Canada / Spotlight Reports
Canada and China Explore Bilateral Trade Agreement

What information do you want to see from IBISWorld on COVID-19? We'd love to hear from you

by Ediz Ozelkan Analyst
Dec 10 2018

Amid the first China-Canada economic and financial strategy dialogue in Beijing and the inaugural China International Import Expo in Shanghai last month, China has been the focus of international trade conversations domestically. While the federal government has aggressively pursued a bilateral agreement with China, the country’s second-largest trading partner, several obstacles have encouraged a surgical trade agreement as opposed to a comprehensive deal akin to the United States-Mexico-Canada Agreement (USMCA). While Canada is not abandoning a sweeping deal, two trade trajectories are being hashed out simultaneously. An all-inclusive deal may disturb the potential ratification of the USMCA, which has a clause for exit if one of the member nations enters a free trade agreement with a nonmarket economy. However, cooling tensions between the United States and China may be advantageous in this regard.

ca-c 1

Fecund soil for trade

Ultimately, the federal government’s plan for a series of trade deals by sector is geared toward sectors that have been lucrative for domestic exports, chiefly agriculture, food and energy. Crop production (NAICS sector 111) has cemented Canada’s place in the global agricultural supply chain. Canada is the fifth-largest agricultural exporter in the world, supplying nearly three-quarters of the world’s maple syrup, as well as being among the leading exporters of other crucial crops such as wheat, oats, canola and soybeans. Canada has benefited from a worldwide trade surplus of crops of nearly $13.4 billion in 2017, up substantially from $3.8 billion in 2000, but down from its peak in 2015. While the United States is the most significant destination for these crops, China consumed a record 19.4% of these exports in 2017. This reflects a marked improvement from 6.1% in 2000. Indeed, Canada has run a trade surplus in crops for two decades, with a $465.9 million surplus in 2000 rising gradually to $4.6 billion in 2017. In 2018, with data until September, that trade surplus currently stands at $3.4 billion. Further, year to date exports to China have outperformed Canada’s crop exports in aggregate, with exports to China growing 9.3%, compared with a 1.8% decline in total crop exports worldwide. Over the span of two decades, China has become a bastion of demand for Canadian agricultural exports, underpinning domestic agricultural expansion. The Soybean Farming industry in Canada (IBISWorld report 11111CA) derived 40.6% of its export value from China alone, showcasing the industry’s reliance on Chinese demand.

Similarly, livestock production (NAICS 112) is an important facet of Canadian agricultural trade activity. While representing a smaller $3.2 billion in 2017 compared with the $25.3 billion generated by crop exports, animal production is another crucial element of Canada’s bilateral trade exploration. Globally, Canada had a $2.3 billion trade surplus in animal production in 2017, up from $1.7 billion in 2000, and down from a high of $3.0 billion in 2015. Over the past two decades, Canada’s livestock trade surplus has ranged between $1.0 billion and $3.0 billion, without any indication of a breakthrough. In contrast, Canadian farmers have been slowly growing their trade surplus with China, although it represents less than 10.0% of all exports in the sector. China made up 0.3% of these exports in 2000, 6.8% in 2015 and 4.1% in 2017, with a year to date surplus of $162.8 million, which is an increase from the surplus over all of 2017. China represents a growth opportunity for livestock producers, with Canadian pork and beef becoming staples in the Chinese food environment. Between January 2018 and September 2018, livestock exports to China increased 45.1% compared with the previous year, while Canada recorded a 1.2% drop in animal exports across the globe.

Further downstream, processed foods make up a much larger sum of export value, comprising $33.9 billion in 2017. Canadian food processors (NAICS 311) have contended with imports but have successfully combatted this competition in aggregate, evidenced by the record $6.4 billion trade surplus in 2017, up from $3.3 billion in 2000. Further, if year to date trends persist, 2018 is expected to be another groundbreaking year with nine months of activity bringing in a surplus of $5.4 billion. This steady surplus over the past two decades is more volatile when it comes to trade with China. Between 2000 and 2018, there were five years of trade deficits in the sector. Still, domestic food processors have been breaking into the Chinese mainstream with a $1.5 billion surplus in 2017 and a 2018 year to date surplus that exceeds 2017 figures. China has grown to represent 7.9% of processed food exports in 2017, down from a high of 9.0% in 2012, but up significantly from the 1.5% share it represented in 2000. Between crop, livestock and food production, Canadian exports to China value over $62.0 billion in 2017, representing a profound increase from just over $25.0 billion in 2000, making the agricultural and food sectors important bargaining chips in upcoming discussions on trade. Domestic food processors in the Seafood Preparation industry in Canada (31171CA) and the Meat, Beef and Poultry Processing industry in Canada (31161CA) derive 14.9% and 12.1%, respectively, of their export value from China in 2018. The second-largest economy can grow to represent a much larger share in the future with the implementation of a sector deal in food processing.

ca-c 2

Deep roots

With the vast expanse of land under its fingertips, Canada is an important source of the world’s timber and is a stronghold of logging activity. Canadian logging (NAICS 113) generated over $900.0 million in export value in 2017, more than half of which was destined for China. Globally, Canada had a record $520.6 million trade surplus in the logging sector in 2017. Its trade surplus with China was $476.5 million that same year, progressively rising from a negligible deficit in 2000 and 2001 when Canada had a negative balance of trade in logging worldwide. This is the sector with the most potential in any trade discussions with China since China represented 0.2% of all logging exports in 2000. Now that China represents more than half of all exported logging products, this should be where Canada expects to gain headway. However, 2018 was less lucrative for Canadian loggers, with an 8.6% decrease in year to date exports globally, compounded by a 25.9% reduction in exports to China. Logging exports are very highly correlated with Chinese consumption, making it a crucial asset for securing leverage if Chinese demand persists in upcoming years. The Logging industry in Canada (11331CA) relies heavily on China for demand, with China representing 47.1% of industry exports in 2018, demonstrating the influence that Chinese demand has on the vitality of the industry.

In contrast, the federal government’s focus on energy seems more farfetched. Canadian exports for oil and gas (NAICS 211) are primarily destined for the United States without any signs of budging anytime soon. However, Canada’s strong global position and abundant natural resources have facilitated trade in the oil and gas sector with a trade surplus every year since 2000 when the surplus was $26.2 billion. Rising as high as $84.6 billion in 2014, which contributed to a total balance of trade surplus for Canada that year, the oil and gas surplus has since levelled off at $60.4 billion in 2017, although year to date data shows a $57.5 billion surplus in 2018 thus far, suggesting a higher surplus this year. Despite a differential between the Western Texas Intermediate (WTI) and the Western Canada Select (WCS) price points for crude oil, domestic production is primarily geared toward export markets. Still, the United States captures nearly all of this demand, while trade with China in this sector posted a comparatively smaller $282.2 million surplus in 2017, half the decade high of $661.4 million in 2008. China has made up less than 1.0% of sector exports since 2000. The Oil Drilling and Gas Extraction industry in Canada (21111CA) is projected to derive 99.9% of its export value from the United States in 2018, demonstrating the industry’s reliance on its southern neighbour. If Canadian production ramps up, particularly with the final investment decision of LNG Canada to develop a liquified natural gas project in Kitimat, BC, in October, domestic producers will need to seek out new markets for this improved capacity. LNG Canada is a joint venture between Royal Dutch Shell PLC, Malaysia's state-owned Petronas, PetroChina, Japan's Mitsubishi Corporation and South Korea's Kogas. If the federal government can come to an agreement on this front, it could provide Canadian operators a chance to compete with China’s leading energy suppliers, which are Russia and Saudi Arabia.

Trade diversification

In an effort to shield itself from a dependence on the United States, the federal government has aggressively pursued free trade initiatives worldwide. In recent years, the implementation of the Canada-Korea Free Trade Agreement in 2016 and the Comprehensive Economic and Trade Agreement between the European Union and Canada in 2017, have guided national strategy. This year, the potential ratification of the USMCA, the successor of the North American Free Trade Agreement, which was signed at last week’s G20 summit, will serve as a harbinger for where the nation’s trade prospects are headed. With the world’s largest economy tethered into the Canadian web of commerce, the federal government is continuing its pursuit of trade diversification with an emphasis on China. While a sweeping deal may be out of reach at the moment, it remains the ambition of the federal government in the long run. Still, a piecemeal trade deal, comprised of those sectors that are capable of contributing significantly to the Canadian economic landscape, is another viable option, as the two nations deliberate on a more comprehensive agreement.

Edited by Tafannum Rahman