Global trade: how does it look?

Edmonton, December 2018 Global trade: how does it look? Marie-France Paquet The Office of the Chief Economist Global Affairs Canada

Overview 1. Canadian economy at a glance 2. Provincial economy at a glance 3. Trade performance and diversification 4. A new trade deal 5. Challenges ahead 2

Canada s economy has seen solid economic growth Percent 5 Canadian Quarterly GDP Growth 4 3 2 1 0-1 -2-3 Q1 Q2 Q3 Q4 2015 Q1 Q2 Q3 Q4 2016 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2017 2018 Data: Statistics Canada 3

Canada s economy has been among the strongest performers in the G7 4

Canada forecast to see 2 nd fastest growth among G7 for next two years 3.0 Percent G7 GDP Growth Forecasts 2.5 2.0 1.5 1.0 0.5 0.0 18 19 20 18 19 20 18 19 20 18 19 20 18 19 20 18 19 20 18 19 20 Canada France Germany Italy Japan UK U.S. Data: IMF 5

Provincial GDP growth (2016-2019) 6.0 5.0 4.0 3.0 2.0 1.0 0.0-1.0-2.0-3.0-4.0-5.0 Provincial GDP growth (2016-2019) NL PEI NS NB QC ON MB SK AB BC 2016 2017 2018 2019 Sources: Statistics Canada, TD Forecast (2018-2019) 6

Jan-2016 Mar-2016 May-2016 Jul-2016 Sep-2016 Nov-2016 Jan-2017 Mar-2017 May-2017 Jul-2017 Sep-2017 Nov-2017 Jan-2018 Mar-2018 May-2018 Jul-2018 Sep-2018 Canadian oil exports experienced a modest decline in September Billion $ 11 10 9 8 7 6 5 4 3 2 1 0 Monthly Canadian Oil Exports* Down 16.7% * HS 2709 and 2710 Data: Statistics Canada 7

01/2016 03/2016 05/2016 07/2016 09/2016 11/2016 01/2017 03/2017 05/2017 07/2017 09/2017 11/2017 01/2018 03/2018 05/2018 07/2018 09/2018 Although non-crude oil is seeing a decline in quantity exported, crude oil quantities have remained steady Billion L 3.0 2.5 Monthly Quantity of Canadian Oil Exports crude oil HS 2709 (RHS) Million M3 20 18 16 2.0 1.5 1.0 0.5 0.0 Non-crude oil HS 2710 (LHS) 14 12 10 8 6 4 2 0 * HS 2709 and 2710 Data: Statistics Canada 8

Jan-2016 Mar-2016 May-2016 Jul-2016 Sep-2016 Nov-2016 Jan-2017 Mar-2017 May-2017 Jul-2017 Sep-2017 Nov-2017 Jan-2018 Mar-2018 May-2018 Jul-2018 Sep-2018 And unit prices of oil exports have barely budged but latest trade data is still Sept Jan 2016 =100 200 Monthly Canadian Oil Exports* 150 Non-crude oil HS 2710 100 crude oil HS 2709 50 0 Data: Statistics Canada 9

2000 2002 2004 2006 2008 2010 2012 2014 2016 June 2018 2018 Volume of Exports Canadian exports have underperformed its benchmark of world merchandise exports 200 Comparison of Canadian and World Merchandise Export Volumes 180 160 140 120 100 Index (Year 2000 =100) 80 60 World Imports Canadian Exports Data: CPB World Trade Monitor, Statistics Canada 10

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Services exports remain small, but have been growing faster than merchandise exports 200 180 Canadian Exports (Balance of payments) 189 160 140 128 120 100 80 Index (Year 2000 =100) 60 Balance of Payment Services Balance of Payment Goods Data: Statistics Canada 11

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Fall Economic Statement: goal is to boost Canada's overseas exports by 50% by 2025 $ Billion $320 $300 $280 $260 $240 $220 $200 $180 $160 $140 Scenarios for Growth in Canada s Oversea Good and Service Exports Target: $285 Billion Current Actual $190 Billion 2011 2017 Annual Growth: 2.3% $297 Billion $248 Billion $229 Billion Scenario 1, Conference Board forecast: Annual growth rate of 5.8% until 2022 extended further to 2025. $297 billion in oversea exports by 2025, $11 billion higher than the target. Scenario 2, Oxford Economics forecast: Annual growth rate of 3.4% until 2025. Oversea exports calculated using current composition of Canadian exports. $248 billion in oversea exports by 2025, short by $37 billion Scenario 3, Historical Exports Growth Rate: Average growth rate from 2011-17 (2.3%) extended further to 2025. $229 billion in oversea exports by 2025, short by $57 billion. Data: Statistics Canada Table 36-10-0014-01, Oxford Economics Global Forecast November 2018, Conference Board Forecast March 2018. Source: Global Affairs Canada Office of the Chief Economist 12

1968 1978 1988 1998 2008 2017 Canadian exports have diversified away from the U.S. in recent years % 90 85 80 75 70 65 60 Share of Canadian Merchandise Exports US EU China Japan Mexico Philippines Other 2000 86.9% 4.8% 0.9% 2.2% 0.5% 0.1% 4.6% 2017 75.9% 7.6% 4.3% 2.2% 1.4% 0.2% 8.5% Data: Statistics Canada 13

A further diversification measure, the Herfindahl-Hirschman Index (HHI) 0.8 Canada's Merchandise HHI 0.7 0.6 HHI 0.5 0.4 0.3 0.2 0.1 Concentrated Moderately Concentrated Diverse HHI less U.S. 0 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 Data: Statistics Canada 14

Canada currently ranks as the 4 th most geographically concentrated exporter 0.8 HHI International Comparisons 2017 0.6 Mexico, Canada 0.4 Hong Kong 0.2 Australia Norway, New Zealand United States France, Great Britain, Sweden, Germany 0 Data: UN Comtrade Database 15

Some provinces are more diversified than others 1 HHI Provincial Comparisons 2017 0.8 0.6 0.4 0.2 0 NL PEI NS NB QC ON MB SK AB BC NWT YK NV Data: Statistics Canada 16

A new trade deal: the CUSMA Announced completion of negotiations toward a new Canada-United States- Mexico- Agreement (CUSMA) on September 30, 2018, and signed at G20 Summit in Buenos Aires, Argentina The outcomes preserve key elements of this trading relationship and incorporate new and updated provisions Updates include: RoO in the automotive sector, dispute settlement mechanism, supply management, increased IP protection New provisions: sunset clause, state-owned enterprises, currency manipulation, non-market economy clause, increased de minimis thresholds Contains 34 chapters, 12 side letters 17

What if CUSMA had not come true? Global Affairs Canada CGE, by 2023 CD Howe CGE Royal Bank of Canada Macroeconomic, over 5 years Bank of Montreal Macroeconomic, over 5-10 years -0.19% -0.47% -1.0% -1.0% 18

Challenges Ahead In Canada Household debt level in Canada Productivity Around the globe Trade tensions and potential ripple effects Changing financial conditions around the globe Increased oil prices The multilateral trading system 19

Global trade tensions: estimates from IMF Steady expansion underway since mid-2016 continues Global growth forecast is 3.7% for 2018-19 (-0.2 pp compared to April 2018) US growth is strong (fiscal stimulus) but revised downwards due to trade tensions; tighter monetary policy to be expected Euro area and UK growth revised downwards China growth revised downwards due to trade barriers and weaker credit conditions Other advanced economies and emerging economies prospects mixed 20

U.S.-China trade tensions: what does it mean for Canada? We use GAC s dynamic Computable General Equilibrium (CGE) model with 57 sectors and 140 countries and regions. It can capture impacts on the Canadian economy even though the policy shock stems from a tariff confrontation between two other economies and is not targeted at Canada. Hypothetical scenario that the U.S. and China impose additional tariffs of 25% for all their respective imports up to 2030. The analysis does not take into account the financial aspect of Sino-American trade. 21

U.S.-China trade tensions: what does it mean for Canada? (cont d) United States and China are not highly trade-dependent countries. Trade intensity accounted for only 27% of U.S. GDP, while it is about 38.5% of China s GDP. In contrast, Canada s trade intensity was around 64% of GDP. Their trade exposures to each other were even less significant: China s trade with the U.S. accounted for 4.73% of China s GDP, and the U.S. trade with China represented 3.7% of U.S. GDP. But bilateral trade was dominated by U.S. imports from China. China s exports to the U.S. accounted for 3.53% of China s GDP, compared to only 1% for U.S. exports to China. 22

The Effects of Tariffs on GDP in 2019 and 2030 2019 2030 % Changes US$ Billion % Changes US$ Billion ASEAN 0.03 0.74 0.2 7.8 Australia 0.01 0.09-0.06-1.3 Brazil 0.02 0.67 0.02 0.5 Canada 0.12 2.38 0.2 4.5 China -0.49-66.19-0.88-194.4 EU_28 0.02 3.51-0.04-9 Japan 0.01 0.56 0.02 1.1 Korea 0.06 0.93 0.11 2.5 Mexico 0.14 2.11 1.4 25.1 New Zealand 0.00 0.00-0.1-0.3 Taiwan 0.01 0.04 0.09 0.6 USA -0.36-64.72-0.52-97.9 Rest of World 0.02 4.08-0.07-17.3 Total -0.13-115.8-0.26-279.2 Data: GTAP 23

Change in 2030 of Macroeconomic Indicators Country 2030 Capital Change Real Exchange Rate Consumer Price Index Value (US$M) % % % ASEAN 45,132 0.32 0.86 0.59 Australia -13,160-0.16-0.22-0.11 Brazil -10,036-0.10 0.51 0.43 Canada 15,604 0.17 1.48 1.13 China -989,553-0.94-1.70-1.22 EU_28-104,851-0.13 0.43 0.32 Japan 2,593 0.01 0.65 0.47 Korea 9,844 0.10 0.84 0.52 Mexico 127,042 2.08 3.48 2.55 New Zealand -1,962-0.22 0.24 0.20 Taiwan 6,596 0.20 0.99 0.64 USA -388,264-0.58-0.01 0.56 Rest of World -158,888-0.22 0.25 0.23 Data: GTAP 24

Effect on Canada as a result of the trade Disputes Canada could potentially capitalize on the trade dispute by importing cheaper products from China while exporting more products to the U.S. to make up for the decline in U.S. imports from China. Potential gains could reach US$4.5 billion or 0.2% in GDP from the dispute. Export opportunities to China: oilseeds (mostly soybeans) and transport equipment (such as airplanes). Export opportunities to U.S: The model results suggest that Canada could increase its exports to the U.S. by US$18.0 billion, almost entirely in the manufacturing sectors. On the import side, Canadians would benefit from reduced prices for imports from China. 25