Canada / Analyst Insights
Analyzing Canadian Trade: Insights into Industry Performance

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by Ediz Ozelkan, Analyst
Aug 28 2018

Canada is dependent on international trade to maintain its economic status in a global economy. However, the uncertainty of ongoing trade disputes may serve to obfuscate the importance of trade in 2018. New trade barriers could hinder trade growth in upcoming years, but who will it hit hardest? Broad strokes analysis or strictly country-level data can miss important details. When macrolevel analysis leaves questions unanswered, one can examine the potential consequences of ongoing trade disputes through a more granular, industry-based analysis. At this level, dynamic trade patterns take shape to supplement broader perspectives and shine a light on previously unknown idiosyncrasies.

Canadian industries are heavily reliant on trade, as has been the case historically. Of all the manufacturing, mining, utilities, construction and agricultural industries (NAICS sectors 11 to 33) that IBISWorld covers, imports and exports are crucial to the health and sustainability of these sectors. Exports regularly account for one-third of revenue for these industries in aggregate, and this proportion has fluctuated over the five years to 2018 from a low of 32.5% in 2013 and a high of 34.6% in 2015. Meanwhile, imports typically satisfy just over one-third of domestic demand, rising nearly every year since 2013 to satisfy 37.6% of domestic demand in 2018. This stability in the share of domestic output destined for foreign markets and the penetration of foreign goods in the domestic sphere signals a global interdependence of economic activity.

Trade stability

These patterns have occurred during a time where the Canadian Effective Exchange Rate (CEER) index decreased sharply from a high of 130.1 in 2013 to 108.5 in 2018. Typically, a depreciation of the Canadian dollar, which makes domestic goods more attractive on the international marketplace, catalyzes an increase in export activity since domestic products would be less expensive abroad. Simultaneously, the weakness of the loonie would discourage import penetration by diminishing domestic purchasing power in comparison. However, currency valuations are only a small part of this story. Canada’s primary export destinations have remained the same since 2003 with the European Union (EU); the China economic area, which include Hong Kong, Taiwan and China; Latin America, excluding Mexico; the ASEAN (Association of South East Asian Nations) region; and NAFTA countries moving from 91.4% to 95.0% of total export value between 2003 and 2017. Although the regions are the same, the makeup has shifted. Most importantly, the United States has lost share in terms of both imports and exports. In general, the trade destinations have become moderately more diversified.

Canada trade_us leads export destinations

canada trade_import origins diversify

At the same time, imports have been derived from the same regions as well. These regions have consistently accounted for between 85.1% and 89.7% of total import value during the same period. Of all the aforementioned trading partners, only Latin American imports and exports correlate with fluctuations in the CEER index, with 68.7% for exports and 62.0% for imports. With the destinations and origins of products relatively stable, data at the industry level could give some insight.

Granular insights for macrolevel trends

Typically, imports are believed to inhibit the domestic industry. At the industry level, the highest levels of import competition are often coupled with high levels of reliance on export markets as domestic operators. When domestic products cannot compete in the home market, operators have to rely on foreign consumption. Granted, this process may take years to fully form and often manifests after a significant downsizing of the domestic industry as operators contend with foreign competition. Nonetheless, exceptional patterns in industry trade flows are worth noting to help paint a more comprehensive picture of the long-term effects of import competition for domestic producers. Some exemplars of this trend include the Battery Manufacturing industry in Canada and the Medical Device Manufacturing industry in Canada.

Export performance can mask industry performance

The Battery Manufacturing industry in Canada, while small, has been mired by an influx of import competition, with imports expected to satisfy 99.6% of domestic demand in 2018, valued at more than 10 times industry revenue that same year. While this has worked to stifle robust industry expansion, operators have responded by seeking out customers in foreign markets. Exports are projected to account for 95.3% of industry revenue in 2018 and this share has grown from 83.1% of industry revenue in 2013. Thus, while imports have consistently undermined the potential to grow in a domestic market, battery manufacturers, and by extension other producers, can combat this competition by establishing an international sales base.

canada trade_weighted average

Still, over the five years to 2018, revenue for the industry fell while domestic demand increased, which suggests that domestic operators are experiencing increasingly difficult operating conditions. A closer look reveals that the industry is driven by four large operators and an increasing number of small operators. The number of employees per establishment has fallen sharply over the past 10 years. Moreover, the industry’s average operating margin is negative. When all of the factors are accounted, while a shift to export markets has enabled operators to stay in business, it has left them exposed to much more volatile conditions.

The Medical Device Manufacturing industry in Canada exhibits similar trends. Imports satisfy 98.0% of domestic demand in 2018, with imports surpassing double the value of industry revenue. Still, the $4.1 billion industry is forecast to derive 95.0% of its revenue from export markets in 2018, up from 79.6% in 2013. However, industry revenue has grown during that period. Over the past 10 years, as international trade has gained importance to the industry, it has responded favourably to the adjustment. The number of companies has fallen, but the remaining operators maintain fewer employees per establishment and generate more revenue per employee on average. Moreover, industry profit is expected to exceed the sector average in 2018. The trends during the period suggest that the domestic industry has increased the value-added nature of its products in response to import penetration.

canada trade_industry trade ratios

The importance of industry-level analysis

Ongoing negotiations of NAFTA as well as the current tariff schedule and evolving trade wars all tug at different strings in the complexly woven fabric of international trade. Industries respond in turn, dismantling or augmenting this mosaic. The federal government’s aggressive pursuit of trade agreements over the past 15 years has been to bolster and diversify economic activity and these initiatives have gradually opened up new markets for domestic producers. As trade barriers shuffle around, both those directly involving Canada and those between key partners, understanding the specific behaviour of industries comes to the fore. If restrictions limit Chinese imports into the United States, then Canada becomes a secondary trade route. As imports rise in most industries, some excel by moving up the value chain and grow using exports, and others end up relying on exports in the middle of the industry’s decline.

Edited and designed by Tafannum Rahman.

Industry Impact: Manufacturing; Mining; Utilities; Construction; Agriculture; Battery Manufacturing; Medical Device Manufacturing; Women's & Girls' Apparel Manufacturing; Computer Manufacturing; Hardware Manufacturing