Canadian Economic Performance in the U.S.

1
Canadian Economic Performance in the U.S.
Presentation to C-TRADE June 20, 2008
Aaron Sydor Office of the Chief Economist Foreign
Affairs and International Trade Canada
2
The rate of growth of every major category of
Canada-U.S. bilateral commercial exchange has
fallen
Annual Average Growth in Commercial Transactions
between Canada and the U.S.
Percent
1990-2000
2000-2006
Goods
Commercial Service
FDI
Knowledge / ST
Exports
Imports
Exports
Imports
Inward
Outward (CDIA)
Receipts
Payments
Source Sydor, Aaron An Index of Canada-U.S.
Economic Integration Foreign Affairs and
International Trade Canada Analytic Paper Series
Number 5, Forthcoming.
3
and exports are even lower when resources are
excluded
Canadian Merchandise Exports to the U.S.
Billions
Total Exports
Excluding Resources
Excluding Resource Resource-Based Exports
Source Office of the Chief Economist,
DFAIT Data Statistics Canada
4
as a result, Canadas share of U.S. imports has
fallen sharply
Canadas Share of U.S. Imports
Percent
Goods and Service
Goods
Source Office of the Chief Economist,
DFAIT Data U.S. BEA
4
5
What is Responsible for this Slowing?
5
6
Four factors that drove export growth to the U.S.
in the 1990s have since changed direction
2000s
1990s
U.S. Economic Performance
U.S. slowdown in 2000 and 2001 now again in
2007/2008 while growth in Canada and our other
major trading partners has improved.
Strong U.S. economic performance combined with
weak Canadian and international economic
performance.
Exchange Rate
Declining Canadian dollar vs. U.S. dollar as well
as U.S. dollar vs all others which in-turn
contributed to large U.S. trade deficit.
Canadian dollar began to appreciate in 2002 and
U.S. current account deficits are beginning to
decline.
NAFTA
Use of NAFTA for U.S. imports from Canada peaked
in 1998 and has declined since.
Canada-U.S. FTA and NAFTA gave a boost to
Canadian exports.
High-tech Boom
High-tech boom in U.S. with Canada an important
supplier.
High-tech bust in 2000
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and three new factors have emerged

• Restructuring in the Automotive Sector
• Drop in automotive exports were responsible for
  more than one-third of the decline in Canadas
  non resource and non resource-based exports to
  the U.S. between 2000 and 2006.
• Thickening of Border Post 9/11
• Lots of anecdotal evidence that this has
  increased costs for Canadian exporters.
• But, thus far, it has been difficult to quantify
  an impact on Canadas export performance.
• Emergence of low-cost competitors in the U.S.
  market, and China in particular.

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China has mostly taken market share from other
Asian countries, especially Japan and the NICs
Share of U.S. Merchandise Imports
Percent
Change in Share of U.S. Merchandise Imports
Canada
Since 1990
Since 2000
China
12.4
7.3
Japan
NICs
Japan
-10.1
-4.0
NICs
-6.3
-3.2
China
Combined
-16.4
-7.2
Canada
-2.1
-2.7
Source Office of the Chief Economist,
DFAIT Data World Bank and U.S. BEA
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but that may not always be the case - Canada
still could lose market share to China
Share of U.S. Merchandise Imports
Merchandise Exports to the U.S.
Percent
US Billions
30
800
2017 (projected)
2017 (projected)
2006 (actual)
2006 (actual)
25
600
20
15
400
10
200
5
0
0
China
Canada
China
Canada
Projections based on econometric projections
using the gravity model for international trade
from the Office of the Chief Economist, DFAIT
Source Office of the Chief Economist,
DFAIT Data Global Insights
10
The automotive sector has put a significant
damper on export growth since 2000
Growth in Merchandise Exports to the
U.S. (2000-2007)
Percent

• Although Canadian employment in the automotive
  sector has fallen by 14.1 thousand from 2000 to
  2006 a decline of about 10. U.S. employment in
  the sector has declined by 243.2 thousand - a
  drop of nearly 23.
• Recent announcements still have Canada fairing
  better than the U.S.

Excluding Autos
Autos
Total
Source Office of the Chief Economist,
DFAIT Data Statistics Canada
10
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Canadian exports to the U.S. were struggling
before the dollar started to rise
Canadian Merchandise Exports to the U.S. and the
Dollar
Cnd/US
Billions
Exports
Exchange Rate
Source Office of the Chief Economist,
DFAIT Data Statistics Canada
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profit margins in the manufacturing sector, with
the exception of automotives, remains solid
Profit Rates by Industry (operating profit/loss
as a share of operating revenues)
Percent
2002
2006
1999
Source Office of the Chief Economist,
DFAIT Data Statistics Canada
Manufacturing
13
and we are not yet seeing a large increase in
offshoring by Canadian manufacturers
Canadian Direct Investment Abroad
Billions
Non- Manufacturing
Manufacturing
Source Office of the Chief Economist,
DFAIT Data Statistics Canada
14
Shifting to New Markets
14
15
Rather, Canadian exports have simply shifted to
those countries that have been growing quickest
Growth in GDP
Growth in Canadian Exports
Percent
Percent
Rest of the World
U.S.
Rest of the World
U.S.
Source Office of the Chief Economist,
DFAIT Data Statistics Canada
16
including the domestic Canadian economy
Destination of Canadian Manufacturing Production
Billions
Canada
U.S.
Other Foreign Market
Source Office of the Chief Economist,
DFAIT Data Statistics Canada
17
and from manufacturing into services
Services Share of the Canadian GDP
Fastest Growing Service Industries (employment
growth, 2000-07)
Percent
Percent
Source Office of the Chief Economist,
DFAIT Data Statistics Canada
17
18
The number of firms exporting only to the U.S. is
on the decline while those exporting to non-U.S.
destinations is increasing
Number of Firms Exporting by Destination
Average Value of Exports
Thousands
Millions
U.S. Only
Both U.S. and Non-U.S.
Both U.S. and Non-U.S.
U.S. Only
Non-U.S. Only
Non-U.S. Only
Source Office of the Chief Economist,
DFAIT Data Statistics Canada, Exporter Register
Source Office of the Chief Economist,
DFAIT Data Statistics Canada, Exporter Register
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The Northern states are seeing the largest
declines in the number of Canadian exporters
Growth in the Number of Firms Exporting to the
U.S. by State, 2000-2005
gt 10
5 to 10
0 to 5
Source Office of the Chief Economist,
DFAIT Data Statistics Canada, Exporter Register
0 to -5
gt -10
-5 to -10
20
Shifting to Old Sectors
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U.S. imports from Canada are growing in most
sectors - but not as fast as those from other
countries
Canadas Sectoral Performance in the U.S. Market
Pharmaceutical Medicine
Non-ferrous Metals Plastics Synthetic Fibres Ply
and Engineered Woods
Petroleum Coal
Oil Gas
Aluminum
Motor Vehicle Parts
Semiconductors Other Electronic Components
Basic Chemicals
Aerospace
Pulp Paper
Communications Equipment
Motor Vehicle
Source USITC Note Bubbles represent the value
of US imports from Canada in 2006.
Growth in US imports growth rates, 2000-2006.
Change in Canadas share of US imports
2006 / 2000
22
and the largest and fastest growing sectors for
Canada continue to be relatively resource
intensive
22
23
Europes share of U.S. imports has stayed
relatively steady while Canadas has declined
Share of U.S. Imports of Goods and Services
Percent
Europe
24.8
1996
24.4
2007
Gap 6.5 percentage points
Gap 10.1 percentage points
17.9
Canada
14.7
Source Office of the Chief Economist,
DFAIT Data US BEA
24
Most European countries saw their share of U.S.
merchandise imports perform better than Canada
Percent Change in Share of U.S. Merchandise
Imports, 1996-2007

• Only three countries (Sweden, Italy and the UK)
  along with the countries of EFTA underperformed
  Canada in terms of the size of their share of
  U.S. imports lost.

Big Gainers
Canada -19.0
Ireland, Austria and the EU-10 were removed from
this slide as their gains were so large that they
disrupted the scale of the slide with gains of
156.2, 96.5 and 68.0 respectively.
Percent
Source Office of the Chief Economist,
DFAIT Data World Trade Atlas
25
Europe is far more dominant in U.S. imports of
services
Canadas Competition in the U.S. Market
Largest Gain, 1996-2006
Largest Share, 2006
Source Office of the Chief Economist,
DFAIT Data U.S. Bureau of Economic Analysis,
unaffiliated trade
25
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U.S. imports from Europe are more heavily
concentrated in faster growing sectors
Contribution to EU-15 Growth in U.S. Merchandise
Imports, 1996-07
Growth in U.S. Imports from the EU-15 and Canada,
1996-2007
EU-15
Canada
Percent
Source Office of the Chief Economist,
DFAIT Data World Trade Atlas
Source Office of the Chief Economist,
DFAIT Data World Trade Atlas
27
The importance of resources in Canadian exports
to the U.S. has increased sharply in recent years
Share of Resource and Resource-Based Exports in
Total Canadian Goods Exports To the U.S.
Percent
Source Office of the Chief Economist,
DFAIT Data Statistics Canada
27
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The Outlook
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The outlook for Canadas export performance in
the U.S. is weak

• A forecast prepared by EDC predicts that Canadian
  exports to the U.S. will decline by 3.2 in 2008
  followed by a modest recovery of 1.7 in 2009.
• EDCs baseline forecast is predicting
• Growth in Canada of 1.0 in 2008 and 2.3 in 2009
• Growth in the US of 1.3 in 2008 and 1.8 in 2009
• The baseline forecast assumes a decline in the
  price of oil and the Canada-US exchange rate
• EDC also provided alternative scenarios
  including
• A prolonged slowdown in the U.S.
• A deeper U.S. downturn and,
• Continued strength of the Canadian dollar.
• Each of these scenarios results in a
  significantly more negative impact for Canadian
  export performance in the U.S.

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Only aerospace, energy, agri-food and pulp will
see consistent growth over the next two years
Forecasted Sectoral Export Performance
2009 (f)
2008 (f)
Forecasted growth for 2008-09
Forecasted growth for 2008-09
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Intra-firm Trade
31
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The share of Canada-U.S. trade that is intra-firm
has been on the decline for more than two decades
and now stands at thirty percent
Share of Canadian Trade with the U.S. that is
Intra-firm
Percent
Source Office of the Chief Economist,
DFAIT Data U.S. BEA
33
nearly half of which is within the
transportation equipment sector
Canada-U.S. Intra-Firm Trade by Industry (2005)
Transportation Eqt
Other Manu.
48.3
15.1
2.9
18.3
ME
5.2
Chemicals
10.3
Wholesale
All Other
Source Office of the Chief Economist,
DFAIT Data U.S. BEA
34
Canada has among the smallest shares of
intra-firm trade of any of the U.S.s major
trading partners which may reflect the closeness
of the relationship
Share of Trade with the U.S. that is
Intra-firm (2005)
Source Office of the Chief Economist,
DFAIT Data U.S. BEA
35
Conclusions

• Canadian commercial performance in the U.S.,
  including trade in both goods and services as
  well as bilateral direct investment, has declined
  considerably in recent years with 2000 appearing
  to be the turning point.
• The strong performance in resource and related
  industries (excluding forestry) to some extent
  masks this poor performance.
• Although a number of factors have contributed to
  this, the weakening of U.S. economic performance
  combined with a strengthening in other markets -
  especially the domestic Canadian economy - was
  the most important factor.
• For the most part, Canadian business has simply
  shifted from an outward U.S. oriented strategy to
  a more inward-looking strategy supported by other
  (non-U.S.) foreign markets.
• Which is why Canadian GDP growth remains strong,
  unemployment is hovering around historic lows and
  even the manufacturing sector has managed to hold
  up profits and we have not seen much offshoring.
• However, the environment will remain challenging
  for the foreseeable future and Canadian firms
  will have to continue to improve their
  productivity performance if they are to remain
  internationally competitiveespecially in their
  most important foreign market.

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Canadian Economic Performance in the U.S.
Presentation to C-TRADE June 20, 2008
Aaron Sydor Office of the Chief Economist Foreign
Affairs and International Trade Canada