movements were partly offset by decelerations in residential fixed investment and in state and local government spending. Imports, which are a subtraction in the calculation of GDP, accelerated.

Given that performance, growth forecasts for the United States have been revised upward. Higher projected external demand and the boost from recent fiscal policy stimulus are also positive factors. The IMF expects the U.S. economy to generate 2.9-percent growth in 2018 and 2.7-percent growth in 2019. Fiscal policy changes are expected to generate short-term growth gains until 2020, after which their effects will turn negative due to increasing fiscal deficit. This expected U.S. strength in the short term is welcome news for the Canadian economy.

Growth surprised on the positive side throughout the eurozone in 2017 and led to a considerable upside revision of the short-term IMF forecast as well. Germany has improved to 2.5-percent growth from 1.9 percent in 2016. France grew at 1.8 percent (up from 1.2 percent in 2016). The United Kingdom was the exception with a slight dip in growth to 1.8 percent in 2017, but even that is welcome news, given some of the Brexit expectations. The eurozone as a whole recorded a solid 2.3-percent growth in 2017, and that is expected to strengthen to 2.4 percent in 2018 before moderating to 2.0 percent in 2019. In Germany, growth should remain stable at 2.5 percent in 2018 and decelerate to 2.0 percent in 2019. France’s growth is expected to accelerate to 2.1 percent in 2018 before a slight slowdown to 2.0 percent in 2019. The United Kingdom is expected to continue slowing down in the short-term, to 1.6 percent in 2018 and to 1.5 percent in 2019, as business investment remains low due to uncertainty about the Brexit process and its results.

Japan also performed better than expected in 2017 and will continue to do so in the short run. Growth was 1.7 percent in 2017, surprising many observers. Expected to moderate to 1.2 percent in 2018 and to 0.9 percent in 2019, growth nevertheless remains above potential, which is weak due to unfavourable demographics leading to a declining labour force. Japan’s short-term strength is occasioned by better external demand prospects, a rebound in private investment and increased fiscal stimulus.

Many other advanced economies have reached a peak performance in 2017 (or, like New Zealand and Spain, in 2016) and are expected to slow down in the short term. That list includes Canada, Hong Kong, Ireland, Singapore, South Korea and Taiwan. Nevertheless, their growth numbers will remain respectable and in most cases above the long-term trend. In all of the Newly Industrialized Economies (NIEs) of Asia, growth in 2018 will slow down: in Hong Kong from 3.8 percent to 3.6 percent, in Taiwan from 2.8 percent to 1.9 percent, in Singapore from 3.6 percent to 2.9 percent, and in South Korea from 3.1 percent to 3.0 percent. The latter is expected to continue performing above trend in spite of international tensions over the Korean peninsula.

Among the developing economies, China continued to perform strongly with 6.9-percent growth in 2017 and is projected to slow down slightly: to 6.6 percent in 2018 and to 6.4 percent in 2019. Stronger external demand supported a slight upward revision of the forecast. Continued rebalancing from investment to consumption will bring the growth down to about 5.5 percent over the medium term, as policy support from credit growth and government policies is reduced and the social safety measures are strengthened. India’s growth of 6.7 percent in 2017 was below expectations due to implications of its currency exchange initiative, but a rebound to 7.4 percent is projected for 2018, rising to 7.8 percent by 2019. Private consumption growth is strong, and efficiency-improving reforms are under way. Broadly stable and strong growth of 5.3 percent was recorded in the ASEAN-5 economies; more of the same is expected for the region as the IMF forecast calls for 5.3-percent growth in 2018 and 5.4 percent in 2019.

Mexico has outperformed expectations with 2.0-percent expansion in 2017, and prospects are for further improvement. A more robust 2.3-percent GDP growth is expected in 2018, then rising to 3.0 percent in 2019 as the country benefits from the acceleration of the U.S. economy. The completion of a structural economic reform agenda is expected to maintain 3.0-percent growth in Mexico over the medium term. Brazil has emerged from a major recession to return to growth in 2017 at 1.0 percent. It is expected to continue accelerating up to 2.3 percent in 2018 and 2.5 percent in 2019 as private consumption and investment return to normal.

Activity in Argentina came in at 2.9 percent in 2017, but is projected to dip to 2.0 percent in 2018 as the effects of fiscal and monetary adjustments needed to curb inflation and reform public finances will be exacerbated by a drought that will affect the country’s substantial agricultural sector. Russia exited its recession with 1.5-percent growth in 2017, supported by stronger oil prices and looser monetary policy, and will grow at 1.7 percent in 2018, before headwinds and tightening sanctions depress economic activity to 1.5 percent over the medium term. Both Poland and Turkey are projected to grow above potential in 2018, at 4.1 percent and 4.4 percent respectively, before moderating to long-term potential in the medium term. Nigeria returned to positive growth, and growth is expected to be 2.1 percent in 2018 and 1.9 percent in 2019, while South Africa is also headed to improve its 1.3-percent growth of 2017 to 1.5 percent in 2018 and 1.7 percent in 2019.

The balance of the risks to the outlook has improved relative to the previous year due to solid gains and considerable momentum; risks are now two-sided and roughly balanced. There is a potential for positive surprises: strong confidence can boost investment and hiring plans, and labour markets may have greater slack than estimated, leading to a general increase in economic activity. Increases in investment could lead to a boost to productivity and unlock a pathway to higher potential growth in the future. At the same time, the downside risks include: uncertainty of the current geopolitical environment, risks of disruptions to global trade, financial vulnerabilities, political discord and climatic catastrophes.

Economic Growth and Outlook: Major Aggregates

Global GDP growth was recorded at 3.8 percent in 2017 (PPP-adjusted), soaring above 4 percent toward the end of the year, with strong support from investment activity. Improved performance for world growth is expected next year as financial conditions still remain supportive. According to the IMF, PPP-adjusted growth will rise to 3.9 percent for 2018 and 2019 (or, if calculated with market-based exchange rates, to 3.4 percent and 3.3 percent, respectively). The IMF forecasts improved performance in the short-term both from advanced economies, at 2.5 percent for 2018 and 2.2 percent for 2019, as well as from developing economies to 4.9 percent in 2018 and 5.1 percent in 2019. This growth is projected to soften in the medium term, as output gaps close and advanced economies return to their lacklustre potential output paths.

The advanced economies have been in a continued recovery mode ever since the Great Recession, which is now drawing to a definite close. Growth is peaking above potential to end the cycle, as normality is restored in labour and investment markets. Faster-than-expected closing of the output gaps and the upward revisions to the estimated potential growth account for the current growth spike. Beyond the short term, growth rates are expected to dip below pre-recession levels as the aging populations and shrinking labour forces in the advanced economies will act as a drag on expansion. Fiscal policy is expected to remain expansionary in 2018 and 2019, but turn mildly contractionary by 2020 and more so by 2023 when the front-loaded investment provisions of U.S. tax reform begin to expire. Monetary policy will remain very supportive in the eurozone and Japan, but will tighten faster than projected in the United States. Global financial conditions will continue to remain generally accommodative.

The emerging and developing economies have not seen an improvement in growth since 2010, but that came to an end last year as they expanded 4.8 percent, up from 4.4 percent in 2016. Growth continued to be strong in emerging and developing Asia and accelerated substantially in emerging Europe. Latin America and the Caribbean region left negative growth behind them, and sub-Saharan Africa accelerated as well; the only exception to the improvement trend was in the Middle East and North African (MENA) countries, whose growth in 2017 was just over half of the previous year’s pace. Commodity exporters had a better year after three years of weakness as commodity prices recovered substantially, owing to a general improvement in activity. The IMF commodity price index is expected to rise 11.9 percent in 2018 and then decrease about 3.7 percent in 2019. Beyond the short term, growth in emerging and developing economies is projected to stabilize at about 5 percent.

Emerging and developing Asia will remain the key engine of global growth, growing steadily at a 6.5-percent pace in 2018 and accelerating to 6.6 percent in 2019. Emerging Europe will slow down from its high current rates to 4.3 percent in 2018 and to 3.7 percent in 2019 as strong demand for exports from its eurozone neighbours and favourable financial conditions support activity. Recovery in commodity prices will be very welcome to Latin American and Caribbean economies and should propel them to growth of 2.0 percent in 2018 and 2.8 percent in 2019. MENA countries will also pick up their pace – to 3.4 percent in 2018 and 3.7 percent in 2019, with support from higher oil prices crucial to their prospects. Growth in sub-Saharan Africa is also projected to increase to 3.4 percent in 2018 and 3.7 percent in 2019, with commodity prices key to the growth.

Overview and Prospects for World Trade

World merchandise trade recorded its largest increase in six years as it expanded 4.7 percent in 2017 in real terms. This trade expansion follows on the heels of a very weak 1.8-percent growth in 2016, when trade growth lagged behind the growth in real world output. According to the WTO, this large acceleration in trade growth was due to stronger than expected economic growth across the globe, with strong investment ^{Footnote 1-4} numbers, private consumption and supportive fiscal as well as financial conditions. The renewed strength of world trade volumes should persist in the short term, with its pace cooling off slightly to 4.4 percent by 2018 and to 4.0 percent in 2019.

At the same time, there are grave risks to this forecast as the heightened trade tensions and uncertainty about the major economies’ commitment to existing rules-based architecture begin to threaten business confidence, affect investment decisions and undermine the robustness of current global economic growth. This outlook is thus dependent on the governments continuing to manage global trade through collective action and employing appropriate trade, monetary and fiscal policies.

The largest trade volume gains in 2017 were recorded on the import side in developing economies; real import growth soared to 7.2 percent after a tepid 1.9-percent performance in 2016. Meanwhile, developed economies’ real imports grew a less spectacular 3.1 percent in 2017 after recording 2.0-percent growth the year before. Real merchandise exports grew 5.7 percent in developing economies in 2017 and 3.5 percent in developed economies, several percentage points above their 2016 performance. The dynamics of growth were also different: while the developing economies achieved higher overall import growth, it was the developed economies that had more momentum at the end of the year, as higher economic growth in these countries took hold.

The recovery in export trade volumes was broad across the world’s regions in 2017. Exports from North America, South and Central America and the Caribbean (SCAC), Europe and Asia all grew faster than in 2016. Asia was the leader with 6.7-percent exports growth, followed by North America at 4.2 percent. Europe’s exports also picked up considerably, from 1.1 percent in 2016 to 3.5 percent in 2017. On the import side, Asia also led with 9.6-percent volume growth, with North America and SCAC both posting a substantial 4.0-percent growth – the former after a near-zero growth in 2016, the latter on the heels of a 6.8-percent contraction in real imports in the same year.

Nominal world imports measured in U.S. dollars expanded 10.7 percent in 2017 after two years of declines, reaching US$17.6 trillion. The stability of the U.S. dollar versus a broad basket of currencies, in spite of the commodity price increases, contributed to this increase. China has once again become the greatest merchandise trading nation, recording US$4.1 trillion in total trade and passing the United States with US$4.0 trillion. Europe remained the greatest trading continent with US$13.0 trillion in total trade, ahead of Asia with US$11.4 trillion. World imports of commercial services also increased in value considerably in 2017 (volume statistics for services are not available), up 6.5 percent to US$5.1 trillion.

The WTO forecast is for a gradual moderation in merchandise trade growth in 2018 and 2019, but projects a strong performance in the short term. Optimism is supported by the recent strength in leading trade indicators such as the container port throughput index and global export orders. On the other hand, the continually swelling tide of anti-trade sentiment and trade-restricting measures carries significant risks to the outlook. If the current GDP growth forecasts are realized, trade volumes will expand by 4.4 percent in 2018; developing economies will see import growth of 4.8 percent and export growth of 5.4 percent, while developed economies will expand their imports by 4.1 percent and their exports by 3.8 percent. A slowdown to 4.0 percent in global trade volume growth in 2019 will affect these estimates roughly in proportion.

Merchandise Exports

In nominal terms, the CIS (Commonwealth of Independent States) was the surprising world leader in exports growth in 2017 among the world’s regions, recording a 24.4-percent increase from the previous year. This was partly due to higher energy prices, which buoyed a large proportion of the region’s exports, and partly to lower trade levels of 2016 due to a recession in Russia (whose exports expanded by over a quarter in 2017). Commodity price increases also occasioned a strong growth in value of Africa’s exports, which were up 18.3 percent, and those from the Middle East, up 18.0 percent. The SCAC region also benefited from higher commodity prices with 13.0-percent growth as well as from the end of a recession in Brazil (whose exports expanded by 17.5 percent in 2017). Asia’s nominal exports grew 10.7 percent, with India leading the ranks at 13.0-percent growth and NIEs not far behind with a combined 12.6-percent growth performance. Exports from Europe expanded to 9.3 percent with a strong performance from Italy (up 9.6 percent), the United Kingdom (up 8.6 percent) and Germany (up 8.5 percent). North America’s exports grew at the slowest pace among the world’s regions (up 7.3 percent) with Mexico in the lead at 9.5 percent. Europe remained the globe’s greatest exporter with a 37.8-percent share, followed by Asia with 34.0 percent and the other regions far behind.

Source: WTO Press Release, April 2018

Merchandise Imports

In nominal terms, world merchandise imports also rose 10.7 percent on the year to reach US$17.6 trillion. Import values were up across the globe, but the CIS again was the fastest-growing region, with 20.8-percent increase in import value. This was mainly due to Russia coming out of the recession and the greater value of its energy-intensive exports (Russia’s imports were up 24.1 percent in 2017). Asia also recorded a big jump in its imports, which expanded 15.3 percent. India was the leader again with a 23.8-percent import increase, followed by China with 16.0 percent.

Nominal import growth in most other regions was clustered just short of 10 percent: Europe was third with 9.9 percent, Africa and SCAC regions next at 7.8 percent and North America at 7.3 percent (with Mexico again in the lead with 8.7-percent growth). Imports were stagnant in the Middle East, which was last among the regions with a tepid 1.1-percent growth performance.

Source: WTO Press Release, April 2018

Among the large economies, import expansions in Italy (up 11.2 percent), Germany (up 10.5 percent) Brazil (up 9.7 percent) and France (up 9.2 percent) are worth noting, as is the United Kingdom’s weak import growth of just 1.2 percent, mainly occasioned by the depreciation of its currency.

Europe remained the world’s leading importer, at 37.1 percent of the global trade, while Asia’s imports accounted for 31.5 percent of the total; together these two regions import well over two-thirds of the world’s merchandise. North America’s share was 18.7 percent, while all other regions together accounted for less than 13 percent of global imports.

Services Exports

After two years of languishing, nominal world services exports measured in U.S. dollars grew strongly in 2017, rising 7.4 percent to reach US$5.3 trillion. Transport services grew the fastest at 8.3 percent, and travel services were up 7.2 percent, while goods-related services ^{Footnote 1-5} registered the slowest growth of all categories as their value increased 5.2 percent. The latter category was the best performer in the years 2015 and 2016.

On a regional basis, “other regions” (which includes Africa, the CIS and the Middle East) performed the best, recording 9.8-percent growth in service exports. Growth was particularly remarkable in Egypt (up 38.2 percent) and Russia (up 15.9 percent). Europe recorded the next-highest increase with 8.5-percent aggregate growth, reaching a US$2.5-trillion total. The Netherlands led this region with a 15.6-percent expansion while growth was slow in the United Kingdom at 4.9 percent. Asia was third-fastest in service exports growth, up 7.1 percent; India was in the lead again with 11.0-percent growth and China ahead of the average at 8.7 percent, while the NIEs recorded only a 2.1-percent increase.

Exports of services from SCAC countries were 6.8-percent higher than in 2016; Brazil’s expansion was only half as fast at 3.4 percent. North America registered the smallest increase of all regions, up 4.2 percent, with Mexico showing the largest growth at 10.1 percent and the United States the smallest at 3.8 percent. Canada’s services exports increased by 5.8 percent. ^{Footnote 1-6}

Europe continued to be the world’s leading provider of services, accounting for 47.6 percent of global value of exports, due largely to intra-EU trade in services. Asia ranked second, with just over a quarter of the global exports (US$1.3 trillion), while North America was third, with US$0.9 trillion – accounting for 16.7 percent of the global services exports in 2017.

Source: Statistics Canada, Table 380-0064

Services Imports

The total value of world services imports rose 6.5 percent to US$5.1 trillion in 2017. “Other regions” was the bestperforming import region; services imports expanded 10.3 percent, led by Russia’s increase of 18.8 percent despite some countries, like Egypt and the UAE, posting marginal growth rates. SCAC was the next-highest region of import growth with a combined increase of 8.5 percent. Brazil performed just below this average with 7.9-percent growth.

North America recorded next-highest import growth at 6.9 percent: Mexico led with 9.9-percent growth, followed by the United States at 6.8 percent, while Canada’s imports of services increased 6.5 percent. ^{Footnote 1-7}

Uncharacteristically, Europe and Asia found themselves at the back of the rankings with growth of 5.9 percent and 5.5 percent, respectively. The Netherlands led Europe with 14.7-percent growth, but the performances of France and the United Kingdom were weaker than the average. Among the large Asian countries, India’s performance of 13.1-percent services import growth was exceptional; the NIEs grew at the average pace of 5.5 percent, while China’s 3.3-percent growth fell far short of the average for the region.

Europe remained the largest importer of services, with 42.2 percent of the world’s imports in 2017, followed by Asia with 29.9 percent. North America’s import share equalled 13.0 percent, while Africa, the Middle East and the CIS combined equalled 11.4 percent of the total, significantly expanding their share.

Source: WTO Press Release, April 2018

Overview of Global Foreign Direct Investment Flows

According to preliminary estimates from the United Nations Conference on Trade and Development (UNCTAD), global FDI inflows decreased by 16.3 percent in 2017 to US$1.5 trillion. This was well below their peak of US$1.9 trillion in 2007.

FDI inflows to developed economies fell 27.0 percent to an estimated US$810 billion in 2017, accounting for a 53.4-percent share of world FDI inflows. North American inflows declined by 33.2 percent to US$330 billion. This was partly caused by the decline in cross-border M&A between Canada and the United States. Inflows into the United States decreased in 2017, yet the country remained the world’s largest recipient of inflows for the third year in a row with an estimated US$311 billion. Within the EU countries, inflows declined by 26.0 percent, accounting for just below one-quarter of global inflows. A significant portion of this decline can be attributed to lower FDI inflows into the United Kingdom, which experienced a 90-percent drop in 2017. Inward flows to Belgium, Spain and the Netherlands also fell. Germany was the highlight of developed economy inflows, which more than tripled in value (from US$10 billion to an estimated US$35 billion), and France experienced a significant increase in FDI flows, mainly due to a number of high value M&A deals.

Source: UNCTAD, Investment Trends Monitor, April 2018

FDI inflows to developing economies grew 2.4 percent, to US$653 billion in 2017, accounting for 43.0 percent of global inflows. In Latin America and the Caribbean, flows increased by 2.9 percent to US$143 billion. Inflows to Africa registered a marginal decline of 2.0 percent to US$49 billion. In developing Asia, FDI inflows grew 2.5 percent to US$459 billion. Mainland China and Hong Kong were the second- and third-largest recipients of FDI, at US$144 billion and US$85 billion, respectively.

FDI inflows to transition economies decreased sharply in 2017, falling 17.9 percent from US$67 billion to US$55 billion. This was largely driven by a drop for the Russian Federation and lower inflows across most of the Commonwealth of Independent States (CIS).

Cross-border M&A contracted by 23 percent to US$666 billion in 2017. The decline was driven by a decrease of 30 percent (to US$553 billion) in developed economies, while in developing economies the value of cross-border M&A increased by 44 percent (to US$100 billion). Worldwide greenfield FDI also decreased significantly, to US$571 billion.

Figure 1-3
Top Performing Trade Regions: Europe VS. Asia, 2017 (Estimated)

Figure 1.3 Text Alternative

Canada’s Current Account Balance and Components, 2012-2016

	Europe	Asia
Export Volume, Growth (%)	3.5	6.7
Import Volume, Growth (%)	2.5	9.6
Nominal Total Merchandise Trade (US$ Trillion)	13.0	11.4
Nominal Merchandise Exports (US$ Trillion)	6.5 (+9.3% growth)	5.8 (+10.7% growth)
Nominal Merchandise Imports (US$ Trillion)	6.5 (+9.9% growth)	5.5 (+15.3% growth)
Nominal Total Service Trade (US$ Trillion)	4.6	2.8
Nominal Service Exports (US$ Trillion)	2.5 (+8.5% growth)	1.3 (+7.1% growth)
Nominal Service Imports (US$ Trillion)	2.1 (+5.9% growth)	1.5 (+5.5% growth)

2. Economic and Trade Developments: Regional and Country Overview

Strong economic performance with the fastest growth since 2011 buoyed global investment and trade in 2017. Activity was particularly impressive in the eurozone, Japan, China and the United States, all of which exceeded expectations last year. As an open economy, Canada is strongly affected by events in other economies and global trends. For example, in 2017, the enactment of a new budget in the United States affected the flow of foreign investment into Canada, and tensions in the Middle East have supported oil prices, thus positively affecting Canada’s terms of trade. Since Canada’s trade is fairly strongly concentrated, it may be particularly affected by events in a handful of key countries and regions. While the previous chapter briefly dealt with important global influences, this chapter describes the economic situation in Canada’s most important trading partners – the United States, China and Mexico – and in the key regions for Canada’s international activities – emerging Asia, the eurozone and Latin America and the Caribbean (LAC).

Many risks and policy challenges facing economies in 2017 are widely shared. A more interconnected world should make it easier to work together for the common good, but that is not what is observed at the moment. Ensuring stable external demand, fostering business and consumer confidence, raising productivity, improving income distribution and preserving a rules-based system of international exchange are the necessary conditions of prosperity for most countries. Yet when there is no domestic agreement on the solutions for these standard economic problems, political deadlock ensues and aggravates them. International institutions have long been a source of economic guidance, but currently there is a lack of worldwide agreement on their future role. Thus the whole multilateral trading and investment system reflecting the post-WWII consensus is in question, representing a threat to economic stability as we know it.

Advanced economies have an additional set of their own peculiar issues: the effect of their aging populations on labour force and productivity, income inequality, and sharing economic influence with emerging powers. The emerging economies have the advantage of a rosier labour force picture (with an important exception of China), grappling instead with challenges of continuous economic and social reforms, infrastructure, labour standards, human rights, pollution and governance institutions.

Considering the above picture, the key regions for Canada’s commercial policy offer greater challenges and greater opportunities than before. While the paramount importance of the United States to Canada’s economy will not change, other regions and countries may become more or less crucial for Canada – often depending on shared values and treaties that link it to these nations. In the coming years, the well-established links with the eurozone should expand further, as the implementation of the Canada-European Union Comprehensive Economic and Trade Agreement (CETA) occurs. For similar reasons, proximity to and engagement with LAC, and particularly Mexico, are to be expected, especially given the potential barriers in their economic relationship with the United States.

Emerging Asia continues to be a global growth leader and cannot be ignored, with China and India still the lands of peerless opportunities; the trade talks with China are an important step in taking advantage of these opportunities. This chapter provides a brief overview of the most important facets of economic and trade developments in these countries and regions.

Country Overview

United States

Annual economic growth in the United States accelerated by the better part of a percentage point, from 1.5 percent in 2016 to 2.3 percent in 2017. This real GDP growth primarily reflected positive contributions from household expenditures, non-residential fixed investment, and exports. Government spending made a near-zero contribution. These contributions were partly offset by negative contributions from private inventory investment and imports. Compared with the previous year, the acceleration in real GDP reflected upturns in non-residential fixed investment and in exports. These positive contributing factors were partly offset by decelerations in residential fixed investment and in state and local government spending, as well as the acceleration in imports.

Household spending expanded 2.8 percent in 2017, a slight pickup from 2.7 percent in the previous year, and once again made a dominant contribution of 1.89 percentage points to the final economic growth tally of 2.3 percent. The pace of spending rose for goods, up to 3.9 percent, but slowed marginally for services, down to 2.2 percent. Expenditures on durable goods accelerated to a 6.7-percent pace while growth in spending on nondurables slowed down to 2.4 percent. Growth in business fixed investment increased dramatically from 0.7 percent in 2016 to 4.0 percent in 2017. The pace of expansion in residential investment slowed down sharply from 5.5 percent in 2016 to 1.8 percent in 2017. Meanwhile, the reverse was the case for non-residential investment, which rebounded from a contraction of 0.6 percent in 2016 to post a 4.7-percent growth in 2017. Within the latter, investment rebounded both in the area of structures and that of machinery and equipment, while growth in investment in intellectual property products declined. As a result, business fixed investment contributed 0.65 percentage point to GDP growth in 2017, up from 0.12 percentage point in the previous year.

Contribution to GDP growth from net exports was negative again (-0.18 percentage point), but slightly less so than in 2016. Exports shrugged off their 2016 contraction to expand 3.4 percent, but imports accelerated from 1.3 percent in 2016 to 4.0 percent. The contribution to growth from both federal and state and local government spending was near-zero as both federal and state and local expenditures expanded marginally.

As in several previous years, weakness in the first quarter was again the case in 2017, as the economy grew just 1.2 percent. Residual seasonality was partly to blame, as well as a fall in consumer spending on autos and utilities, and lower defence spending. Strong consumer spending and non-residential investment boosted the growth to 3.1 percent in the second quarter of 2017. In the third quarter, investment and net exports pushed the economic growth even higher to 3.2 percent, before slowing down to a more restrained 2.9-percent pace in the last quarter of the year, mainly due to a sharp fall in inventory investment.

Overall, the latest U.S. data show signs of continuing strong recovery with 3.0 percent average annualized growth over the last three quarters of 2017, followed by unexpected first-quarter strength of 2.3 percent in 2018.

Source: U.S. Bureau of Economic Analysis, Tables 1.1.2 and 1.1.6

Combined with other factors such as stronger and earlier federal outlays related to the Bipartisan Budget Act of 2018, this bodes well for the 2018 growth. Most cyclical indicators suggest that growth will stop accelerating by 2019 due to higher projected resource prices, upward pressure on inflation, a quicker monetary tightening schedule by the Federal Reserve, and global risks. Labor market data indicate that the country is close to full employment as the jobless rate reached 4.1 percent at the end of 2017 and is projected to dip below 4 percent in 2018. The IMF expects GDP growth of 2.9 percent in 2018, slowing down to 2.7 percent in 2019.

Canada’s goods exports to the United States increased by 4.8 percent in 2017, slightly slower than the overall increase of 5.4 percent for Canada’s overall goods exports. Growth in goods imports from the United States rose 2.9 percent, also slower than the overall import growth rate of 4.8 percent.^{Footnote 2-1} Exports of services to the United States grew 2.7 percent, and imports of services from it grew 2.5 percent. Canada’s top five categories of export commodities to its greatest trading partner were: mineral fuels and oil, automotive products, mechanical machinery, plastics, and wood and articles of wood; its top five imports were automotive products, mechanical machinery, mineral fuels and oil, electric machinery and equipment, and plastics.

China

In 2017, China’s economy did better than many analysts expected. Economic growth accelerated to 6.9 percent (up 0.1 percentage point from 2016 and equal to 2015), surpassing the government’s target of around 6.5 percent. Even more impressively, this occurred while excessive credit growth was being reined in, following years of credit stimulus, previously flagged as a concern by many economic organizations.

China’s economy continued to switch over from investment-fueled to consumption-based growth while decelerating very gradually. Within the industrial sector, growth is slowing down in construction activities, manufacturing and mining. On the other hand, growth was observed to rise in the agriculture and service sectors. Real fixed investment growth continued to slow down, from 6.6 percent in 2016 to 5.7 percent in 2017.

IMF data indicate that China’s real exports of goods and services expanded by 9.2 percent in 2017. Real imports rose at a 6.9-percent pace. General government expenditures as a proportion of GDP were reduced from 31.9 percent in 2016 to 31.5 percent in 2017, and the current account surplus narrowed from 1.8 percent of GDP in 2016 to 1.4 percent of GDP in 2017. Inflation dipped to 1.6 percent, and so did reported unemployment, now at 3.9 percent.

China’s government, directing its economy to achieve a more sustainable consumption-based growth, is indicating satisfaction with its strong performance in setting its objectives. Current economic policy targets, identified in December’s annual economic work conference, were identified as pollution control, mitigation of financial system risk and new anti-poverty measures. These policies can be expected to slow down economic growth, indicating the Chinese government’s confidence in the strength of the economy to withstand them.

According to the IMF, China’s economy is expected to continue to slow down in the medium term – to 6.6 percent in 2018 and to 6.4 percent in 2019. Labour markets remain stable, and a controlled slowdown in housing is under way. Nevertheless, risks to China’s forecast in the medium term are on the downside. Large commercial indebtedness, excess industrial capacity, and a housing glut are all headwinds against the economy beyond the short term. In the short term, severe risks are associated with the trade spat with the United States, although the trading relationship of these countries is widely believed to be too extensive and lucrative to end in a full-scale trade war (for example, the latest IHS^{Footnote 2-2} forecast for China cites the risks of a trade war as “non-negligible”, but foresees a deal as the most probable outcome).

Canada’s goods exports to China rose 11.5 percent in 2017, a rate almost triple that of 2016. Meanwhile, Canada’s goods imports from China grew even faster, up 13.3 percent, to reach $42.6 billion. China remains Canada’s second-largest trade partner; Canada’s main export commodities to China in 2017 were oil seeds and miscellaneous plants, wood pulp, wood and articles of wood, automotive products, and ores; Canada’s main import commodities from China were electrical and electronic machinery, mechanical machinery, furniture, toys and sporting equipment, and plastics and articles thereof.

Mexico

After higher-than-expected GDP growth of 2.9 percent in 2016, Mexico’s economy has slowed to a 2.0-percent pace in 2017. A marked slowdown took place in the second half of 2017, as the growth figures were just short of a recession. A combination of factors is responsible. Public investment has declined, as the government is attempting to rein in the fiscal deficit stemming from lower oil prices, while the country’s central bank is fighting high inflation. But it is the renegotiation of NAFTA that remains the gravest external threat to the economy. Mexico’s manufacturing industry is the country’s engine, and the uncertainties or disruptions that the lengthening NAFTA negotiation process implies are not conducive to its normal business. Total investment was flat in 2016 and then contracted 1.0 percent in 2017, as business sentiment declined and private investment no longer compensated for the dip in public investment. FDI into Mexico declined 0.2 percent in 2017 and may be expected to fall further due to uncertainty.

Thus the outlook remains problematic for Mexico’s economy. Private consumption has driven growth in recent quarters, but may lose strength due to high inflation. Real exports increased 3.2 percent in 2017, while real imports increased 6.0 percent. The current account deficit narrowed to 1.6 percent of GDP, down from 2.1 percent in 2016; the unemployment rate edged down to a very low 3.4 percent in 2017. The Mexican peso will continue to show volatility in the short term. Elections scheduled for July 2018 are also a source of uncertainty. Nevertheless, the IMF projects a pickup in growth to 2.3 percent in 2018 and all the way to 3.0 percent in 2019; other forecasters disagree. IHS expects only 1.9-percent growth in 2018 and 2.0 percent in 2019; the Economist Intelligence Unit (EIU) forecast is in the similar range. Most risks are associated with U.S. policy, punitive trade barriers or a complete failure of NAFTA negotiations. The climate of fiscal austerity and rising interest rates is a damper on economic growth.

Mexico remains one of Canada’s key trading partners, and the current situation may be very conducive to expanding these ties, as Mexico will need more friends in the Americas in the medium term. In some industries, Canadian businesses looking to expand abroad might consider Mexico as a viable alternative to the United States. Canada’s goods imports from Mexico grew 12.4 percent in 2017. In contrast, Canada’s goods exports to Mexico grew much slower – up 3.3 percent. Canada’s merchandise trade deficit with Mexico expanded to $27.6 billion in 2017, second only to the deficit with China. This deficit is largely generated by three sectors: automotive, electric and electronic machinery, and mechanical machinery, which together account for over three-quarters of it.

Regional Overview

Emerging Asia

According to the IMF’s estimates, growth in emerging Asia averaged 6.5 percent in 2017, unchanged from the previous year. This is the world’s fastest-growing region, and is projected to continue to grow at that level in the medium term. Among the large economies in this region, China regained its growth lead with reported 6.9-percent growth in 2017, slightly ahead of India, which grew at 6.7 percent. The ASEAN-5 economies (Indonesia, Malaysia, the Philippines, Thailand and Vietnam) improved their economic performance, as their growth increased from 5.0 percent in 2016 up to 5.3 percent in 2017. Medium-term growth prospects remain favourable in the region. In India, the domestic demand is recovering from the double shock of its currency exchange program in 2016 and the introduction of a goods and services tax in 2017, and economic growth is expected to continue approaching the 8-percent mark, with 7.4-percent performance in 2018 and accelerating to 7.8 percent by 2019. Stronger domestic demand will underpin continued strength in the ASEAN-5 economies, and broadly stable growth is expected. Continued policy support and careful management underpin China’s growth, but this support is expected to weaken as the government deals with its anti-pollution, anti-poverty and anti-debt agenda. Vast diversity and inequality remain the keynote within this region; e.g. India’s per capita income is less than one quarter that of China, and while Malaysia, like China, runs a current account surplus, the opposite is true of India and Indonesia.

Source: IMF WEO Database, April 2018; and Global Trade Atlas

Inflation continues to be moderate in most of the region, recently moderating in India; average inflation in emerging Asia fell to 2.4 percent in 2017. Unemployment is also fairly low across emerging Asia, with Indonesia’s 5.4 percent as the highest among large economies, although data for India were not available. Real exports of goods and services grew at a strong pace of 8.8 percent in 2017; China and Malaysia benefited the most. Real imports registered a similar growth pace, up 8.1 percent, with India in the lead at 10.6 percent while China’s import growth, at 6.9 percent, was comparatively modest. Current account balances were 0.9 percent of GDP on average, with a strong surplus in Malaysia and a deficit of 2.0 percent of GDP in India.

China is and will remain Canada’s most important trading partner in emerging Asia, accounting for over twothirds of Canada’s exports and over three-quarters of Canada’s imports. Of key importance in Canada’s trade with the region are the imports of electrical and electronic machinery conducted through the key international export platforms (e.g. China, Malaysia and, increasingly, Vietnam). Canada’s trade with this region’s countries that are not part of that platform, such as India and Indonesia, is nearly balanced, demonstrating that trade deficit is not necessarily a feature of Canada’s commercial activities in the region. Emerging Asia now accounts for 16.6 percent of Canada’s imports and 6.2 percent of Canada’s exports, both up considerably from the previous year.

Eurozone

After many years of tentative and uncertain economic conditions in the eurozone, proper recovery has finally arrived. Growth expectations have been exceeded, as the 2.3-percent performance of 2017 ranks it as the best year after the Great Recession. Many years of substandard performance in the region mean that it is in mid-cycle of the recovery, that there is relatively more slack in the economy than is the case for other developed countries, and so the current spurt of growth has the potential to be stronger and last longer. At the same time, some preliminary survey data indicate that growth may already be peaking in early 2018; as the projections of output gaps in the aftermath of a lasting crisis are very uncertain, it is difficult to estimate when growth in the eurozone will fall back to normal levels. Current projections call for a moderate speed-up to 2.4 percent in 2018 as some countries catch up with the trend, before falling back to 2.0 percent in 2019. Medium-term growth is projected at 1.4 percent, as low productivity and unfavorable demographics dominate. Sizeable risks remain, chiefly associated with potential trade disruption and the rolling back of monetary stimulus by the European Central Bank, as well as internal disagreements between members.

Source: IMF WEO Database, April 2018; and Global Trade Atlas

In 2017, strong growth was observed in Germany and Spain; both are now expected to have peaked. Outlook for Germany calls for the same 2.5-percent growth in 2018, and 2.0 percent in 2019; Spain is projected to slow down to 2.8 percent and 2.2 percent, respectively. France, which has lost some time and whose trade exposure is less, has posted 1.8-percent growth and should continue to expand in the short term, to 2.1 percent in 2018 and then down to 2.0 percent in 2019. Italy was up to 1.5-percent growth in 2017 and should produce equal growth in 2018 before falling back to 1.1 percent in 2019. As for the United Kingdom, growth was 1.8 percent in 2017, but the combination of continued uncertainty about the path of Brexit, high inflation and strengthening currency points to a declining short-term outlook. Growth is projected to decelerate to 1.6 percent in 2018 and 1.5 percent in 2019.

Inflation picked up to somewhat normal levels in 2017, averaging 1.5 percent for the year, as deflation in Italy and Spain has ended. The unemployment rate improved further to 9.1 percent, but is very unevenly distributed; surveys in Germany show tight labour markets while Italy and Spain are still running double-digit unemployment rates. Current account balances as a proportion of GDP in the region remain strongly positive at 3.5 percent, rising as high as 8.0 percent in Germany but dipping to negative 1.4 percent for France.

Total imports by Canada from the eurozone rose substantially in 2017 and now amount to 8.9 percent of Canada’s total imports; imports from Germany – mainly automotive products and machinery – account for over one-third of that figure. Exports to the eurozone are smaller, amounting to 3.9 percent of Canada’s total exports to the world, with this share falling slightly in 2017. Trade with the eurozone countries is much more diverse in detail than with most other regions. While Germany is very important, it does not dominate Canada’s trade with its eurozone partners. Many eurozone countries occupy key positions in Canada’s global supply chains, and the importance of Europe as a global services hub may be of key value to Canada in the future, especially in light of the new trade agreement between us.

Latin America and the Caribbean (LAC)

After three consecutive years of slowing down, LAC economies finally saw better times in 2017. Local giants, Argentina and Brazil, both came out of the recession that year, and the region followed: growth picked up from negative 0.6 percent in 2016 to 1.3 percent in 2017. The external environment is much more favourable to growth in the short term, and improved commodity prices, which fuel the region’s economy, provide a crucial boost to regional balances. Nevertheless, business investment and confidence are still relatively low. Brazil, Mexico and Colombia will hold general elections in 2018, and many important investment decisions might be deferred until then. Growth could be boosted by timely fiscal stimulus, but this is likely not in the cards as the fiscal balances of most countries are stretched already (partly due to the collapse in commodity prices over 2014-2015). Thus the potential for growth to surprise on the upside is limited. Current growth projections call for 2.0-percent growth in 2018, which is fairly low for the region; this is partly due to the ongoing collapse of Venezuela’s economy.

Source: IMF WEO Database, April 2018; and Global Trade Atlas

In 2017, stronger growth was observed in Uruguay at 3.1 percent and Argentina at 2.9 percent. Peru at 2.5 percent and Mexico at 2.0 percent were also above average, but this year was the low point of the cycle for them; growth in Peru was 4.1 percent in 2016, and is expected to rebound to 3.7 percent in 2018. As for Mexico, strong growth of 2.9 percent in 2016 faltered somewhat in 2017, but is expected to ratchet back to 3.0 percent by 2019. The big regional stories were the rebounds in Brazil (up from negative 3.5 percent in 2016 to 1.0 percent in 2017) and Argentina (up from negative 1.8 percent in 2016 to 2.9 percent in 2017). Brazil’s economic growth is expected to strengthen to 2.3 percent in 2018 and 2.5 percent in 2019, while Argentina’s reforms will cause its pace to dip to 2.0 percent in 2018 before they will allow it to accelerate to 3.2 percent in 2019. Meanwhile, economic activity in Venezuela went from bad to worse as GDP was down 16.5 percent in 2016 and then estimated to have dropped another 14.0 percent in 2017 by the IMF (although precise calculations are difficult due to the economic chaos).

Inflation averaged 4.1 percent through the region, an improvement over the last year. Data for Argentina, not available from the national sources for 2016, indicated 25.7 percent inflation in 2017, while Venezuela’s exceeded 1,000 percent. Inflation abated in Brazil (down from 8.7 percent to 3.4 percent), Colombia and Uruguay, but rose to 6.0 percent in Mexico. Conversely, the unemployment picture was fairly difficult in Brazil where the rate was 12.8 percent, while Mexico clicked along smartly at only 3.4 percent. The current account balance for the region as a whole improved further to negative 1.6 percent of GDP; every major economy was in the negative territory. The LAC region’s real exports continued their recovery, going up 3.7 percent, while real imports rose 4.6 percent. Brazil’s real exports soared 10.9 percent while Chile’s fell; import growth was the rule among the large economies.

Canada’s links with this region were getting stronger in the recent years. Imports from LAC rose to 9.3 percent of Canada’s total imports in 2017, with Mexico accounting for over two-thirds of Canada’s imports from the region, 7.5 times the value of imports from the next-biggest partner (Brazil). Exports to the region represented 2.7 percent of Canada’s total exports, over half of those to Mexico. Canada ran substantial trade deficits with Mexico, Brazil, Chile and Peru in 2017, importing two to four times as much as it exported to those countries. This region is of particular interest to Canada’s trade policy, with a number of trade and investment protection agreements signed in recent years, and culminating in the recent Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Other initiatives may be expected as LAC countries search for stronger hemispheric links in the wake of possible policy and trade risks emanating from the United States, and Canada is deepening its ties with MERCOSUR and the Pacific Alliance.

World Merchandise Trade Value Rankings

For the ninth consecutive year, China was the world-leading merchandise exporter at US$2.3 trillion, accounting for 12.8 percent of the global exports (down from 13.2 percent in 2016). The United States, in second place, exported US$1.5 trillion worth of merchandise. Germany was third with US$1.4 trillion in exports and 8.2 percent of the global market.

These top three exporters were followed, at a considerable distance, by Japan, with US$698 billion in exports, and the Netherlands, with US$652 billion in exports. South Korea vaulted to sixth place with exports of US$574 billion, and Hong Kong slipped down to seventh with US$550 billion in exports. France went from seventh to eighth place with exports of US$535 billion.

Italy remained ninth with US$506 billion in exports and a 2.9-percent share and the United Kingdom closed out the top ten with US$445 billion in exports. Canada remained in 12th place with exports of US$421 billion – which translated to a 2.4-percent share of the world’s exports.

On the import side, Canada slipped out of the top ten and all the way down to 12th place, having imported US$442 billion worth of merchandise. Other changes in the top ten were Japan passing the United Kingdom to capture the fourth spot with US$672 billion in imports and a 3.7-percent share of the import market. South Korea and Italy went up a rank to ninth and tenth positions, respectively. The United States was the leading importer with US$2.4 trillion in imports, but China took back the distinction of the world’s leading trading nation overall, after yielding it to the United States in 2016.

Source: WTO Press Release, April 2018

World Services Trade Value Rankings

In 2017, the United States remained the world’s foremost supplier and consumer of services, although the margin of its supremacy fell back considerably. Its US$762 billion in services exports accounted for 14.5 percent of global exports, a decrease from 15.4 percent in 2016. The United Kingdom was a distant second, at US$354 billion, or 6.7 percent of the global exports, also a relative decrease from 2016. Germany and France remained third and fourth with US$296 billion and US$249 billion, respectively. China kept its fifth place, with US$226 billion in services exports; all those positions were unchanged since 2013.

Source: WTO Press Release, April 2018

The Netherlands remained sixth, exporting US$216 billion worth of services; Ireland vaulted up three spots from 2016 to end up in seventh rank, with US$182 billion exported and a 3.5-percent share of the global market. Japan and India followed with US$180 billion and US$179 billion in the eighth and ninth spot, respectively. Singapore closed out the top ten with US$165 billion in services exports. Canada remained in 18th place, with exports of US$86 billion, accounting for 1.6 percent of the world’s services exports, a marginal relative decrease from 2016.

In terms of imports, the United States remained in first place, with US$516 billion in imports of services and a 10.2-percent global share. China remained a close second with US$464 billion in services imports in 2017. Germany, with imports of US$319 billion, was a distant third; France was ranked fourth, with US$244 billion in services imports and a 4.8-percent global share. The United Kingdom rose to fifth with imports of US$218 billion and the Netherlands to sixth at US$211 billion in imports. Ireland slipped past them into seventh, having imported US$196 billion worth of services and accounted for 3.9 percent of global imports. Japan was eighth and Singapore ninth, with imports of US$189 billion and US$171 billion, respectively, while India stayed in tenth. Canada’s services imports were US$105 billion, which put it in 14th place, the same rank as in 2016, with 2.1 percent of the global services import market.

Trade is Not Gender Neutral: Gender Analysis of the Impacts of Trade Agreements

Trade agreements were often said to be gender neutral.^{Footnote m1- 1} More accurately they would be described as gender blind – there are no innate biases in design favouring or disadvantaging one sex over the other. However, that does not mean that there could not be differential impacts by gender. The opportunities and costs could be claimed by or fall on one gender disproportionally due to other biases or historical roles or norms. This report describes recent work undertaken by the Office of the Chief Economist at Global Affairs Canada to understand the differentiated labour market impacts of trade agreements in Canada by gender and complements previous work on women-owned exporters.^{Footnote m1- 2} The results clearly indicate that trade is not gender neutral.

Methodology for Estimating Gender Impacts of Trade Policy

Although developed independently, the methodology employed by Global Affairs Canada follows closely that described by the United Nations Conference on Trade and Development (UNCTAD) in its Trade and Gender Toolbox.^{Footnote m1- 3} Global Affairs Canada has for some time used a Computable General-Equilibrium (CGE) model to estimate the economic impacts of trade policy. A CGE model compares two points in time: as close an approximation to the current state of the economy as it can manage, versus a state of the world after a shock is applied and the economy has had time to adjust and find a new equilibrium level. In the present context, that shock is a new trade agreement and the difference between these two states is the impact of the shock.^{Footnote m1- 4}

Trade creates an impact on the economy by encouraging the reallocation of resources away from sectors where the country does not have a comparative advantage and toward sectors in which it does. By so doing, capital and labour become more productive and this results in a net increase in economic output. Estimating the labour market impacts, however, poses a special challenge. The increased output of sectors with comparative advantage could be achieved by hiring only a few new workers and employing much more capital resulting in a large increase in labour productivity and wages, but few employment impacts. Alternatively, output could simply be increased by employing more labour, resulting in an increase in jobs but not much for wages. In addition, if labour markets adjust freely, workers should shift easily from contracting sectors to expanding sectors resulting in little if any employment impacts. Conversely, if labour markets fail to adjust, the new employment in expanding sectors may be met through new entrants to the labour force. A common interpretation is that inflexible labour markets approximate a short-term impact while that of flexible labour markets reflects the longer-term impact once all adjustments have taken place.

The precise method by which labour adjusts to the shock of a trade agreement is an issue for empirical study and will be covered in the section on next steps. At present, it is assumed that the sectoral output impacts are translated directly into employment impacts and that there are no productivity changes (i.e. if a sector is expected to see an increase of output of 6 percent, then that sector is assumed to also see an increase in employment of 6 percent). These labour market impacts are then applied to a matrix of employment by sector in Canada disaggregated by gender.

Employment by gender is obtained from Statistics Canada’s labour force survey. The data are highly disaggregated with more than 300 four-digit North American Industrial Classification (NAICS) industries. The basis of the CGE model used by Global Affairs Canada is a modified version of the Global Trade Analysis Project (GTAP) model. As this model is international in nature, the sectors do not conform precisely to Canadian employment data by gender. As such, it is necessary to concord the employment data to the GTAP model’s approximately 50 sectors.

Figure 1
Gender Composition of Select Industries in Canada, 2016

Source: Labour Force Statistics

Figure 1 Text Alternative

Canada’s Current Account Balance and Components, 2012-2016

	Men	Women
Forestry & Logging	23.9	2.9
Construction	1,222.6	162.4
Fishing	12.0	2.5
Mining	211.2	52.7
Transport & Warehousing	695.5	211.9
Manufacturing	1,218.4	476.4
Agriculture	187.8	78.9
Retail	961.3	1,106.5
Finance & Insurance	333.3	474.8
Education	416.7	853.3
Health	408.1	1,931.2

For Canada, men dominate sectors where physical strength is, or was at some point, an important characteristic of the job such as forestry and logging, construction, mining, and manufacturing. These also tend to be more traded sectors. In contrast, women account for more than half of employment in the health, education, finance and insurance, and retail sectors.

The Results

The shock in this case is a fictitious regional trade agreement with a group of both developed and developing economies. Overall, as a result of the agreement, Canadian GDP is predicted to increase by 0.7 percent implying an agreement of significant size.

As there is a net positive impact of the agreement overall, as indicated by the positive impact on GDP, the overall employment impact is also positive. Overall, using the method described above, the estimated employment impact of this scenario is 8,300 job losses and 32,800 job gains for a net increase of 24,700 jobs. To put those numbers into perspective, the 8,300 job losses of this scenario represent approximately five-one hundredths of one percent of total Canadian employment, which stood at more than 18 million in 2016, the year for which this analysis was done. Or to put it another way, the Canadian economy has been adding between 30,000 and 40,000 net new jobs per month on average for the past year. Also, as the current methodology implies no productivity gains, the results may be interpreted as an upper bound, and so the job impacts of even this extreme scenario results in relatively modest job impacts.

Figure 2
Post Agreement Employment Change
(Level Change in Contracting/Expanding Sectors)

Source: Gender Impact Trade Shock Scenario

Figure 2 Text Alternative

	Contracting Sectors		Expanding Sectors
	Male	Female	Male	Female
# of Jobs (Thousands)	-6.1	-2.2	17.7	15.1

The broad outline of the estimated gender impacts is not surprising. Given that men account for the largest share of employment in traded sectors, men are found to be the most impacted by the trade agreement, in both contracting and expanding sectors. The proportions are very different however; while men dominate employment in contracting sectors by a ratio of almost three to one, they are only slightly ahead among expanding sectors. By design, the sex ratio of each sector is held constant based on the most recent full year of employment data. As a result, even if men were to be disproportionately impacted by job losses, which would potentially imply that more men were seeking jobs in other sectors, this would not be accounted for by the job gains. In this particular scenario, the jobs gains are nearly four times as great as the number of those lost and so this would not likely be a constraining factor.

The sectors being impacted will vary by agreement, but the results in this example are likely illustrative in a number of dimensions. First, the losses are highly concentrated. In this example, the motor vehicles and parts industry accounts for the majority of losses for both sexes. This implies that the fictitious trade agreement is with a country or group of countries that has scope for expanding automotive exports to Canada or to existing destinations for Canadian auto exports. The more general takeaway, however, is that the motor vehicles and parts sector is a large employer in Canada and continues to enjoy relatively high tariff barriers both in Canada as well as in countries where Canadian automotive products are sold. The sectoral impacts will largely be determined by the degree of protections removed and the level of employment of the sector.

Figure 3
Contracting Sectors

Source: Gender Impact Trade Shock Scenario

Figure 3 Text Alternative

	Male Employment				Female Employment
	TOTAL	Business services nec	Trade	Construction	TOTAL	Business services nec	Public Administration, Defense, Education, Health	Trade
# of Jobs (Thousands)	17.8	7.57	2.09	1.93	15.2	5.86	4.57	2.13

Figure 4
Expanding Sectors

Source: Gender Impact Trade Shock Scenario

Figure 4 Text Alternative

	Male Employment			Female Employment
	TOTAL	Motor vehicles and parts	Chemical, rubber, plastic products	TOTAL	Motor vehicles and parts	Chemical, rubber, plastic products
# of Jobs (Thousands)	-6.27	-4.12	-0.47	-1.99	-1.11	-0.25

A second takeaway comes from looking at expanding sectors. The business services sector appears among the largest gainers for both sexes. Again, this can often be anticipated as an advanced country like Canada would be expected to face competitive pressures in more traditional manufacturing sectors as the result of a trade agreement with low-wage countries but will have comparative advantage in higher-knowledge sectors such as business services, which includes many professional services such as legal, accounting, architecture, engineering, and similar sectors.

It is also notable that the expanding sectors are more diverse than the contracting sectors. The trade,^{Footnote m1- 5} construction, and public administration sectors are not expanding due to export opportunities for the most part, but rather from the general expansion of economic activity that results from the trade agreement. These expanding sectors are more difficult to identify specifically as well as to link them to the trade agreement whereas the losses will be more easily identified creating a communications challenge for policy-makers.

Conclusions and Next Steps

Trade policy may be gender blind, but it is not gender neutral. As previously shown, majority female-owned SMEs are less likely to export, and while this may be explainable once industry and size of firm are taken into account, it does not imply that more should not be done.^{Footnote m1- 6} Similarly, women are less likely to be employed in highly traded sectors, particularly in import competing sectors, and as a result are more insulated from trade policy, but by the same token may see less of the benefits from trade.

This analysis has only looked at the gender impacts of trade for Canada and has not looked at our trading partners. Any such work should be done cooperatively. The data required to undertake this analysis are not onerous. Most advanced countries would have the basic gender composition of the labour force, and in those countries for which such data are not available, analysis can focus on those sectors that are being most impacted and for which the gender imbalance is significant.

The refinement of these results is not in the data but rather in the methodology. A methodology that allows for a more nuanced link between trade policy shocks and labour impacts without requiring a one-for-one transmission from changes in output to labour would likely have the most significant impact on the results and potentially allow for the demand and supply of workers to balance. A better understanding of within-industry responses to trade shocks would provide more dynamic results.

3. Canada’s Economic Performance

2017 was a year of very robust growth for Canada’s economy, which expanded 3.0 percent – its best performance since the economic recovery from the Great Recession in 2010 and 2011. The cyclical recovery in manufacturing and trade that began in the second half of 2016 in most developed countries continued in 2017, benefiting Canada and leading to a more balanced growth in the economy. With the economy operating close to its capacity, the labour market near equilibrium and inflation stable, the signs for the future are also encouraging. These trends are broad-based across regions and sectors, but are particularly advantageous in British Columbia, which led the Canadian provinces in relative employment gains for the second year running. The resource sector of Canada’s economy has also benefited from the continuing upturn in commodity prices. Strong gains in employment brought the unemployment rate to near-historic lows. Substantial monetary stimulus remains in the system despite the beginning of a tightening cycle by the Bank of Canada, while existing federal fiscal stimulus is projected to be strengthened by the recent provincial announcements in Ontario and Quebec. The weighty issues on the short-term economic horizon both involve uncertainty. The first one is the uncertainty around the NAFTA renegotiation process, and the global rules-based trading system in general. The second is the uncertainty related to the impact of high household debt load on consumer demand in Canada. In the short term, the IMF expects Canada’s growth to moderate to 2.1 percent in 2018 and to 2.0 percent in 2019.

Strong first-quarter growth of 4.0 percent and second-quarter growth of 4.4 percent brought about most of the past year’s economic gains. This white-hot pace was obviously not sustainable, given the potential long-term growth is estimated at about 1.8 percent by the Bank of Canada. Growth slowed down in the third quarter to 1.5 percent before recovering to 1.7 percent in the last quarter of the year. Output soared in goods sectors after two years of declines, with substantial increases in mining and oil extraction, construction, and manufacturing.

Trade policy uncertainty and competitiveness challenges continued to weigh on the numbers and outlook, as the NAFTA negotiations and worldwide trade policy volatility continued. Employment rose briskly during this expansion year, generating 336,500 new jobs, with substantial gains across the country. A strong recovery in resource prices helped the economy in 2017, and the generally supportive monetary and fiscal environment continued.

Business investment began recovering in 2017, though household spending remained the major source of growth. Robust increases in household spending last year were mostly due to spending on goods and were the highest for durable goods. Inventory investment, followed by government spending and investment, were the other major contributors to economic growth. The contribution of net exports to growth turned negative in 2017, as import growth outpaced that of the exports. The Canadian dollar did not move substantially during the year, though its end-year value was higher than in the beginning in U.S. dollar terms. Inflation rose slightly to 1.6 percent while core inflation moderated.

Figure 3-1
Canadian Real GDP Growth %, 2013-2017

Figure 3-1 Text Alternative

Canadian Real GDP Growth, 2013-2017

2013	2014	2015	2016	2017
2.5	2.9	1.0	1.4	3.0
Q4 2016	Q1 2017	Q2 2017	Q3 2017	Q4 2017
2.2	4.0	4.4	1.5	1.7

Gross Domestic Product (GDP)

Canada’s real GDP growth soared to 3.0 percent in 2017, more than doubling the 1.4-percent performance of 2016. The year ended with the sixth straight quarter of growth, and much of the yearly strength was due to the first half of the year, with deceleration in the second half. This was the highest growth observed in Canada since 2011, considerably exceeding the IMF forecast of 1.9 percent made in April 2017. The IMF currently expects this growth to be rolled back to 2.1 percent in 2018 and to 2.0 percent in 2019, in spite of considerable acceleration forecast for the U.S. economy for those years. The Canadian economy is now operating close to capacity, with some short-term fluctuations due to temporary factors. Inflation is on target, and economic growth in the next few years will benefit from some additional fiscal stimulus.

In 2017, the main contributions to GDP growth came from household expenditures, followed by inventory investment, government expenditure and business investment. Growth in household expenditures (i.e. private consumption) continued to increase its pace, up to 3.5 percent in 2017 after 2.4-percent growth in 2016. This was due to higher spending on both goods and services, but particularly on durable goods. Growth in spending on services accelerated from 2.2 percent in 2016 to 3.2 percent in 2017. As a result, private consumption of goods and services contributed about equally to the 1.97-percentage point boost that household expenditures gave to GDP growth. This contribution was dominant, accounting for about two-thirds of the total GDP growth.

After two years of decline, business investment rose in 2017, up 2.6 percent. Business investment in residential structures grew 3.1 percent, with non-residential investment growing 2.6 percent, mostly due to investment in machinery and equipment. Overall, business investment added 0.50 percentage point to GDP growth in 2017. Investment in inventories rebounded after shrinking in the previous year and was a strong factor in GDP growth with a 0.75-percentage point contribution in 2017, dominated by non-farm investment.

Net exports, the difference between exports and imports, reversed their positive contribution to growth, subtracting 0.89 percentage point from GDP growth last year. Growth in real exports remained at 1.0 percent, led by continuing strong growth in services (up 2.8 percent). Growth in real imports advanced 3.6 percent in 2017, mostly due to the 3.9-percent growth in goods imports, as real services imports expanded 2.2 percent. Government expenditure and investment continued to support GDP growth with a contribution of 0.61 percentage point to GDP growth, a similar level of support to 2016.

Source: Statistics Canada, Tables 380-0064 and 380-0100

GDP by Industrial Activity

Real GDP at basic prices, by industry, increased 3.3 percent in 2017, more than double the 1.4-percent growth in the previous year. After two years of declines, output soared in goods-producing industries in 2017, rising 4.6 percent. Growth in service-producing industries, traditionally more stable, also accelerated, from 2.2 percent in 2016 to 2.8 percent in 2017.

Among the goods industries, GDP growth was the highest in mining, quarrying, and oil and gas extraction where after two years of decline GDP grew at 8.2 percent. Construction expanded briskly at 4.0 percent and utilities grew at 2.8 percent, while agriculture, forestry, fishing and hunting slowed down a notch in 2017.

Manufacturing increased at a 3.2-percent rate with output in non-durables growing faster at 3.5 percent, while output in durables improved the most during the year (from a 1.2-percent decline in 2016 to 3.0-percent increase in 2017). The runaway growth recorded in machinery manufacturing stood out at 15.9 percent. Increases were the rule, with the highest growth observed in non-metallic minerals (up 8.1 percent), plastics and rubber (up 7.7 percent), and petroleum and coal products (up 7.6 percent). Activity declined considerably in miscellaneous manufacturing (down 5.1 percent), with decreases also observed in transportation equipment manufacturing (down 3.0 percent), printing (down 1.6 percent) and furniture (down 0.6 percent).

Source: Statistics Canada, Table 379-0031

Most major services industries grew during 2017 with the single exception of management of companies (down 3.4 percent). Wholesale trade was the fastest-growing industry at 7.4 percent, followed by transportation and warehousing, retail trade, and professional and technical services.

Employment

In 2017, employment in Canada expanded by 336,500 jobs (up 1.9 percent) and reached 18.4 million. The unemployment rate that stood at 6.9 percent in December 2016 declined 1.1 percentage points to 5.8 percent at the end of 2017. There was no change in the participation rate during the year, which was at 65.8 percent in both December 2016 and December 2017.

After three consecutive annual declines, employment increased 1.1 percent in the goods-producing industries. This increase amounted to 43,000 jobs and was led by an increase of 30,000 jobs in manufacturing (up 1.8 percent) and an increase of 24,300 jobs in construction (up 1.8 percent). The most significant relative increase in jobs was observed in forestry and fishing, which was up 3.7 percent, although that only translated to 2,400 more jobs, predominantly in fishing. Employment in utilities and agriculture each dropped by 3.4 percent during the year and remained stable in mining, oil and gas extraction.

Employment in the services-producing industries recorded a growth of 2.1 percent and accounted for 87.3 percent of the total increase in Canadian employment. Jobs grew the fastest in transportation and warehousing services (up 4.0 percent), professional and technical services (up 4.0 percent) and finance, insurance and real estate services (up 3.9 percent). Employment in wholesale and retail trade increased 2.3 percent but added the most jobs to the economy (up 63,700). Employment declined in business and support services (down 1.3 percent) and hotels and restaurants (down 0.1 percent).

Regionally, job gains and losses diverged somewhat, although the general trend was toward higher employment. Ontario had the highest total job gains (up 128,400 jobs), followed by Quebec (up 90,200 jobs) and British Columbia (up 87,300 jobs). In relative terms, British Columbia’s employment gains were the highest among the provinces (up 3.7 percent), with Prince Edward Island registering the next largest increase (up 3.1 percent). Declines in employment occurred in Newfoundland and Labrador (down 8,500 jobs) and Saskatchewan (down 900 jobs). Among the territories, Yukon alone showed employment growth of 1,000 jobs (up 5 percent), while employment fell 1,200 jobs in Northwest Territories (down 5.3 percent) and marginally in Nunavut (down 0.7 percent).

Source: Statistics Canada, Tables 282-0007 and 282-0123

Inflation

Canada’s annual rate of inflation rose slightly from 1.4 percent in 2016 to 1.6 percent in 2017. The Bank of Canada’s core inflation measures all showed declines during the year, with one of these, CPI-trim,^{Footnote 3-1} decelerating from 1.9-percent growth in 2016 to 1.5-percent pace in 2017. Thus both the CPI and the core inflation rate are well within the target area of the Bank of Canada monetary policy, with monetary support from the Bank continuing at high levels. Increases in core inflation measures are expected in 2018 due in part to recent minimum wage increases.

Services prices grew considerably faster (up 2.2 percent) than goods prices (up 0.8 percent). Prices of nondurable goods grew the fastest (up 1.4 percent), followed by durables (up 0.6 percent) while prices of semidurables declined (down 0.2 percent). Growth in food prices slowed down to a crawl in 2017 (up 0.1 percent), a considerable change from the 3.7-percent pace of 2015. Prices of shelter increased at a steady rate of 1.7 percent, while prices of household operations increased marginally, up 0.2 percent. Prices of alcohol and tobacco continued to grow faster than the average at 2.7 percent, while recreation and education activities cost 2.4 percent more in 2017 than in the previous year. Prices of gasoline jumped 11.8 percent after two annual decreases, driving transportation prices up as well (up 3.9 percent), while prices of clothing and footwear declined again (down 0.7 percent).

Regionally, the highest level of inflation was again observed in Newfoundland and Labrador at 2.4 percent. Inflation was also higher than the national average in New Brunswick (up 2.3 percent), British Columbia (up 2.1 percent), Prince Edward Island (up 1.8 percent) and Ontario (up 1.7 percent). Quebec had the lowest inflation recorded in Canada at 1.0 percent.

Source: Statistics Canada, Tables 282-0123, 326-0021 and 326-0023

The Canadian Dollar

After declining against the U.S. dollar for five consecutive years, the value of the Canadian dollar vis-à-vis the greenback rose by 2.0 percent in 2017. The value of the loonie relative to the European euro was almost unchanged (up 0.1 percent). The Canadian dollar rose substantially against both the Japanese yen (up 5.4 percent) and the British pound (up 7.4 percent).

Throughout most of 2017 and similarly to the previous year, the Canadian dollar traded in a narrow 10-cent band relative to the U.S. dollar (between 72¢ and 82¢). After opening at US 74.4¢ on January 3, the Canadian dollar hovered around US 76¢ till late February, but declined to US 74.0¢ by March. On May 4, the currency hit its low for the year at US 72.8¢ and rallied from there until a peak of US 80.3¢ on July 28. After a weakening in August, the Canadian dollar continued rising in September, briefly exceeding US 82¢ to hit its high for the year at US 82.5¢ on September 11. From that high point, the currency quickly declined to a plateau at US 78¢ by October and continued trading around that mark until a rally in the last week of the year sent it up to close at US 79.7¢ on December 29, 2017.

Figure 3-2
CAN$-US$ Daily Exchange Rate (2017)

Figure 3-2 Text Alternative

 

Average Daily Exchange Rate (2017)

Date	Conversion Rate
1/3/2017	0.744324525
1/4/2017	0.75103267
1/5/2017	0.755058895
1/6/2017	0.756773119
1/9/2017	0.755287009
1/10/2017	0.756830394
1/11/2017	0.754716981
1/12/2017	0.763009309
1/13/2017	0.760977095
1/16/2017	0.760340633
1/17/2017	0.765872712
1/18/2017	0.763417055
1/19/2017	0.751710141
1/20/2017	0.748727164
1/23/2017	0.752388835
1/24/2017	0.759070897
1/25/2017	0.76405868
1/26/2017	0.763184004
1/27/2017	0.762020879
1/30/2017	0.762543846
1/31/2017	0.767459708
2/1/2017	0.764876855
2/2/2017	0.768285187
2/3/2017	0.768285187
2/6/2017	0.763417055
2/7/2017	0.759474444
2/8/2017	0.760051684
2/9/2017	0.76178868
2/10/2017	0.764292265
2/13/2017	0.764409112
2/14/2017	0.765110941
2/15/2017	0.76405868
2/16/2017	0.765990042
2/17/2017	0.763242253
2/21/2017	0.76057195
2/22/2017	0.758667779
2/23/2017	0.762776506
2/24/2017	0.763650248
2/27/2017	0.762311328
2/28/2017	0.754773945
3/1/2017	0.749737592
3/2/2017	0.746993352
3/3/2017	0.745990302
3/6/2017	0.746045956
3/7/2017	0.745323098
3/8/2017	0.742115028
3/9/2017	0.740028121
3/10/2017	0.742721331
3/13/2017	0.743660296
3/14/2017	0.741619697
3/15/2017	0.744712541
3/16/2017	0.750807118
3/17/2017	0.749793807
3/20/2017	0.748615062
3/21/2017	0.750919877
3/22/2017	0.748502994
3/23/2017	0.74985003
3/24/2017	0.747719456
3/27/2017	0.747775368
3/28/2017	0.747719456
3/29/2017	0.748278958
3/30/2017	0.751653638
3/31/2017	0.751314801
4/3/2017	0.747160789
4/4/2017	0.744878957
4/5/2017	0.745767768
4/6/2017	0.745267551
4/7/2017	0.746547219
4/10/2017	0.749119784
4/11/2017	0.750075008
4/12/2017	0.751879699
4/13/2017	0.753295669
4/17/2017	0.752502069
4/18/2017	0.747551768
4/19/2017	0.742942051
4/20/2017	0.741729714
4/21/2017	0.740411669
4/24/2017	0.741179958
4/25/2017	0.735726898
4/26/2017	0.735672773
4/27/2017	0.733998826
4/28/2017	0.731957254
5/1/2017	0.732064422
5/2/2017	0.728862974
5/3/2017	0.729181858
5/4/2017	0.727643164
5/5/2017	0.729288215
5/8/2017	0.729660708
5/9/2017	0.728438228
5/10/2017	0.731421884
5/11/2017	0.729554242
5/12/2017	0.729181858
5/15/2017	0.733084085
5/16/2017	0.735510444
5/17/2017	0.734537976
5/18/2017	0.734699875
5/19/2017	0.738334318
5/23/2017	0.741289844
5/24/2017	0.742942051
5/25/2017	0.743328626
5/26/2017	0.743162901
5/29/2017	0.743715603
5/30/2017	0.742445616
5/31/2017	0.740740741
6/1/2017	0.740740741
6/2/2017	0.740521327
6/5/2017	0.741674701
6/6/2017	0.742886858
6/7/2017	0.741179958
6/8/2017	0.740576168
6/9/2017	0.743328626
6/12/2017	0.745434215
6/13/2017	0.755401118
6/14/2017	0.757059581
6/15/2017	0.752841978
6/16/2017	0.755743652
6/19/2017	0.756429652
6/20/2017	0.753749906
6/21/2017	0.751314801
6/22/2017	0.755229968
6/23/2017	0.753693096
6/26/2017	0.755401118
6/27/2017	0.758265089
6/28/2017	0.765696784
6/29/2017	0.768344218
6/30/2017	0.770594128
7/4/2017	0.77273781
7/5/2017	0.770297335
7/6/2017	0.772439364
7/7/2017	0.77597579
7/10/2017	0.77591558
7/11/2017	0.773993808
7/12/2017	0.781616383
7/13/2017	0.784744566
7/14/2017	0.789141414
7/17/2017	0.789328282
7/18/2017	0.791891036
7/19/2017	0.793965859
7/20/2017	0.794596742
7/21/2017	0.796876245
7/24/2017	0.799232737
7/25/2017	0.799552251
7/26/2017	0.799680128
7/27/2017	0.798722045
7/28/2017	0.803406443
7/31/2017	0.800961153
8/1/2017	0.799105002
8/2/2017	0.796178344
8/3/2017	0.795038957
8/4/2017	0.791264441
8/8/2017	0.789141414
8/9/2017	0.787091696
8/10/2017	0.786720164
8/11/2017	0.788332676
8/14/2017	0.787091696
8/15/2017	0.784006272
8/16/2017	0.78746358
8/17/2017	0.790701352
8/18/2017	0.794533609
8/21/2017	0.795228628
8/22/2017	0.796685787
8/23/2017	0.795924865
8/24/2017	0.798148296
8/25/2017	0.800512328
8/28/2017	0.801153661
8/29/2017	0.799041151
8/30/2017	0.793335978
8/31/2017	0.797702616
9/1/2017	0.807102502
9/5/2017	0.80834209
9/6/2017	0.815394651
9/7/2017	0.82318077
9/8/2017	0.824266403
9/11/2017	0.824538259
9/12/2017	0.822436056
9/13/2017	0.820546484
9/14/2017	0.819806526
9/15/2017	0.82088327
9/18/2017	0.817126982
9/19/2017	0.814531237
9/20/2017	0.814796708
9/21/2017	0.810438447
9/22/2017	0.811886011
9/25/2017	0.810307106
9/26/2017	0.808407437
9/27/2017	0.80567193
9/28/2017	0.803212851
9/29/2017	0.801282051
10/2/2017	0.799680128
10/3/2017	0.8
10/4/2017	0.801346262
10/5/2017	0.796939751
10/6/2017	0.796876245
10/10/2017	0.799936005
10/11/2017	0.80012802
10/12/2017	0.801796023
10/13/2017	0.800832866
10/16/2017	0.798148296
10/17/2017	0.796939751
10/18/2017	0.800897005
10/19/2017	0.801410482
10/20/2017	0.79358781
10/23/2017	0.790888959
10/24/2017	0.789515238
10/25/2017	0.783024039
10/26/2017	0.779362481
10/27/2017	0.77675936
10/30/2017	0.778998208
10/31/2017	0.775614675
11/1/2017	0.776096236
11/2/2017	0.77990953
11/3/2017	0.783453463
11/6/2017	0.784559862
11/7/2017	0.782166601
11/8/2017	0.785607668
11/9/2017	0.787897888
11/10/2017	0.78845699
11/14/2017	0.785360873
11/15/2017	0.782901433
11/16/2017	0.78462142
11/17/2017	0.782288978
11/20/2017	0.78167748
11/21/2017	0.782595085
11/22/2017	0.785607668
11/23/2017	0.78647267
11/24/2017	0.786905886
11/27/2017	0.785237534
11/28/2017	0.780822987
11/29/2017	0.778028476
11/30/2017	0.77591558
12/1/2017	0.785607668
12/4/2017	0.787711698
12/5/2017	0.788643533
12/6/2017	0.783883358
12/7/2017	0.778634275
12/8/2017	0.777604977
12/11/2017	0.777967948
12/12/2017	0.776940409
12/13/2017	0.778089013
12/14/2017	0.780944943
12/15/2017	0.779180302
12/18/2017	0.777302759
12/19/2017	0.776036008
12/20/2017	0.778694907
12/21/2017	0.785299199
12/22/2017	0.783760483
12/27/2017	0.791076655
12/28/2017	0.794407372
12/29/2017	0.797130331

In consequence, at the year-end mark the Canadian dollar appreciated in value 7.0 percent against the U.S. dollar relative to the previous year-end mark.

At the same time, Canada’s currency depreciated against the European euro (down 5.9 percent) and the British pound (down 2.3 percent) while appreciating 3.2 percent against the Japanese yen at the end-year mark.

Using NAFTA? Trends in Coverage Rates and Utilization Rates

Introduction

The North American Free Trade Agreement (NAFTA) between Canada, the United States and Mexico is Canada’s most important regional free trade agreement (FTA) to date in terms of the size of trade. It delivered significant tariff elimination and fostered high trade growth among the three partner countries since it came into effect 24 years ago. However, doubts have been raised in various recent publications about whether FTAs such as NAFTA actually foster trade and economic growth to the extent claimed. In 2015, for example, Thomson Reuters published a survey that suggested FTAs were actually underutilized globally. There is a possibility of an institutional failure that firms may not be making optimal use of tariff treatment to maximize the potential benefits of an FTA. ^{Footnote m2-1}

Using the recent Canadian customs data, the following analysis looks specifically at the relationship between Canada’s imports from the United States and the utilization of NAFTA preferential tariffs to provide an updated perspective on whether Canadian importers actually make full use of NAFTA.

Do Companies Actually Take Full Advantage of NAFTA Preferences?

There is no formal definition of the utilization of tariff preferences in publications; as a result, there are different ways to measure whether firms are utilizing tariff preferences available to them under any FTA, whether bilateral or regional. One approach is to compare the level of imports that claim the preferences in the agreement in question with total imports. This is referred to as the coverage rate. This approach often gives rise to a moderate rate of use because total imports include both Most Favoured Nation (MFN) duty-free and excluded products that are not affected by the trade agreement. A second approach, the utilization rate, compares imports that claim the tariff preferences with dutiable imports ^{Footnote m2-2} only, thus excluding all MFN duty-free and imports excluded from the agreement. This method results in a high rate of use.

Figure 1 below depicts the coverage rate of NAFTA for Canadian imports from the United States from 1994 to 2016. Throughout the entire period, only about half (between 40 percent and 50 percent) of Canadian imports from the United States claimed NAFTA preferences. ^{Footnote m2-3} This result appears to support the conclusions of the 2015 Thomson Reuters survey that preferential tariff rates are underutilized. However, the coverage rate is not necessarily the best indicator to measure the rate of use of tariff preferences because it includes in the calculations products that are either already MFN duty-free or excluded from the trade agreement. Conversely, the utilization rate only considers dutiable products and is therefore a better option as it is derived from the share of imports actually receiving preferential tariff treatments out of the total dutiable imports covered by the trade agreement.

Figure 1
NAFTA Coverage rate for Canadian imports from the U.S., 1994-2016

Source: Statistics Canada

Figure 1 Text Alternative

NAFTA Coverage rate for Canadian imports from the U.S., 1994-2016

Year	%
1994	43.6
1995	44.5
1996	45
1997	47.2
1998	43.8
1999	40.6
2000	39.1
2001	42.6
2002	45.1
2003	44.1
2004	42.9
2005	43.6
2006	43.8
2007	42.7
2008	41.7
2009	43.8
2010	42.9
2011	40.9
2012	41.7
2013	41.9
2014	40.4
2015	41.1
2016	41.8

Figure 2 illustrates the utilization rate of NAFTA preferences from the United States between 1994 and 2016. As shown, the NAFTA utilization rate is clearly higher than the coverage rate since the denominator is restricted to dutiable imports. While the coverage rate remained stable roughly between 40 percent and 50 percent, the utilization rate of NAFTA preferences increased from 50 percent in 1994 when NAFTA came into effect to over 80 percent in 2016. This means the proportion of dutiable products from the United States that entered Canada using preferential rates increased 30 percentage points since the implementation of the FTA.

Figure 2
NAFTA Utilization Rates for Canadian Imports from the U.S. (1994 - 2016)

Source: Statistics Canada

Figure 2 Text Alternative

NAFTA Utilization Rates for Canadian Imports from the U.S. (1994 - 2016)

Years	Dutiable	Duty-free
1994	48.8	33.4
1995	49.6	34.1
1996	48.7	35.1
1997	55.6	25.6
1998	52.5	33.6
1999	51.1	28.2
2000	52.3	24.3
2001	60.8	21.9
2002	66.6	19.1
2003	66.8	17.9
2004	67.4	15.5
2005	69.5	15.9
2006	70.9	14.5
2007	70.5	13.4
2008	73.3	13.2
2009	76.3	16.1
2010	79.8	21.4
2011	79.1	19.0
2012	79.8	20.1
2013	80.9	21.1
2014	82.3	19.3
2015	81.3	20.3
2016	80.9	20.1

The calculations of rates of use are impacted by changes in the Canadian MFN rates through multilateral trade liberalization under the Uruguay Round of Negotiations as well as Canadian unilateral trade liberalization announced under Budget 2010 and Budget 2011. Both liberalizations reduced the number of dutiable tariff lines. Nonetheless, the utilization of NAFTA preferences is clearly characterized by an increasing trend.

Noteworthy is the proportion of duty-free imports that continued to declare NAFTA preferential treatment: Figure 2 shows that about 30 percent of duty-free products had declared NAFTA preferential treatment in 1994 while this figure declined to 20 percent in 2016. This puzzling phenomenon requires further investigation as there is no difference between MFN and NAFTA tariff rates for these products. A possible explanation is that importers might have been unfamiliar with the declaration process itself.

Similarly, even for products that are dutiable on an MFN basis, and for which NAFTA provides preferential treatment, a substantial proportion of Canada’s imports from the United States still occur on an MFN basis. The likely reasons for this are two-fold; first, some goods may not be eligible for duty-free treatment under NAFTA because they do not meet the applicable product-specific rule of origin. Second, in the face of low MFN tariff rates, importers may prefer to claim MFN treatment over NAFTA, as it is easier and more cost-effective to demonstrate compliance. ^{Footnote m2-4}

At the product level, NAFTA utilization rates vary significantly. ^{Footnote m2-5} In 1994, the utilization rates ranged from 11.5 percent in the motor vehicles and parts sector to over 99 percent in the products of animal origin sector. Similarly, in 2016, they ranged from 11 percent for nickel to almost 100 percent for meat and meat offal. Over the last two decades, the utilization rates of some products increased markedly (see Table 1). Tables 1 and 2 present the Canadian products for which NAFTA utilization rates varied the most. The motor vehicles and parts sector (representing 21 percent of total imports from the United States in 2016), experienced the largest utilization increase; growing over 60 percentage points from only 11.5 percent in 1994 (see Figure 3). The low utilization rate in 1994 for Canadian imports of certain motor vehicles and parts is likely due to the use of preferential tariff treatment under the Auto Pact ^{Footnote m2-6} (1965) rather than NAFTA. Under the Auto Pact, Canada eliminated its tariffs on motor vehicles and parts imported from the United States by automotive companies that made vehicles in Canada, provided certain conditions were met. Whereas, under NAFTA, Canadian tariffs on originating motor vehicles and parts were not fully eliminated until 1998. As such, claiming duty-free treatment under the Auto Pact was therefore preferable until tariffs were fully eliminated. By 2001, Canada repealed the provisions under the Auto Pact that provided duty-free treatment for imports from the United States. ^{Footnote m2-7} As imports could no longer enter under the Auto Pact, the use of NAFTA for motor vehicles and auto parts likely increased considerably as a result as illustrated in Figure 3.

Table 1
Table 2. Top 5 increases in utilization rates by product, 1994 - 2016

	Utilization Rate
Product Sector	1994 (%)	2016 (%)	Percentage Point Change (%)
75 Nickel and Articles	72.3	11.2	63.9
37 Photographic Goods	52.9	94.6	41.7
61 Articles of Apparel, Knitted	56.9	97.8	41.0
42 Articles of Leather	81.2	99.0	17.9
63 Other Made up Textiles	57.7	73.0	15.2

Following motor vehicles and parts, the products with the next largest increases in utilization rates are nuclear reactors and machinery, trees and plants, edible products of animal origin and optical instruments. These products combined with motor vehicles and parts accounted for over 60 percent of all dutiable imports from the United States in 2016. On the other hand, nickel and articles thereof and apparel product sectors displayed the largest utilization rate decreases. In fact, dutiable imports from these sectors accounted for less than 1 percent of all dutiable imports from the United States in 2016.

Figure 3
NAFTA Utilization Rates for Canadian Imports from the U.S. in the Sector of Motor Vehicle and Parts (1994 – 2016)

Source: Statistics Canada

Figure 3 Text Alternative

NAFTA Utilization Rates for Canadian Imports from the U.S. in the Sector of Motor Vehicle and Parts (1994 – 2016)

Years	Percent
1994	11.55
1995	12.94
1996	13.08
1997	16.04
1998	18.48
1999	18.62
2000	18.56
2001	39.69
2002	56.97
2003	59.22
2004	58.42
2005	62.22
2006	65.13
2007	65.77
2008	66.80
2009	69.45
2010	70.10
2011	70.31
2012	70.69
2013	73.55
2014	76.03
2015	75.56
2016	75.40

Table 2
Table 2. Top 5 decreases in utilization rates by product, 1994 - 2016

	Utilization Rate
Product Sector	1994 (%)	2016 (%)	Percentage Point Change (%)
87 Motor Vehicle and Parts	11.5	75.4	-61.0
84 Nuclear Reactors and Machinery	85.4	37.2	- 48.2
6 Trees and Plants	93.7	63.0	-30.7
4 Edible Products of Animal Origin	81.0	51.2	-29.9
90 Optical Instruments	91.4	62.8	-28.6

Conclusion

Over time, FTAs have increasingly become a tool for countries to foster strong trade relations. Globally, there has been a consensus that, overall, FTAs benefit all participating countries. The 2015 Thomson Reuters survey, however, provided a less optimistic view of FTAs as they were perceived as underutilized.

The analysis provided here offers a different perspective, arguing that the utilization rates of NAFTA preferences actually increased over time. This suggests that the process of fully utilizing any FTA preferences may take time, thus that there is an adaptation period.

Trade theory demonstrates that FTAs can foster stronger trade relations and provide firms with lower cost imported products as a means to profit from these agreements. Raising awareness and educating the public about the benefits is therefore crucial. From NAFTA to recent FTAs such as the Canada-European Union Comprehensive Economic and Trade Agreement (CETA) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the Canadian government has embarked on a systematic approach to promote the benefits of FTAs both before and after their implementation. The results from this study are concrete examples that ascertain this approach is successful in making firms aware of the benefits of FTAs.

4. Canada’s International Transactions

After two years of sliding commodity prices, with consequent reductions in value of Canada’s resource-based exports, 2017 was the year of a rebound. Overall prices of Canada’s goods exports rose by 4.4 percent, with most of the impact occurring in the energy sector, where prices soared 22.7 percent from 2016 levels. At the same time, the price index of Canada’s imports grew only 1.1 percent. The result was a very substantial improvement in Canada’s overall terms of trade index, which rose from 91.6 in 2016 (its lowest value since 2007) to 94.3 in 2017 (2007 level = 100). This index level is still the third-lowest in the past 11 years and just below the 2009 terms of trade.

The value of both exports and imports of goods increased moderately in 2017. While the price increases strongly supported nominal exports, real exports grew as well (though at a smaller rate), while growth in nominal imports was predominantly due to growth in real imports. The recovery in energy prices strengthened the Canadian dollar and spurred the adjustment process in Canada’s trade in the opposite direction to the one followed in 2015 and 2016. In 2017, exports of resources and resource-based goods soared, supported by volume and price expansion (particularly energy products; metal ores and minerals; and metal and mineral products), while the relatively more expensive manufactured exports were rolled back in both volumes and prices (particularly motor vehicles and consumer goods). Meanwhile, relatively less expensive manufactured imports experienced large volume gains (particularly electronic and electrical equipment, and aircraft and other transport equipment).

While these developments narrowed Canada’s trade deficit in goods, that narrowing was almost entirely offset by the widening of the deficit in services. Both exports and imports of services continued to expand strongly during the year, but imports were larger and grew faster. Canada’s expanding aggregate services trade deficit is principally due to two causes that have nothing to do with trade policy: travel and transportation services. Canadians spend much more abroad than do visitors to Canada, and Canadian overseas trade is carried in foreign ships (both for exports and imports). Commercial services, on the other hand, have now run a surplus for 15 years, starting in 2003 and continuing throughout the Great Recession. More detail on the structure of Canada’s services trade is provided in the special feature.

As a result of these and other developments on the income accounts, Canada’s current account deficit narrowed somewhat, declining from $65.4 billion in 2016 to $63.9 billion in 2017.

The Balance of Payments

The summary of Canada’s international transactions is recorded in its Balance of Payments (BoP) accounts. BoP entries track all the exchanges and transfers of economic value between Canadian residents and nonresidents, viewed from the Canadian perspective. The BoP accounts consist of two main sections: the financial account and the current account. Transactions that involve financial assets are recorded in the financial account;^{Footnote 4-1} these include direct investment assets and liabilities, portfolio investments, official reserves and other investments such as loans, currency and deposits.

Transactions that involve movements of goods and services, investment income or transfers are recorded in the current account. The values of exports of goods and services are recorded as receipts in the current account. The values of imports of goods and services are recorded as payments. When receipts and payments do not match, the result is a trade account imbalance – a trade surplus if receipts exceed payments, and a trade deficit otherwise.

The Current Account

Canada’s current account balance – a net measure of the flow of goods, services, income, and transfers – recorded a deficit of $63.9 billion in 2017. This represented a $1.4-billion narrowing from the $65.4-billion deficit of 2016 and was not far from the 2013 deficit level of $61.1 billion. In the intervening period, Canada’s current account deficit narrowed considerably in 2014, widened in 2015 and moderated again in 2016.

Most of those movements were due to a combination of the changes in energy prices and the Canadian dollar exchange rate (mostly versus the U.S. dollar). Expressed as a share of GDP, the 2017 deficit amounted to 3.0 percent. This is down from 3.2 percent of GDP in both 2013 and 2016, the smallest proportion since 2014, when it amounted to just 2.4 percent of GDP due to favourable terms of trade.

It could be argued that the data in the past few years imply that Canada’s current account deficit has largely stabilized. However, this stability may be illusory. The current account balance depends on a great number of variables outside Canada’s control, and in these volatile times there are good reasons to expect at least some of these to change rapidly. Neither should deficit be regarded as a weakness. Since the BoP accounts are connected, running a deficit on the current account implies relatively more Canadian assets are being sold to foreigners, who are purchasing them as a form of investment. If Canadian assets are relatively more attractive (in terms of their perceived safety, stability, and potential), they can only be acquired through shifting the financial account into surplus and thus creating a deficit on the current account; it is difficult to determine which of the two motives is primary as they represent two sides of the same transaction.

Within the current account, two principal movements were of interest. On the trade side, there was a considerable $2.0-billion narrowing of the deficit in goods trade, as growth in goods exports was faster than growth in goods imports. That, in turn, was mainly caused by the upward movement in prices for energy exports, which rose 22.7 percent overall compared to the previous year. Although a similar increase took place in prices for energy imports (up 22.3 percent), a reduction in import volumes mitigated that increase; furthermore, the value of Canada’s energy imports is considerably smaller than that of its energy exports.

Figure 4-1
Canada’s Current Account Balance and Components, 2013-2017

Source: Statistics Canada, CANSIM Table 380-0064

Figure 4-1 Text Alternative

 

Canada’s Current Account Balance and Components, 2013-2017

Current account and capital account	2013	2014	2015	2016	2017
Total current account	-61.12	-47.78	-71.53	-65.37	-63.93
Goods	-8.15	4.67	-23.74	-25.87	-23.89
Services (2)	-23.10	-24.26	-25.57	-23.31	-25.09
Total Income	-29.88	-28.20	-22.22	-16.19	-14.95

The dynamics of the goods balance can be traced directly to the fluctuations in Canada’s terms of trade index. From 100.4 in 2014 (roughly equal to 2007 level of 100), that index dropped to 93.4 in 2015 and further declined to 91.6 percent in 2016. A two-year decline of 8.8 percentage points is drastic; it approaches the severity of the 9.6-percentage points plunge during 2009 (the start of the Great Recession) when resource prices collapsed. The terms of trade index rebounded somewhat in 2017 to 94.3, but will not necessarily trend upward much further. Canada’s trade structure must adjust to the new terms of trade in conditions of uncertainty, with their dampening impacts on investment and growth.

The narrowing of the goods trade deficit described above was almost negated by the widening of the services trade deficit, which increased $1.8 billion. The travel deficit, the principal item on the balance, was the principal contributor, and high imports of transportation services were a big factor also. Lastly, exports of financial services declined sharply, offsetting most of the other growth in commercial service exports and preventing this area of strength for Canada from retrieving the balance.^{Footnote 4-2} Thus the combined goods and services deficit narrowed only by $0.2 billion to $49.0 billion.

Source: Statistics Canada, CANSIM Tables 376-0101 and 376-0102

Meanwhile, the other large movement occurred on the income side of the current account balance (which includes investment income, compensation of employees and transfers). Due to a 25.9-percent increase in the direct investment income receipts of Canadians from abroad, the direct investment income balance improved by $4.6 billion. This was mitigated by the opposite movement from the portfolio investment income balance, which worsened by $3.4 billion, and a $0.8-billion worsening in the other investment income balance. As a result, the combined effect on the primary income balance was a $0.5-billion improvement. The secondary income balance improved by $0.7 billion due to a large increase in government transfers receipts.

The Financial Account

Canada’s financial account describes the balance between the transactions involving the acquisition and disposition of Canadian assets abroad, on one side, and foreign acquisition and disposition of assets in Canada, on the other. The sum of the former (i.e. transactions involving the acquisition and disposition of Canadian assets abroad) is termed net acquisition of financial assets, while the sum of the latter is labelled net incurrence of liabilities. The financial account balance, which is the sum of these two, represents the balance of all transactions involving financial assets and is referred to as “net borrowing” (or lending).

In Canada’s financial account, net borrowing of Canadians declined substantially, from $68.2 billion in 2016 down to $56.5 billion in 2017. This narrowing of $11.7 billion came about as a result of much faster growth in the net acquisition of financial assets (up $25.2 billion) than in the net incurrence of liabilities (up $13.5 billion). The principal factor in the 12.7-percent growth of net acquisitions was Canadian portfolio investment, which jumped fivefold in 2017 to hit $84.7 billion. Most of that growth was in the form of transfers from other Canadian investment (loans, currency and deposits etc.), but there was enough new growth to generate a substantial net increase. It is important to note that these processes were largely the result of a shift from less profitable to more profitable activities, whereas in 2016 a massive movement in the opposite direction took place (i.e. these financial assets stayed abroad while switching between investments). Net acquisitions of direct investment assets grew moderately, while official international reserves declined to just one-seventh of their 2016 level.

Growth in net incurrence of liabilities, i.e. Canadian financial assets acquired by foreigners, was also principally in the area of foreign portfolio investment, which rose by $16.8 billion to $188.5 billion (among its components, Canadian bonds did well, rising $32.5 billion, and Canadian debt securities gained $13.6 billion). Meanwhile, net incurrence of foreign direct investment liabilities (i.e. net inflows of foreign FDI) declined by over a quarter in 2017.

There was also a large statistical discrepancy ($7.5 billion), which balanced the net borrowing on the financial account with the balance of receipts and payments on the current account. This discrepancy, which represents net errors and omissions, indicates that there may be significant adjustments to the quoted figures with the passage of time, particularly those in the financial account.

Goods Exports

Canada’s exports of goods on a BoP basis soared $28.0 billion in 2017 (up 5.4 percent) to $549.5 billion, with growth in 7 of 11 sectors and declines in the other 4. This put an end to the run of two consecutive decreases in goods exports in 2015 and 2016. As in those previous years, this movement was due largely to the change in export prices, which were up 4.4 percent during 2017, and was aided by the 1.0-percent expansion in volumes.

Resource prices, which were on the decline in the previous years, have now reversed direction, led by the energy products’ export prices, which rose 22.7 percent on the year. Prices of exported metal ores and minerals rose 4.2 percent, while export prices of metal and mineral products grew at over twice that pace (up 8.6 percent). Price growth extended to chemicals, plastics and rubber as well as forestry and building sectors. Meanwhile, the agri-food sector prices continued to stagnate after healthy growth in 2015. Finally, export prices in all 5 non-resource-based goods sectors declined marginally. Export volumes rose in 5 out of 11 sectors (notably energy, metal ores and minerals, and industrial machinery and equipment) and fell in the other 6 sectors (notably aircraft and other transport equipment, and motor vehicles).

Source: Statistics Canada, CANSIM Tables 376-0101, 376-0110 and 380-0070

The combination of a large price increase and a substantial volume growth boosted exports of energy products 32.8 percent to $95.1 billion. A similarly structured increase of about one-third the magnitude propelled exports of metal and mineral products to 10.9-percent growth, while the 12.1-percent rise in exports of metal ores and minerals was predominantly indebted to the 7.6-percent increase in export volumes. A comparable increase in export volumes of industrial machinery and equipment dominated a marginal price reduction to boost export values of those products by 6.8 percent.

Exports in the rest of the non-resource-based goods sectors were dragged down largely by the volume reductions rather than by price decreases (with the exception of exports of electronic and electrical equipment, where prices played the main role in the declines, which were all small).

Exports of motor vehicles and consumer goods both declined by 5.3 percent in 2017. These developments put an end to three years of notable export growth for Canada’s non-resource-based (or “advanced manufacturing”) sectors. In 2015 and 2016, growth in those areas was supported by export price increases (with the exception of aircraft and other transport equipment, where growth fell in spite of those increases).

Regionally, exports to all large trading partners increased, with exports to the United States growing 4.8 percent, marginally slower than the overall growth of 5.4 percent. Consequently, the share of goods exports destined for the United States declined from 75.2 percent in 2016 to 74.8 percent in 2017. Exports to the EU rose 3.7 percent, and exports to Japan were up 10.5 percent. Exports to Switzerland soared (up 53.0 percent), as did those to Norway, Algeria and Indonesia. Exports to China increased 11.5 percent, exports to India went up 9.3 percent and exports to South Korea rose 17.5 percent.

Goods Imports

Canada’s imports of goods on a BoP basis rose $26.1 billion in 2017, up 4.8 percent over their 2016 total. Total imports were up to $573.4 billion, with increases occurring in 9 out of 11 sectors. Overall growth in import prices was positive but minimal, at 1.1 percent, with prices actually falling in 6 out of 11 sectors. Among the 5 sectors where import prices increased, energy prices led the way with a 22.3-percent hike, while price growth in other sectors was substantially more modest. Import volumes rose in 8 out of 11 sectors and dropped in the other 3, including the energy sector.

Imports of consumer goods, the largest import category, grew 3.3 percent in 2017 (up $4.0 billion). This growth was driven by volume growth of 4.0 percent, while import prices decreased 0.6 percent. The second-largest import sector, motor vehicles, grew by 4.9 percent (up $5.2 billion) on volume growth of 7.2 percent, in spite of the 2.2-percent fall in prices. Imports of metal ores and minerals showed the largest proportional increase, growing 19.4 percent, as strong volume growth of 12.6 percent was complemented by a 6.0-percent increase in price. On the other hand, imports of metal and mineral products went down 1.3 percent, mostly on volume decline of 3.9 percent, moderated by the 2.8-percent hike in import price. Imports of energy products were up 16.4 percent, as the price jump of 22.3 percent was partly offset by a 4.8-percent reduction in import volume.

Imports from all key destinations increased, with the exception of South Korea, where the fall in imports was due to a one-time event in 2016. Japan led the way in relative growth of imports, up 15.1 percent; growth in imports from China and Mexico was not far behind at 13.3 percent and 12.4 percent, respectively. Imports from the EU grew very robustly at 7.9 percent, while imports from the United States expanded only by 2.9 percent, further reducing the share of goods imports from Canada’s main trading partner to 64.6 percent. Other import suppliers in the rest of the world increased their shipments to Canada by 6.7 percent in 2017 – significantly faster growth than in the previous two years.

Source: Statistics Canada, CANSIM Tables 376-0101, 376-0110 and 380-0070

Trade in Services

In 2017, Canada’s services exports increased for the eighth consecutive year, rising by $3.9 billion to reach an all-time high of $112.8 billion, which was an increase of 3.6 percent over 2016. Meanwhile, services imports rose by $5.7 billion (up 4.3 percent). As a consequence of those movements, Canada’s deficit in services trade widened by $1.8 billion, reaching $25.1 billion. Canada continued to run a services trade deficit with every broad region, over half of which was with the United States.

Travel exports, which represent the purchase of goods and services for own use or as gifts by foreign travellers in Canada, were again the most rapidly growing area of services exports. From $23.9 billion in 2016, travel exports expanded 10.3 percent to reach $26.4 billion in 2017 (up $2.5 billion). Personal travel accounted for 85.5 percent of total travel exports and saw a $2.1-billion increase, but business travel grew at a slightly higher rate of 11.0 percent (vs. 10.2-percent growth for personal travel). This growth in travel exports abated somewhat from 2016, but still remains the key source of growth in services exports and was likely influenced by the relatively low value of the Canadian dollar.

Exports of transportation services grew at a more moderate rate of 5.9 percent, somewhat faster than in 2016, adding $0.9 billion to their total value and reaching $17.0 billion. The fastest relative growth occurred in the exports of water transportation services (up 9.5 percent) after two years of declines, but growth in air transportation services contributed more in absolute value with a $0.4-billion increase (up 5.7 percent). Growth in land and other transportation services exports was 4.1 percent.

Commercial services exports, the crucial component accounting for just over 60 percent of the total services exports, grew marginally at 0.7 percent in 2017, much slower than other services categories. Exports increased $0.5 billion to reach $67.8 billion. The primary cause for this slow growth was a considerable reduction of $0.8 billion in exports of financial services (down 7.8 percent); the only other sub-sector whose exports declined was maintenance and repair services (down 5.6 percent). Exports increased in the other eight sub-sectors, notably in insurance services (up 7.2 percent), charges for the use of intellectual property (up 4.8 percent) and in technical, trade-related and other business services (up 4.1 percent). The last-mentioned sub-sector exhibited the largest absolute increase among all, growing its exports by $0.6 billion.

On the import side of services trade, travel imports (or spending by Canadians while abroad) have likewise been the key growth item in 2017. Growth was 8.9 percent (up $3.4 billion) to reach $41.5 billion. Transportation service imports grew briskly as well at 6.3 percent (up $1.7 billion). Imports of air transportation services led the way with 7.7-percent growth and water transportation services were not far behind with a 6.5-percent increase.

Source: Statistics Canada, CANSIM Table 376-0108

Like exports, imports of commercial services were largely stagnant. A 0.9-percent increase added $0.6 billion to their value, which reached $66.9 billion. Several smaller sub-sectors showed declines in imports during 2017, in particular maintenance and repair services (down 16.0 percent), research and development services (down 12.0 percent) and construction services (down 11.4 percent). However, the combined effect of these double-digit declines was only $0.4 billion, as the sub-sectors in question are not very large. On the other hand, some of the larger import sectors showed steady growth. Imports of financial services increased 5.2 percent, following up their rapid growth in the previous year, to reach $11.5 billion; professional and management consulting services imports rose 3.0 percent to reach $13.8 billion. Together, these two added $1.0 billion to Canada’s services imports. Highest relative growth of 8.3 percent was observed in personal, cultural, and recreational services (up $0.2 billion) – a second consecutive year of strong growth for this item. Charges for the use of intellectual property declined marginally in 2017, but remained the largest single import sub-sector, valued at $14.0 billion.

Source: Statistics Canada, CANSIM Table 376-0108

Overall, exports of services grew slower than imports; combined with the greater value of the latter, this increased Canada’s deficit in services trade to $25.1 billion in 2017. Over three-fifths of that deficit ($15.2 billion) is due to the travel deficit, which widened by $0.9 billion during the year. The remainder of the services trade deficit can be traced to the large and growing deficits in water transportation services ($9.2 billion in 2017), which represents the international shipping industry services provided to Canada.^{Footnote 4-3}

Commercial services, on the other hand, have now run a surplus for 15 years, starting in 2003 and throughout the Great Recession. However, this surplus has been declining for several years and it was razor-thin in 2017 at $0.9 billion. Continued increases in imports of financial services and professional and management consulting services were the chief influence on this trend. Some mitigation of the trend came from the growing surplus in technical, trade-related and other business services (widening by $0.7 billion to $3.7 billion) while the deficit in charges for the use of intellectual property improved again (narrowing by $0.3 billion to $8.2 billion) in 2017.

Figure 4-2 Canada's Travel Service Trade, 2017

Figure 4-2 Text Alternative

 

Travel Services Trade ($B)

2017	Exports	Imports	Balance
Total	26.4	41.5	-15.2
United States	10.2	22.1	-11.9
EU	3.6	6.8	-3.3
Japan	0.6	0.2	0.3
ROW	12.0	12.3	-0.3

Source: Statistics Canada, CANSIM Table 376-0101

Trade in Services by Region

Canada’s trade in services with the United States was perfectly balanced in 2017, with 54.5 percent of its exports going to the United States and 54.5 percent of its imports arriving from there. Less than half of the overall increase in services exports in 2017 was due to exports to the United States (up $1.6 billion, or 2.7 percent). Imports from the United States grew at a comparable rate of 2.5 percent (up $1.8 billion). As a result, the services trade deficit with the United States expanded slightly (up $0.2 billion) to $13.7 billion. That deficit was overwhelmingly due to travel services, as Canadians travelling in the United States spent more than double what Americans travelling in Canada spent. This travel deficit with the United States reversed the recent trend of narrowing and widened by $1.0 billion in 2017 (up 9.1 percent).

Source: Statistics Canada, CANSIM Table 376-0101

Transportation services showed a small deficit while trade in commercial services (over half of all transactions) was close to balanced with a $0.6-billion deficit on the Canadian side.

In services trade with the EU, exports declined marginally (down 0.9 percent) while imports grew substantially (up 6.8 percent). This was mostly due to higher imports from the United Kingdom (up 18.6 percent, driven by the 27.6-percent increase in imports of commercial services from that country). The role of the Brexit process in these developments is worth considering. Travel and particularly commercial exports to the EU declined, while on the import side travel was the strongest-growing item at 12.9 percent. These movements increased Canada’s services trade deficit with the EU by $1.8 billion, all due to a much wider deficit with the United Kingdom.

Japan is among the few locales where Canada has a consistent surplus on the travel account. However, travel imports expanded by nearly one-third in 2017 while travel exports were steady. Similarly, exports of transportation and commercial services showed small declines while imports increased considerably. This considerably widened the services trade deficit with Japan, from $0.4 billion in 2016 to $0.9 billion in 2017.

Services trade with the rest of the world (ROW) is the most travel-intensive, with travel accounting for more than a third of both exports and imports. Exports of travel services to ROW soared once again, up 18.5 percent in 2017, reaching $12.0 billion; imports growth was about half of that at 8.6 percent, and as a consequence the travel services trade with ROW became roughly balanced. Notably, growth in travel exports to non-OECD destinations in ROW was the highest of all at 20.3 percent. This growth in travel services provided could indicate a further strengthening in education, immigration and business travel to Canada from those countries.

The surplus in commercial services with ROW increased to $4.8 billion as exports increased 2.1 percent while imports grew just 0.6 percent. Exports and imports of transportation services grew by 6.9 percent and 6.4 percent, respectively; however, the vast preponderance of the latter over the former (driving the overall deficit with this region due to the role of transoceanic shipping) meant that the deficit in this category increased further to $8.1 billion. Overall, the services trade deficit with ROW narrowed from $3.9 billion in 2016 to $3.2 billion in 2017.

On a country basis, other than the increase of $1.6 billion to the United States, services exports increased notably to China (up $0.4 billion) and Hong Kong (up $0.3 billion), while services exports to India and Switzerland grew by $0.1 billion each and services exports to the United Kingdom fell by $0.4 billion. Services imports from the United States grew by $1.8 billion, followed closely by the $1.3-billion increase in imports from the United Kingdom. Other notable changes were increases in imports from Japan (up $0.5 billion), Hong Kong (up $0.3 billion), and China and Mexico (up $0.2 billion each).

5. Key Developments in Canadian Merchandise Trade in 2017

The earlier chapters discussed the global economic situation and Canada’s economic performance in this context. They also presented a general view of Canada’s international trade and its contribution to Canada’s economic growth in 2017. The present chapter takes a closer look at the detailed developments in Canada’s merchandise trade over the course of last year. The use of Customs data on merchandise trade – as opposed to the Balance of Payments (BOP)^{Footnote 5-1} data used in Chapter Four – allows for a more detailed analysis of the trade statistics: by partner country, by commodity, and by province/territory of origin.

Canadian merchandise exports increased to record levels in 2017 after two consecutive years of declines. The 5.6-percent yearly growth saw exports reach $546.3 billion, a $29.2-billion increase from the 2016 level. Merchandise exports rose 20.0 percent in the five years since 2012, growing at a compound annual rate of 3.7 percent between 2012 and 2017. Canadian merchandise imports grew at a rate of 5.2 percent in 2017, rising by $27.8 billion to $561.0 billion. Imports recorded an overall growth of 21.4 percent since 2012, and a compound annual growth of 4.0 percent between 2012 and 2017. As exports grew more than imports, Canada’s merchandise trade deficit narrowed by $1.3 billion in 2017, down to $14.7 billion. Canada’s trade balance improved significantly with the United States (up $10.7 billion), South Korea (up $2.7 billion, one-time effect) and Algeria (up $1.2 billion). Conversely, the trade balance worsened significantly with China (down $3.9 billion to $47.3 billion), Mexico (down $2.1 billion), Brazil and Azerbaijan (each down $1.2 billion).

Figure 5-1
Merchandise Trade by Major Partners, 2016

Figure 5-1 Text Alternative

 

Merchandise Trade by Major Partners, 2017

Exports by Destination
United States	$414,927
China	$23,602
United Kingdom	$17,635
Japan	$11,820
Mexico	$7,845
ROW	$70,465
Imports by Source
United States	$287,992
China	$70,919
Mexico	$35,491
Germany	$17,939
Japan	$17,520
ROW	$131,179

The main influence on Canadian merchandise exports was exercised, as usual, by the exports of energy products. These rose by about one-third during 2017 (up 33.1 percent), which amounted to $27.3 billion and accounted for 93.5 percent of the overall increase in Canadian merchandise exports.

The importance of energy exports was even greater for Canada’s most important trading relationship – that with the United States. Without the growth in energy exports, Canada’s total exports to the United States would have declined last year. Higher prices accounted for roughly two-thirds of the increase in the value of energy exports, and higher volumes of exports for the rest. Substantial growth was also observed in the exports of mechanical machinery, aluminum, iron and steel, and copper. On the other hand, notable declines occurred in the exports of automotive products, precious stones and metals, and pharmaceutical products.

The proportion of Canada’s exports destined for the United States dropped 0.3 percentage point to 76.0 percent. Growth in exports to China accelerated to 12.5 percent as their value reached $23.6 billion. Double-digit growth was also recorded in exports to Japan and South Korea. The extent of Canada’s export diversification in the top 10 (90.8 percent of all exports) and the top 20 destinations (94.6 percent of all exports) did not change substantially in 2017.

Imports from the United States grew considerably slower than total imports, leading to a decline in the U.S. import share from 52.2 percent in 2016 to 51.3 percent in 2017. Mostly as a result of that development, imports became slightly more diversified both for the top 10 (to 83.3 percent of all imports) and the top 20 destinations (to 89.9 percent of all imports).

In 2017, Ontario was the only province whose exports declined, falling by $8.9 billion (down 3.6 percent). That decline was offset by growth in exports from Quebec and British Columbia (up $4.7 billion and $4.9 billion, respectively). Alberta’s exports soared $21.1 billion (up 26.4 percent). Most provinces also reported higher imports, with double-digit increases for Alberta, New Brunswick and Saskatchewan. Meanwhile, imports were down by nearly half in Newfoundland and Labrador as well as down by one-fifth in Prince Edward Island. Nunavut reported substantial exports for the first time.

Trade by Top Products

Merchandise Exports

Canada’s merchandise exports increased 5.6 percent to an all-time high of $546.3 billion in 2017, after declining for two consecutive years. Export values rose $29.2 billion above the 2016 level. In the five-year period between 2012 and 2017, exports gained 20.0 percent on aggregate, implying a compound annual growth rate (CAGR) of 3.7 percent over that period.

For the top 10 export products in 2017, results were mostly positive as 7 of the 10 recorded an increase in exports during the year. The largest gains occurred in exports of energy products, which grew 33.1 percent (up $27.3 billion) to reach $109.8 billion. This allowed them to regain the top spot in Canada’s exports ranking and brought their share of total exports to over one-fifth. While higher prices were a driving force behind the growth in energy exports, they were not the only factor responsible. The contribution of higher prices to export value growth was roughly two-thirds in the case of crude oil, just under 60 percent for refined oil, over 80 percent for natural gas and over 95 percent for coal. The remainder of the contribution was accounted for by higher volumes of exports.

Source: Global Trade Atlas

The bulk of energy exports and of the year’s increase were both accounted for by exports to the United States, which was the destination for 91.1 percent of Canada’s energy exports in 2017. However, growth in the U.S.- bound energy exports was only 31.2 percent, considerably below the 56.1-percent growth in energy exports to other destinations. Particularly notable is that shipments to the other four of the top five destinations rose more than 50 percent each; that all of these four destinations were in Asia; and that the main energy product exported there (coal, bituminous) was not even in the top three sub-products of Canada’s overall energy exports menu (which were occupied by crude oil, refined oil, and natural gas). The destinations in question were, in order: Japan, South Korea, China and India; coal exports were mostly responsible for the increases, but crude oil also figured prominently in the case of China and, to a lesser extent, India. This coal exports growth followed on the heels of a similar performance in 2016. Canada’s total coal exports nearly doubled in two years, having increased by $2.3 billion in 2017.

Figure 5-2
Canada’s Top 5 Energy Exports Destinations

Figure 5-2 Text Alternative

 

TOP 5 energy export destinations

		Type of energy product:
1	US	Crude Oil	Refined Oil	Natural Gas
	Increase due to Price	2/3	2/3	4/5
	Increase due to Volume	1/3	1/3	1/5
2	Japan	coal
3	South Korea	coal
4	China	coal
5	India	coal

Automotive exports (also known as motor vehicles and parts) declined by 4.9 percent in 2017 (down $4.2 billion). Several factors might have played a role in this decline. First, there was increased domestic consumption: Canada saw a record year for new vehicle sales in 2017 at 2,077,000 units, up 4.7 percent.

Secondly, there were production losses in the car lines: end of production for Buick Regal (June 2017) and GMC Terrain (July 2017). Lastly, a labour strike at General Motor’s Ingersoll plant (September and October, 2017) cut production of the top-selling Chevrolet Equinox, and there was a five-week halt to minivan production at FCA Canada’s Windsor plant for retooling and modernization. All of these models are normally exported in large volumes, but with these developments, total Canadian light vehicle production dropped by 7.9 percent.

The decline in automotive exports to the United States was fairly commensurate with its dominant share in Canada’s auto exports (93 percent in 2017). Automotive exports to Mexico declined more than total automotive exports (down 20.9 percent) while those to China, Saudi Arabia and Germany increased (up 3.7 percent to China, 27.2 percent to Saudi Arabia and 69.1 percent to Germany).

Exports of mechanical machinery and equipment went on an upswing, adding $2.3 billion to reach $42.0 billion (up 5.7 percent). All of those increased exports were to the United States. Most notable increases were in turbojets, turbopropellers and other gas turbines (up $0.8 billion), machinery parts (up $0.2 billion), fork-lift trucks (up $0.2 billion) and molding boxes/mold bases (up $0.2 billion). The next largest expansion took place in exports of aluminum and its products, which grew by $2.0 billion (up 19.0 percent).

Changes in other major export sectors were smaller in absolute value. Exports of precious stones and metals contracted by 3.0 percent (down $0.8 billion), in spite of the continuing increase in shipments of gold to the United Kingdom, as exports of gold, silver, coin and other articles to the United States declined. Exports of gold to Hong Kong continued their decline (though at a slower rate than in the previous years), while exports of gold to China increased, and substantial shipments of waste and scrap of precious metals to Norway made an appearance.

Exports of aircraft and parts declined 7.6 percent in 2017 (down $1.0 billion). Shipments fell considerably to the United States, but grew to Switzerland and Latvia. Growth was notable in exports of iron and steel (up $1.7 billion), copper and its products (up $1.0 billion), ores, slag and ash (up $0.9 billion) and wood and its products (up $0.8 billion).

After long and sustained growth, exports of pharmaceutical products stumbled in 2017, losing over a quarter of their value (down $3.0 billion). Having grown at over 18 percent a year for five years to reach 9th place in 2016, this year’s performance sent them tumbling to 16th place in 2017. Medicaments in dosage form destined for the U.S. market accounted for nearly all of that decline.

Merchandise Imports

Canada’s merchandise imports rose by $27.8 billion (up 5.2 percent) in 2017, to $561.0 billion, another high. Import growth was observed in 9 out of 10 top import products, the only exception being precious stones and metals. In the five-year period between 2012 and 2017, imports gained 21.4 percent on aggregate, implying a CAGR of 4.0 percent over that period.

Automotive imports, the top item, grew substantially by 7.7 percent (up $6.9 billion). Less than half of that growth came from the United States, Canada’s top supplier, where the rate of growth was only 4.9 percent. Meanwhile, double-digit growth in auto imports was observed from Mexico, Japan, China, the United Kingdom, Italy and Belgium. Imports of trucks led the increases (up 18.7 percent), followed by imports of passenger vehicles (up 6.1 percent) and tractors (up 24.3 percent).

Mechanical machinery imports moved largely sideways for the second year running. Growth amounted to just $0.4 billion (up 0.5 percent). Imports from China grew robustly at 10.7 percent (up $1.3 billion) and imports from the United States also rose more than the average, at 3.0 percent. Offsetting those increases was a large decline of machinery imports from South Korea (down $3.1 billion) due to the Hebron Utilities/Process Module (UPM) shipment in 2016; few other significant changes occurred for this commodity.

Source: Global Trade Atlas

After a surprising decline in 2016, imports of electrical machinery and equipment resumed growth in 2017, gaining $3.0 billion (up 5.7 percent). Most of the growth ($2.4 billion) came from China and was due to increased cellphone imports; smaller increases occurred in the imports from Malaysia and Thailand. Meanwhile, imports in this sector from Japan, Germany and especially Vietnam declined. This put an end to years of explosive growth in imports of electrical machinery and equipment from Vietnam, which slipped from the fifth to seventh in the rankings of suppliers of this commodity to Canada.

Imports of energy products grew the fastest in the top 10, rising 15.3 percent (up $5.1 billion) to $38.6 billion. The increase was mainly due to rising imports from the United States, due primarily to crude oil and natural gas, and in smaller part to refined oil. Price and volume dynamics were quite different for these components: while both price and volume of natural gas imports increased by roughly a quarter, volumes of oil imports (especially refined oil) were cut back, somewhat inelastically, in view of oil price increases of between 20 to 25 percent. Large increases in imports of energy products from Saudi Arabia, Azerbaijan, the United Kingdom, Belgium and South Korea were observed. Imports from Nigeria, Algeria, Kazakhstan and Mexico declined. Overall, imports of natural gas increased by over half and imports of coal by one-third.

Outside of these top four products, imports are considerably smaller, but those commodities still generated almost 45 percent of the overall import growth. Notable contributions came from the imports of articles of iron and steel^{Footnote 5-2} (up $1.5 billion), iron and steel^{Footnote 5-3} (up $1.5 billion), plastics and articles (up $1.3 billion) and copper and articles (up $0.9 billion). The only decline of note occurred in imports of precious stones and metals, which fell on lower imports of gold and silver from the United States.

Trade by Top Destinations

Merchandise Exports

In 2017, Canada’s merchandise exports to the United States reversed two years of declines and rose $20.5 billion, reaching $414.9 billion. Growth of exports to the U.S. market was, at 5.2 percent, slightly behind average export growth of 5.6 percent, resulting in the decline of the U.S. share of Canadian merchandise exports for the third consecutive year, down to 76.0 percent of the total (from 76.3 percent in 2016). Nevertheless, there was no increase in export diversification, as the other top 10 export destinations compensated by increasing their shares. All 10 top export destinations accounted for 90.84 percent of Canadian exports in 2017, little changed from 90.87 percent in 2016; notably, 87.1 percent went to the top five destinations. Concentration was also fairly stable in the top 20, from 94.68 percent in 2016 to 94.57 percent in 2017.

Source: Global Trade Atlas

Growth of merchandise exports to the United States in 2017 was largely driven by exports of energy products, which grew 31.2 percent, or $23.8 billion, to reach exactly $100.0 billion. This returned energy products to the top rank in commodity exports to the United States, briefly lost to automotive exports in 2016. All major components of energy products exported to the U.S. market – crude oil, refined oil, and natural gas – grew markedly in 2017. In the case of oil, roughly two-thirds of the increase was due to higher prices; this proportion was up to four-fifths in the case of natural gas.

After a sizeable increase in 2016, automotive exports to the United States shrank by 5.3 percent in 2017 (down $4.2 billion) to $75.4 billion. This was mainly due to a $4.1-billion decline in passenger car exports (down 6.7 percent). Exports of auto parts dropped 4.6 percent while truck exports rose 14.7 percent. Among other major exports to the United States, Canada’s exports of mechanical machinery to the U.S. market increased by 8.0 percent in 2017, reaching $31.8 billion; the most significant component of that increase was a 125-percent growth in turbojet exports. Other top exports to the U.S. market – plastics, wood and articles of wood and electrical machinery – experienced modest increases in value, while aluminum exports grew 19.9 percent (up $1.8 billion). Other movements of significance included a 22.8-percent rise in iron and steel exports and a 33.2-percent rise in exports of copper and articles of copper (worth $1.3 billion and $0.9 billion, respectively). Meanwhile, exports of precious metals declined by 29.7 percent (down $2.9 billion), aircraft exports dropped by 14.8 percent (down $1.1 billion) and pharmaceutical products exports fell by 32.7 percent (down $2.6 billion).

Exports to the next top destination, China, grew strongly at 12.5 percent, expanding its share to 4.3 percent and picking up most of the room left by the declining U.S. share. The total of $23.6 billion in exports to China is Canada’s highest ever. Canada’s exports of oil seeds, wood pulp, and wood and articles of wood to China increased strongly (up $0.7 billion, $0.5 billion and $0.2 billion, respectively); other prominent increases occurred in the exports of energy products, fish and crustaceans, and organic chemicals. Exports to the United Kingdom increased by $0.5 billion (gold exports went up while most of the other top export items declined). Exports to Japan grew strongly for the second year running (up 10.3 percent, or $1.1 billion, primarily due to coal and pork exports). The highest rate of growth in the top 10 destinations was observed in exports to South Korea, which grew close to 20 percent (up $0.8 billion, mostly due to coal exports). Growth in exports was observed among all 10 top destinations.

In 2017, the six leading destinations for Canadian exports maintained their 2016 ranks. The United States remained on top, followed by China. The United Kingdom was next with 3.2 percent of total exports, Japan was fourth, Mexico fifth and South Korea sixth. The only change in the top 10 was India leapfrogging Germany into seventh place, as exports to India rose 5.8 percent (due to rising coal exports). Germany slipped to eighth place, followed by Belgium in ninth and France in tenth. The only change in the top 20 was Switzerland’s rise to 15th place at the expense of the United Arab Emirates.

Among the 41 markets that represented at least $500 million of Canadian exports, growth was the highest in Latvia (up 129.7 percent, mostly due to aircraft exports), followed by Vietnam (up 99.2 percent, driven by wheat exports) and Switzerland (up 51.7 percent, driven by aircraft exports).

The largest proportional export reduction occurred in exports to Pakistan, down 30.8 percent; exports to Thailand declined by 18.9 percent and exports to Brazil dropped by 16.3 percent.

Merchandise Imports

The top import suppliers to Canada have been quite stable recently, and there were no newcomers to the top 10 in 2017. The only change was the United Kingdom regaining the sixth place that it lost to South Korea in 2016 due the one-time delivery of the Hebron UMP module. The United States, China and Mexico hold the top three spots as import suppliers to Canada, with Germany and Japan rounding out the top five. No other changes occurred in the top 10, and the only newcomer to the top 20 Canadian import sources was Saudi Arabia taking the place of Peru in 20^th place.

Imports from the United States expanded by 3.5 percent in 2017, a slower pace than the 5.2-percent growth in overall imports. Total imports from the United States for the year rose by $9.8 billion to $288.0 billion. Thus the U.S. share in Canadian merchandise imports also decreased, down by 0.8 percentage point to 51.3 percent. Proportionally, over one-third of the import growth from the United States was due to a 15.7-percent expansion in energy imports (up $3.4 billion, driven in equal measure by increased imports of crude oil and natural gas). Nearly another 30 percent of the increase occurred due to the 4.9-percent growth in automotive imports (up $2.9 billion, entirely due to higher imports of trucks, trailers and tractors). Other significant changes occurred in imports of iron and steel (up 12.9 percent), miscellaneous chemical products (up 14.5 percent), pharmaceutical products (down 8.7 percent) and precious stones and metals (down 28.4 percent).

Source: Global Trade Atlas

Imports from China grew robustly, rising 10.1 percent (up $6.5 billion) to reach the $70.9-billion mark. That expansion was broadly distributed among top import categories, with electrical machinery imports leading the way at 14.9 percent growth (up $2.4 billion, mostly cellphones). Other significant growth items were: mechanical machinery, with growth of 10.7 percent (up $1.3 billion, mostly computers); plastics, with growth of 13.0 percent (up $0.3 billion); articles of iron and steel, with growth of 18.5 percent (up $0.4 billion) and automotive products, with growth of 13.8 percent (up $0.3 billion). Imports from Mexico increased by 7.0 percent (up $2.3 billion) to $35.5 billion (about half of the value of imports from China), and imports from Germany and Japan were each valued, in turn, at about half of imports from Mexico. Imports from Germany grew 4.2 percent while imports from Japan jumped 10.9 percent – a third consecutive year of strong growth, and the strongest among Canada’s top 10 import sources. A large decrease in imports from South Korea (down 17.8 percent, or $1.9 billion) was due to higher than usual import levels of 2016, related to the delivery of the $2.9-billion, 30,000-tonne Hebron UPM module to Newfoundland and Labrador.

For imports, there was an increase in diversification: the top 10 supplying countries were responsible for 83.28 percent of total Canadian merchandise imports in 2017, which was down from the 83.69-percent share that the top 10 suppliers provided in 2016. Diversification also increased slightly in the top 20 import suppliers, with concentration down from 90.02 percent in 2016 to 89.89 percent in 2017.

Among the import-supplying countries of significance (providing imports in excess of $1 billion), imports from Azerbaijan registered the largest growth rate at 878.8 percent to reach $1.3 billion. Twelve other suppliers outside the top 10 to register double-digit growth rates were Saudi Arabia, Belgium, Finland, Norway, Denmark, Turkey, Brazil, Ireland, Chile, Russia, Spain and Argentina. Significant decreases in imports also took place: from Nigeria (down 34.1 percent) and Peru (down 26.8 percent).

Merchandise Trade by Provinces and Territories

Merchandise Exports

The top three exporting provinces – Ontario, Alberta and Quebec – accounted for 78.1 percent of Canada’s exports in 2017. Ontario, however, was the only province whose exports declined, falling by $8.9 billion (down 3.6 percent). Automotive exports, to a large degree concentrated in Ontario and already mentioned above, were the main culprit (down 5.8 percent), with additional impact coming from declines in exports of precious stones and metals (down 8.2 percent) and pharmaceutical products (down 29.1 percent). The Ontario decline, however, was offset by growth in exports from Quebec and British Columbia (up $4.7 billion and $4.9 billion, respectively), while Alberta’s exports soared $21.1 billion (up 26.4 percent), restoring it to the second rank among Canada’s exporter jurisdictions. Exports of energy products were driving Alberta’s growth, while in Quebec mechanical machinery and aluminum and articles were key; as for British Columbia, coal and gas exports caused most of the increase.

Source: Global Trade Atlas

Saskatchewan’s exports grew 8.5 percent (up $2.3 billion) while Manitoba’s exports inched up 2.8 percent (up $0.4 billion). Further down the rankings, New Brunswick showed remarkable growth of 20.4 percent (up $2.2 billion), matched and exceeded by Newfoundland and Labrador with 20.7 percent (up $1.7 billion).

Energy exports were behind both increases, though ores helped as well in the case of Newfoundland and Labrador. Nova Scotia’s exports grew modestly by 2.4 percent (up $0.1 billion), while Northwest Territories expanded exports by 30.2 percent (up $0.4 billion) due to higher diamond exports. Yukon’s main export article, copper ores, halved their (and the territory’s) exports, while Nunavut reported major exports ($320 million, gold) for the first time.

Merchandise Imports

On the import side, the three great import gateways to Canada are Ontario, Quebec and British Columbia, providing access to and from the United States and to the Atlantic and Pacific shipping routes, respectively. In 2017, 84.9 percent of Canada’s imports entered the country through these provinces.

Source: Global Trade Atlas

Most provinces reported higher imports in 2017. Ontario led the way with a $13.0-billion increase, although that amounted to only 3.9-percent growth (led by the imports of automotive products and electrical machinery and equipment). Quebec imported $3.7 billion more (broad-based growth led by copper and articles) and British Columbia’s imports rose by $3.3 billion (broad-based growth led by mechanical machinery). Alberta, New Brunswick and Saskatchewan all saw double-digit import growth (12.7 percent, 23.7 percent and 28.2 percent, respectively). Meanwhile, imports were down by nearly half in Newfoundland and Labrador as well as down by one-fifth in Prince Edward Island. Nunavut reported a substantial increase in imports.

Figure 5-3
Provincial/Territorial Merchandise Exports And Imports, 2017

Figure 5-3 Text Alternative

 

Provincial/Territorial Merchandise Exports, 2017

	Value 2017 ($B)	Change 2017/2016 ($B)	Growth 2017/2016 (%)
Ontario	240.681	-8.863	-3.551678261
Alberta	100.734	21.057	26.42795286
Quebec	85.055	4.684	5.827972776
British Columbia	44.634	4.892	12.3093956
Saskatchewan	29.003	2.272	8.499494968
Manitoba	14.004	0.377	2.766566376
New Brunswick	12.829	2.173	20.39226727
Newfoundland and Labrador	10.189	1.749	20.72274882
Nova Scotia	5.47	0.126	2.357784431
Northwest Territories	1.871	0.434	30.20180932
Prince Edward Island	1.383	0.06	4.535147392
Nunavut	0.333	0.329	8.225
Yukon	0.109	-0.112	-50.67873303
All Jurisdictions	546.295	29.178	5.642436818

Provincial/Territorial Merchandise Imports, 2017

Ontario	346.629	12.98	3.890315871
Quebec	77.348	3.694	5.015342005
British Columbia	52.072	3.281	6.724600849
Alberta	28.215	3.174	12.67521265
Manitoba	21.45	1.706	8.640599676
Saskatchewan	11.524	2.534	28.1868743
New Brunswick	11.408	2.185	23.69077307
Nova Scotia	8.939	0.779	9.546568627
Newfoundland and Labrador	3.244	-2.567	-44.17484082
Yukon	0.078	0.019	32.20338983
Nunavut	0.081	0.077	1.925
Prince Edward Island	0.053	-0.013	-19.6969697
Northwest Territories	0	0	N/A
All Jurisdictions	561.041	27.849	5.222642637

Source: Global Trade Atlas

Merchandise Trade by Top Drivers

Canada’s trade performance can be examined in greater detail using a commodity breakdown comprising over 1,200 items.^{Footnote 5-4} However, only a few of these items account for a sufficient trade value to decisively influence Canada’s trade balance. The table below lists 20 commodities that drove Canada’s trade balance performance in 2017, expressed at the 4-digit HS level.

These 20 commodities accounted for $237.3 billion (43.4 percent) of Canada’s $546.3 billion in exports in 2017. At the same time, these products also represented 29.0 percent of overall imports, or $162.5 billion. Total trade in these 20 commodities thus amounted to nearly $400 billion and yielded a $74.7-billion trade surplus, which was $10.5 billion higher than in the previous year. That movement helped narrow Canada’s merchandise trade deficit to $14.7 billion in 2017, an improvement of $1.3 billion from $16.1-billion deficit registered in 2016.

A closer inspection of the trade performance of these commodities shows that Canada specializes in a relatively small number of products, mostly natural resources, in order to produce a sizeable trade surplus among these key products. It then uses this trade surplus to finance imports of a large variety of other products – mostly varieties of manufactured goods that are not produced in Canada because of a small domestic market (e.g., smart phones, medicine, vehicles and vehicle engines). Canada also seems to completely supply its domestic market in a range of natural resource products (wheat, lumber, canola seeds, aluminum, potash, etc.). Overall, this picture of more concentrated exports and more varied imports is consistent with the economic trade theories that derive trade from comparative advantage, resource endowment, and demand for variety, as well as firm-based theories of trade.

Source: Global Trade Atlas

Canada’s performance in the EU - A constant market share perspective

Background

Over the last 15 years, Canadian merchandise exports to the European Union (EU) have seen significant growth, nearly doubling from $24.2 billion in 2002 to $41.9 billion in 2016. A further push can be expected from the Canada-European Union Comprehensive Economic and Trade Agreement (CETA), whose provisional application began on September 21, 2017. Though $41.9 billion represents only about one tenth of Canadian exports to the United States in 2016, the EU (if treated as one partner) was the second-largest market for Canadian exports by a wide margin, ahead of China at $21.0 billion.^{Footnote m3-1} With total EU imports at $2.5 trillion in 2016, the Canadian share is about 1.7%. Remarkably, this market share stayed relatively constant from 2002 until 2016, despite the emergence of strong international competition. For example, China saw its market share of EU imports more than double from 9.7% in 2002 to 20.1% in 2016, while the U.S. share declined from 19.3% to 14.5%.

This analysis attempts to shed light on two issues: what drove the near doubling of Canadian exports to the EU and the resilience of Canada’s import share in the EU over the past 15 years. Another area of interest is the Canadian product mix and its impact on overall export performance in the European market. Based on the results of this analysis, this study aims to identify areas of strength and weakness in Canadian exports, which may help inform sectors of focus for the Canadian Trade Commissioner Service (TCS) as efforts move toward making the most of CETA.

Figure 1
Canadian Merchandise Exports To EU ($B) 2016

Figure 1 Text Alternative

 

Canadian Merchandise Exports To EU ($B) 2016

	EU ($B) 2016
Metals & minerals	18.3
Machinery & electrical equipment	5.8
Aerospace	4.0
Agri-food	3.9
Chemicals	3.7
Energy	2.1
Miscellaneous manufacturing	2.0
Wood & paper	1.3
Automotive	0.7

Canadian merchandise exports to the EU in 2016 were dominated by the metals and minerals category. Exports in this category accounted for $18.3 billion in 2016, 43.5% of total Canadian merchandise exports to the EU. Gold comprised a large part of these exports (60.6% in 2016) and was exported almost exclusively to the United Kingdom. Other significant export categories included machinery and electrical equipment, aerospace, agri-food, and chemicals. There were a few key developments in the composition of Canadian exports to the EU by industry between 2002 and 2016. The share of metals and minerals more than doubled, led by exceptional growth of gold exports from $0.2 billion to $11.1 billion. Meanwhile, wood and paper, and machinery and electrical equipment saw large declines in their relative importance.

The Methodology – Constant Market Share Analysis

The Constant Market Share Analysis (CMSA) method was used to decompose growth or decline in EU imports from Canada into three components: the growth effect (or market size effect), the product mix effect, and the competitiveness effect. The growth effect (GE) describes how Canadian exports to the EU would have changed if they had followed growth of the total EU import market. In other words, it describes the opportunity presented by the growth of the total EU market, a useful benchmark against which to evaluate Canadian exports. The product effect (PE) describes how Canadian exports aligned with rising and falling sectors in EU imports. For example, a positive PE indicates that imports in that sector were in high demand and thus boosted Canadian exports. Finally, the competitiveness effect (CE) shows how Canadian exports compared to their international competition given the growth opportunities described by growth and product effects. A positive CE is associated with an increase in market share for Canadian exports. All three effects can be measured for both sectoral and overall exports from Canada to the EU.

The analysis is performed on trade data at two different levels of detail. First, the main analysis compares exports broken down into nine large sectors such as “Metals and minerals”, “Aerospace” and “Agri-food”. Second, results are analyzed at the more detailed product level by HS-2 codes. Examples of HS-2 code categories within the “Agri-food” group are oilseeds, cereals, fish and crustaceans. The more detailed level analysis supplements the main analysis by providing information on key subcategories. Due to the large size of and fluctuations in the precious metals subcategory, a secondary analysis was conducted excluding precious metals.

Result by Period

The overall time period from 2002 to 2016 was separated into four time periods according to the dynamics of overall EU import growth. The first period is labelled “expansion”, as the EU experienced strong growth in total merchandise imports that lasted from 2002 to 2008. This was followed by a sharp decline in 2009, the “financial crisis” period. After the crisis, there was a period of solid import growth that lasted for two years (2009-2011) and is labelled “recovery”. More recently, there has been a period of import growth “moderation” over which EU imports have seen modest growth.

Figure 2
Total EU External Imports

Figure 2 Text Alternative

 

Total EU External Imports

Commodity	Millions of Canada Dollars
	2002	2003	2004	2005	2006	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016
Total	1,390,879	1,480,126	1,656,498	1,778,390	1,949,966	2,128,481	2,473,159	1,959,180	2,086,046	2,374,218	2,308,843	2,305,143	2,481,870	2,453,579	2,506,985

Figure 3
Constant Market Share Analysis of European Imports from Canada (Billion $)

Figure 3 Text Alternative

 

Constant Market Share Analysis of European Imports from Canada ($ Billions)

	Growth Effect	Product Effect	Competitiveness Effect	Total Effect
2009-2016	8.7	3.6	-0.4	11.9
2008-2009	-8.0	-0.1	-0.2	-8.2
2002-2008	18.8	-7.0	2.3	14.1
	Growth Effect	Product Effect	Competitiveness Effect	Total Effect
2011-2016	2.3	3.9	-5.8	0.4
2009-2011	6.4	-0.3	5.4	11.5
2008-2009	-8.0	-0.1	-0.2	-8.2
2002-2008	18.8	-7.0	2.3	14.1

Looking at the expansion period in the early part of the millennium, Canada’s export growth was $14.1billion – less than the benchmark of $18.8 billion set by total EU import market growth (GE). Canadian exports were set to overtake that benchmark and outperform international competition thanks to a positive CE carried by the energy and metals and minerals sectors. However, export growth was restrained by a negative PE of $7.0 billion that reflected slower EU import growth in sectors where Canadian exports were concentrated, namely aerospace, machinery and electrical equipment, and wood and paper.

The decline in Canadian exports to the EU during the financial crisis was in line with EU imports from the rest of the world, with the decline of $8.2 billion almost exclusively explained by the negative GE, whereas PE and CE were insignificant. Thus, while Canadian exports suffered from a shrinking pie of EU imports, they did not experience a decline in the size of their slice relative to others, i.e. their market share.

The recovery period saw growth in Canadian exports nearly double the benchmark set by total EU imports. Canadian exports outperformed the rest of the world due to a large positive CE. Again, the CE was strongly supported by the metals and minerals and energy sectors, with aerospace and agri-food also outpacing international competition. The PE caused only a slight drag of $0.3 billion, driven by lower EU import demand for aerospace, machinery and electrical equipment, and agri-food products.

The growth moderation period is so named as total EU imports experienced slow growth, but Canadian exports underperformed even this benchmark. Canadian exports grew by only $0.4 billion (+1%) despite benefiting from a large positive PE (+$3.9 billion). This PE was supported by strong European demand for aerospace, machinery and electrical equipment, chemicals and agri-food imports. A large negative CE of $5.8 billion undid most of the potential gains, with precious metals and chemicals having the largest negative impact. Focusing on precious metals, Canada’s market share of the EU precious metals import market declined from 14.1% to 10.1% as Switzerland, Turkey and Hong Kong saw their shares increase. Energy was the only sector to record a positive CE, but suffered from a strong negative PE, as EU energy import demand declined by 42.9% from 2011 to 2016.

Full Period Results

Figure 4
Constant Market Share Analysis of European Imports from Canada 2002 to 2016 (Billion $)

Figure 4 Text Alternative

 

Constant Market Share Analysis of European Imports from Canada ($ Billions)

Main Results
Growth Effect (GE)	Product Effect (PE)	Competitiveness Effect (CE)	Total Effect
19.4	-2.3	0.7	17.8
Excluding Precious Metals
Growth Effect (GE)	Product Effect (PE)	Competitiveness Effect (CE)	Total Effect
18.0	-2.6	-10.5	4.9

When the full time period (2002-2016) is considered, some of the short-term period-to-period changes disappear and a few long-term trends stand out. Canadian exports slightly underperformed benchmark growth of $19.4 billion as Canada’s export mix negatively affected total growth to the tune of $2.3 billion (i.e. product effect). As explained in the methodology section, this means that Canadian export products did not align well with EU import demand. Results from the period-to-period analysis have shown that weaker European import demand for wood and paper and aerospace products contributed the most to this negative PE. At the same time, Canadian exports outperformed their international competition, achieving a positive CE of +$0.7 billion. This positive CE was largely due to the metals and minerals sector, which recorded a +$9.1 billion CE, strongly outpacing international competition. Canada’s energy sector also outperformed the rest of the world with a +$0.9 billion CE. In contrast to these positive results, Canadian wood and paper products struggled with a negative CE across all time periods. This was exacerbated by a negative PE, resulting in a decline of 58.9% in the value of exports in this sector between 2002 and 2016. China and Brazil were some major competitors in wood and paper that increased their market share. The machinery and electrical equipment and aerospace sectors also underperformed global competition. Finally, after posting competitiveness gains from 2002 to 2009, the Canadian chemicals sector experienced a decline in competitiveness from 2009 to 2016.

Once the precious metals subcategory is excluded from the analysis, the results paint a vastly different picture. While the impact of the product mix remains negative and close in size to the main analysis, struggling competitiveness represented by a negative CE of $10.5 billion causes Canadian exports to the EU to significantly underperform benchmark growth. Machinery and electrical equipment, wood and paper, and base metals were some of the main culprits contributing to this negative CE. As a consequence, exports excluding precious metals grew by only $4.9 billion instead of a potential $18.0 billion over the time period. The stark contrast between the two graphs highlights how the strong performance of Canadian precious metals exports hid competitive weaknesses in other sectors.

As noted in the beginning of this report, Canada’s share of EU external imports was stable while that of the United States fell sharply. If, however, precious metals are excluded, Canada’s share fell from 1.7% to 1.2%, in line with the relative decline of the United States’ share of the EU market.

Conclusions

This CMSA research helps explain the drivers behind the performance of Canadian exports to the EU over the 2002 to 2016 period. There are three key observations. First, though Canada’s market share stayed relatively stable at about 1.7%, and growth in EU imports from Canada only slightly trailed growth in total EU imports, the strong performance of the precious metals sector hid the overall weakness in competitiveness of most Canadian sectors in the EU import market. Canadian precious metals exports were largely driven by gold exports to the United Kingdom. Excluding precious metals, Canada’s market share would have dropped from 1.7% to 1.2%. Second, most Canadian sectors experienced a negative competitiveness effect in the EU market, highlighted by machinery and electrical equipment, wood and paper, and base metals. Only Canadian energy and precious metals exports were able to gain market share against international competition. In total, weaker competitiveness in sectors other than precious metals cost the Canadian economy a potential $10.5 billion in exports to the EU across the 2002 to 2016 period. Much of this can be explained by the rise of emerging markets such as China, which saw its market share of EU imports more than double from 9.7% in 2002 to 20.1% in 2016. Third, the product mix of Canadian exports had an overall negative effect on export growth to the EU of $2.3 billion. Weak demand for wood and paper, and aerospace sector products from the EU put a drag on potential exports, in contrast to metals and minerals and chemicals, which were helped by growing demand. Canadian exports to the EU face a dual challenge of over-reliance on sectors with weak import growth and struggling competitiveness relative to new entrants. The implementation of CETA offers Canadian exporters an opportunity to reverse some of these trends.

6. Canada’s Foreign Direct Investment Performance

Foreign Direct Investment Inflows and Outflows, 2017

Infographic 6.1 Text Alternative

Canada's Merchandise Trade Balance, 2017

	Foreign Direct Investment in Canada: Inflows (FDI)		Canadian Direct Investment Abroad: Outflows (CDIA)
	2017 ($M)	Growth (%)	2017 ($M)	Growth (%)
From the World	31,462	-36.4	99,910	2.5
From the U.S	23,172	-14.4	81,893	12.0
Trade and Transportation	12,724	0.2	51,032	130.4
Manufacturing	9,825	94.5	-833	N/A
Other Industries	7,336	-6.2	14,684	-36.8
Finance and Insurace	6,395	-12.2	27,282	23.1
Management of Companies and Enterprises	4,196	-27.5	10,390	516.3
Mining and Oil and Gas Extraction	-9,014	N/A	-2,647	N/A

Infographic 6.2 Text Alternative

Foreign Direct Investment Stock by Region

	Foreign Direct Investment in Canada: Inflows (FDI)		Canadian Direct Investment Abroad: Outflows (CDIA)
Countries	2017 ($M)	Growth (%)	2017 ($M)	Growth (%)
United States	404,473	4.2	504,771	4.9
Netherlands	91,883	-5.4	32,606	11.0
United Kingdom	47,431	7.3	102,625	8.3
Japan	29,632	-0.4	4,753	-8.3

Infographic 6.3 Text Alternative

Canada's Top Merchandise Trade Partners, 2017

	FDI			CDIA
Industry	Value 2017 ($M)	Share 2017 (%)	Change 2016-17 (%)	Value 2017 ($M)	Share 2017 (%)	Change 2016-17 (%)
Total, All Industries	824,035	100	1.9	1,121,102	100	3.4
Management of Companies and Enterprises	170,885	20.7	2.1	140,858	12.6	5.1
Manufacturing	176,200	21.4	-0.3	85,412	7.6	-4.1
Mining and Oil and Gas Extraction	162,230	19.7	-7.4	175,705	15.7	-5.2
Finance and Insurance	136,974	16.6	8.0	395,783	35.3	3.0
Wholesale Trade	74,670	9.1	8.6	25,484	2.3	-5.6
Retail Trade	35,790	4.3	4.3	13,192	1.2	38.3
Professional, Scientific and Technical Services	17,440	2.1	-9.7	31,460	2.8	17.2
Real estate and Rental Leasing	13,447	1.6	21.4	63,179	5.6	-0.2
Transportation and Warehousing	10,371	1.3	44.3	71,100	6.3	43.6
Information and Cultural Industries	8,853	1.1	26.1	48,975	4.4	7.3
Accommodation and Food Services	4,302	0.5	11.0	2,899	0.3	-8.3
Construction	3,444	0.4	-3.4	1,334	0.1	2.9
Utilities	2,784	0.3	26.5	32,148	2.9	2.5
Agriculture, Forestry, Fishing and Hunting	282	0.0	97.2	3,458	0.3	-9.5
Information and Communication Technologies	15,828	1.9	10.1	25,971	2.3	16.7