Canada used to be the top U.S. trading partner, but now Mexico has taken the lead, with China falling off. Short- and longer-term trends from trade data paint a worsening picture for the Canadian economy.
Analysts point to two areas in which Canada needs to improve to better compete—energy exports and revamping of transportation infrastructure—as global trade flows are being reshaped by the U.S. Inflation Reduction Act and move to decouple from China.
Canada needs to find a way to send more exports to the United States and the rest of the world, Eric Miller, president of Rideau Potomac Strategy Group, said in an interview on Aug. 4.
“Certainly, the rise of China has taken a bite out of North American trade,” Mr. Miller said. “Mexico has just become a very desirable and established location.”
The Rise of Mexico
The Canadian auto sector has always had the challenge of competing against lower-wage and larger-population Mexico.
Mr. Miller explains that two countries with similar production structures—like Canada and the United States—may trade less between each other and trade more with countries with differentiated production structures, like Mexico.
But the decline in trade also points to Canada’s inability to export energy products and its relative unattractiveness for investment compared to Mexico.
“Energy is also a major area where there could be a lot of value created in exports, but certainly, on the fossil energy front, there’s been a great deal of focus in reducing production and reducing exports,” said Mr. Miller, an expert on trade.
“My question is, if the world used a record amount of coal last year—which it did—would it not be better to help them actively transition to Canadian natural gas, which is produced under a price on carbon where the externalities are already priced in?”
From the Canadian perspective, in 2000, roughly 80 percent of merchandise trade was done with the United States. But that has also trended lower and sits now at about 70 percent. Also, trade has not diversified significantly during the last 20-plus years, as close to 90 percent is still done with the United States, the European Union, the United Kingdom, China, and Mexico.
Merchandise Trade
Canada’s merchandise trade deficit widened again in June, with exports decreasing more than imports, according to Statistics Canada in an Aug. 8 report. That’s four of the past five months in trade shortfall, noted BMO economist Shelly Kaushik.
This data does not factor in the B.C. port strike, which began July 1.
Monthly trade data is pointing to a slowing Canadian economy.
“For Q2 as a whole, real goods exports fell at a 1.5 percent annualized pace, while imports rose by 3.5 percent, suggesting that net trade turned into a drag on overall GDP (gross domestic product) during the quarter,” said CIBC senior economist Andrew Grantham in a note to clients.
Statistics Canada noted that exports to countries other than the United States decreased 5.5 percent in June, while imports from those countries fell 0.1 percent. Canada’s merchandise trade deficit with countries other than the United States sat at a record high of $11.2 billion in June.
In its July 6 merchandise trade report, which covered May, Statistics Canada noted that Canada’s trade surplus with the United States is at its lowest in two years.
“A lot of it is about asking the question in these key sectors of ‘how can we do more, produce more, and sell more, and generate more value for the Canadian economy?’ And that’s a constant never-ending struggle, but it’s one that’s absolutely necessary to do,” Mr. Miller said.
While it has not been overt U.S. policy to minimize trade with Canada, certain actions like shutting down the Keystone XL pipeline and the climate spending in the Inflation Reduction Act are large obstacles for Ottawa to overcome if it wants to remain competitive in international trade and investment.
“Is it something that should worry Canada? To some extent, but it also is a message that Canada will need to look globally on where it wants to trade. Natural gas is a perfect example,” Mr. Miller said.
Ben Brunnen, senior fellow at the C.D. Howe Institute, noted in an Aug. 2 op-ed that Canada makes up about 7 percent of the U.S. natural gas supply.
“Canada has the potential to export LNG on both the East and West Coasts,” he said.
Inadequate Transportation Infrastructure
A July 25 report by RBC noted that obstacles like capacity constraints, long project approval times, and labour stoppages are slowing down Canada’s transportation arteries and are “hurting Canada’s reputation.”
“An urgent new strategy is needed to reimagine transportation infrastructure holistically, with new, hard assets complemented by investments in data and technology, sector cooperation, smart regulation, and talent,” wrote RBC assistant chief economist Cynthia Leach.
RBC estimates that it will take at least $600 billion by 2040 from private and public sources to upgrade Canada’s infrastructure just to keep pace with economic growth.
“Logistics interruptions are not new in Canada, with no fewer than 13 real or potentially major interruptions in the past six years. Each has complex causes but represents an ‘own goal,’ sowing doubt about the Canadian proposition at a time when global factors are already providing plenty of uncertainty and the returns to being a bastion of stability are much higher,” states the report.
“Canada must do something.”
RBC listed statistics that show how poorly Canada’s transportation infrastructure fares, like the World Bank’s Container Port Performance Index, which ranked the Port of Vancouver second-last in 2022. Airports in Toronto and Montreal were ranked among the lowest for flight cancellations and delays.
Canada also faces acute labour shortages for truck transportation.
