Fraser Forum

Hillary’s plans won’t help Canada’s trade performance

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Canada’s trade performance has deteriorated markedly over the past 18 months. Last week, Statistics Canada reported that for the April-June 2016 quarter, Canada’s trade deficit with the world widened from C$6.4 billion in the first quarter of 2016 to a record C$10.7 billion.

The widening trade deficit (or the dollar amount by which imports exceed exports) in part reflects a decrease in Canada’s trade surplus with the United States, Canada’s largest trade partner, which accounted for almost 77 per cent of Canadian exports and around 53 per cent of Canadian imports in 2015. For the first six months of 2016, Canada had a trade surplus with the United States of US$3.243 billion. This is only about 20 per cent of Canada’s trade surplus with the United States for the full year 2015.

Canada’s trade performance in the first half of 2016 reflects a continuation of a stagnating export performance beginning in 2015 combined with a continuing growth of imports. Specifically, the total value of Canadian exports decreased by around C$965 million comparing 2015 to 2014 which virtually matched the C$938 million decrease in exports to the U.S. over that time period. Meanwhile, imports from the U.S. increased by almost C$6.8 billion from 2014 to 2015. Canada’s total imports increased by around C$23.7 billion between the two years of which about $7 billion reflects increased imports from China and around $2.4 billion of increased imports from Mexico.

Part of the explanation of Canada’s worsening trade performance with the U.S. is the dramatic decline in the price of crude oil over the past two years. The F.O.B. (freight on board) price of crude oil imports to the U.S. decreased from an average of US$85.65/barrel in 2014 to an average of $41.91/barrel in 2015. For the months of January through May of 2016, this average price was down to $29.85/barrel. Given the importance of oil exports to the U.S. in Canada’s overall trade flows, in the absence of a substantial recovery in the price of crude oil or a dramatic increase in Canadian exports of manufactured goods, the performance of Canada’s trade sector is likely to be a serious continuing constraint on the country’s rate of economic growth for the foreseeable future.

While geo-political disturbances in other parts of the world might contribute to higher oil prices in North America, the longer-run outlook for a significant growth in the value of Canada’s oil exports to the U.S. is not promising. Indeed, with recent pre-election polls suggesting it’s increasingly likely that the Democrats will retain the presidency and possibly retake the Senate, if not the House of Representatives, a continuation of the current U.S. administration’s policy of promoting a substitution away from carbon fuels in favour of alternative energy sources seems a good bet.

Furthermore, the Democrat Party’s platform, which ignores the need for corporate tax reform and a reigning in of government regulations, does not augur well for accelerating growth of the U.S. economy which would stimulate increased Canadian exports of non-energy products. In particular, the Democrat Party’s platform offers little to encourage private-sector capital investment, which has been an especially weak source of spending in the U.S. in recent years.

In short, it’s difficult to be optimistic about increased Canadian exports of machinery and other manufactured goods to the U.S. offsetting continuing unfavourable terms-of-trade in the energy sector, as well as possibly declining physical volumes of oil and natural gas exports to the U.S.

Further declines in the value of the Canadian dollar relative to the U.S. dollar are therefore quite possible, especially given the outlook for declining interest rates in Canada relative to those in the U.S. mirroring slower economic growth and higher unemployment in Canada.

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