August 26, 2010
Economy at a Glance
All’s not right in the world of Canadian and U.S. foreign trade
ALEX CARRICK
Chief Economist, CanaData
The shapes of the monthly foreign trade curves for both Canada and the U.S. are cause for concern. In Canada’s case, the merchandise trade balance (as reported by Statistics Canada) has remained near zero for a year and a half.
Historically, Canada has been able to count on a $50 billion-plus CDN surplus to make a significant contribution to gross domestic product (GDP).
In the most recent reporting month (June 2010), more than three quarters (76%) of Canada’s goods exports were to the U.S. and nearly two thirds (64%) of our imports were from the U.S. The U.S. is clearly this nation’s most important trading partner. It’s mainly problems in the U.S. domestic economy that are bringing down the Canadian trade statistics.
South of the border, the economy continues to struggle with poor job creation and moribund housing markets. Plus, the U.S. goods and services trade deficit is exploding again. The foreign trade deficit stood at -$600 billion USD in June 2010, after receding dramatically in early 2009. The historical low of -$800 billion USD was reached several times in the 2005 to 2008 period.
The importance of manufacturing in the trade statistics of both countries has diminished over the past decade. Manufactured-goods production has shifted from North America to poorer nations with cheap labour. Cross-border trade in vehicles is still important, but there are offsets between final product and parts. Foreign trade for Canada and the U.S. is increasingly about commodities.
That’s where demand from China, Southeast Asia, India and Brazil comes in. Infrastructure spending by those nations forced up the prices of some commodities. The European slowdown and credit tightening in China have caused some commodity prices to back off of late. But other commodities, particularly in agriculture, are on the upswing again, reminiscent of the worldwide food shortage of several years ago. For example, the price of coffee now stands at a 17-year high.
Canada is currently resting its foreign trade hopes and aspirations on energy products and industrial goods and materials. The latter includes metals and minerals – such as iron ore, nickel, copper, coal and gold – that are being shipped to emerging nations, particularly in Asia.
The U.S. has serious problems on the trade front. Early in the recovery, a saving grace had been manufactured exports. But austerity measures in Europe have reduced demand from that market. Then Germany emerged as a strong competitor for worldwide export sales. This began with the slide in value of the euro versus the greenback when Greece’s debt problems were exposed.
At the same time, economic growth in the U.S. has required a ramping up of fossil fuel imports. January to June 2010 crude oil imports in the U.S. were +62% versus the first half of 2009. U.S. total imports in June were +29.2% year over year. Exports, on the other hand, were only +17.7%. It’s worrisome to contemplate what will happen when the price of crude oil moves up again.
The problem for the U.S. lies in the need to counterbalance its goods and services trade deficit with a capital inflow. There are indications that China, which has huge foreign currency holdings, wants to diversify out of U.S. government debt (in the form of treasury bills) into a more internationally diverse portfolio. Longer-term, this will put upward pressure on U.S. interest rates. This is a dilemma with no quick or easy answers for American policymakers.
For the construction industry in Canada, commodities play two important roles: 1) as the raw materials going into all building products; and 2) as a source for mega investments by owners in the resource sector. The future outlook for one commodity can be surmised by the recent interest in acquiring Potash Corp. of Saskatchewan shown by BHP Billiton of Australia, with counter bids reportedly being contemplated by Vale of Brazil and Sinochem of China.
For more articles by Alex Carrick on the Canadian and U.S. economies, please see his market insights. Mr. Carrick also has an economics blog. His lifestyle blog is at www.alexcarrick.com
*Based on seasonally adjusted monthly figures, projected at an annual rate.
Analysis of Canada’s foreign trade position usually focuses on the Merchandise Trade Balance which is goods exports minus goods imports.
Data source: Statistics Canada
Chart: Reed Construction Data - CanaData.
*Industrial goods include metals and minerals.
N/A or "not applicable" is when the signs don't match or the percent change is too high.
Data source: Statistics Canada (based on seasonally adjusted current dollar monthly figures).
Table: Reed Construction Data - CanaData.
*Based on seasonally adjusted monthly figures, projected at an annual rate.
Analysis of U.S. foreign trade usually focuses on goods and services exports minus goods and services imports.
Data source: U.S. Bureau of the Census
Chart: Reed Construction Data - CanaData.
*Indonesia has a large trade surplus with the U.S. but it is mainly in products other than oil. In fact, the country has become a net importer of oil.
The five major suppliers of crude oil to the United States are Canada, Saudi Arabia, Mexico, Venezuela and Nigeria.
Data source: U.S. Census Bureau (Department of Commerce) (based on not seasonally adjusted current dollar monthly figures).
Table: Reed Construction Data - CanaData.
