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Canada’s Exports to China: Still Hewers of Wood and Drawers of Water

August 02, 2011
Michael Burt
Associate Director
Forecasting and Analysis

We all know that the U.S. is Canada’s largest trading partner, but do you know who is second? The answer, China, may surprise some. In fact, it’s been like that since 2003. What is more, the trade flows are not all one way. Although Canada does run a sizeable merchandise trade deficit of about $30 billion with China that number has been little changed in recent years, as export growth has kept pace with import growth. But note what we’re selling; when it comes to trade with China, we largely remain “hewers of wood and drawers of water.”

In the past ten years, Canada’s exports of goods to China have tripled, from $4 to $13 billion. As a result, China has surpassed Japan to become Canada’s third largest export market and is within striking distance of the number two spot, currently held by the United Kingdom. In fact, China would have already surpassed the U.K. if it were not for surging gold prices and a rising volume of gold exports to that country. Gold and silver now account for half of Canada’s goods exports to the U.K. by value.

Canadian Exports to U.S.

Canadian Exports to United Kingdom and China

When the surging value of goods exports to countries like the U.K. and China is combined with stagnant exports to the U.S., Canada’s export picture is gradually changing. Today the U.S. is the destination for 75 per cent of Canada’s goods exports, compared with a peak of 87 per cent in 2002. In the place of the U.S., other countries have grown in importance. For example, China now accounts for a significant 3.3% of Canadian merchandise exports.

Canadian Exports to China by Product, 2010

What are we selling to China? Nearly all the major product groupings are either raw materials or partially processed raw materials. Canada’s top three exports to China in 2010 were pulp, canola oil and coal. Combined, these three products accounted for nearly one-third of goods exports to China. Our top three non-commodity exports include organic chemicals and resins (both of which are made from petroleum products), and navigational, measuring and control instruments. Combined these three products accounted for about 7 per cent of goods exports to China.

Also, exports of wood products from Canadian sawmills to China have surged over the past two years, and growth has been so strong thus far in 2011 that they are likely to become the second most important export to China this year. Nearly all of this wood is being sourced from British Columbia and that’s why B.C.’s wood product sales are outperforming every other province this year. The boom in wood exports to China is being driven by robust construction activity in China, and reduced access to Russian logs due to the imposition of an export tax by Russia.

If current patterns continue, we could see Canada’s role as a supplier of raw materials to the U.S. slowly transition to a supplier to China, much as it did a century ago from the British Empire to the U.S. We would join Australia and others that are already fulfilling this role. This of course is contrary to the often-pronounced desire of policymakers to move the Canadian economy away from its reliance on natural resources. But what if we instead chose to embrace it?

China and to a lesser degree other emerging economies, are driving a global commodities boom that has left few products unaffected by rising demand and prices. Canada has the means to benefit from this boom. We are major global producers of a variety of agricultural, forestry, mineral and energy products, and there is potential for more. For example, Canada has the second largest oil reserves in the world and routinely attracts more mineral exploration dollars than any other country in the world.

As well, our industrial structure is already indirectly linked in many ways to our natural endowments. Perhaps the best example of this is Canada’s dominance in mining financing, with approximately one third of global mining capital being raised here and an even larger share of transactions occurring in Canada. This has substantive secondary effects for industries like accounting, legal services and financial services. Canada could become a global leader in other ways as well, such as pioneering environmentally friendly extraction techniques and providing the services and equipment that are used by the natural resources sector. In other words, the export of commodities could be a critical driver of a diverse array of support technologies and services.

The bottom line is that Canada’s success in exporting natural resource-based products to China does not reflect a failure on the part of the Canadian economy or policymakers. Rather, it is a reflection of our endowment of resources and what we are good at doing relative to other countries. Commodity prices are strong thanks to Chinese demand, and we should be doing all we can to harness this opportunity. Rather than trying to break away from our past, we should leverage this strength to expand the list of things for which Canada is regarded as a global leader.

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