Fraser Forum

China displaces Canada as largest U.S. trade partner (though China’s bragging rights may be short-lived)

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Recently released data from the U.S. Department of Commerce show that through September 2015, China accounted for a larger share of total U.S. trade than Canada.

Specifically, China accounted for 15.7 per cent of total U.S. trade, while Canada accounted for 15.5 per cent of total U.S. exports plus imports. The recent data also show that Mexico is not far behind Canada, as the former accounted for 14.1 per cent of total U.S. trade over the period covered.

To be sure, Canada remains quite firmly the United States’ largest export market accounting for almost 19 per cent of U.S. exports. Mexico lags behind at 15.7 per cent, while China accounts for only 7.4 per cent of total U.S. exports. Obviously, China’s recently achieved position as the United States’ largest trading partner reflects the prominence of U.S. imports from China. Hence, while imports from China account for 21.2 per cent of total U.S. imports, Canada’s share is only 13.4 per cent.

What should Canadians make of these recent data?

Arguably not much. For one thing, Canada’s recent export performance has been harmed by the decline in the price of oil and natural gas. Because Canada is the largest energy exporter to the U.S., any recovery in the price of oil will result an increase in the value of Canada’s exports to the U.S. relative to China’s exports, other things constant. And the decrease in the value of the Canadian dollar relative to the U.S. dollar can ultimately be expected to promote increased Canadian exports of manufactured goods to the U.S.

In addition, the growth rate of exports from China to the U.S. can be expected to slow over time for several reasons. Firstly, as China’s population continues to become wealthier, a growing share of China’s production is being consumed domestically rather than exported. Secondly, the Chinese government is focused on promoting the growth of service industries relative to manufacturing industries, and services are more difficult to export than manufactured goods. Finally, U.S. politicians continue to be critical of China’s lopsided balance of trade surplus with the U.S.

There is increasing congressional pressure on the president to declare China a “currency manipulator,” which would open the door for American retaliatory measures against Chinese exports. While China’s government says it will not be moved by such threats, it seems unlikely that the threats will be ignored by Beijing. Indeed, U.S. government pressure might be a convenient rationale for the Chinese government to accelerate its reduction of financial support for state-owned enterprises in export sectors such as steel and aluminum characterized by excess capacity and major financial losses.

In sum, China’s “bragging rights” to being the United States’ largest trading partner may be short-lived. Furthermore, published trade data do not accurately identify the degree to which production supply chains are integrated across national boundaries. In particular, trade data understate the degree to which U.S. and Canadian companies collaborate to create finished products. Canada’s close geographic proximity to the U.S., as well as large accumulated bilateral foreign direct investment, continues to make Canada the United States’ most important trade partner.  


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