China may now be the largest trading partner of the United States, but Canada still has a bigger influence on economic growth in the world’s largest economy.
It was a tough autumn for the Canadian psyche. Global oil prices plateaued around $45 (US) a barrel, crushing the dream of becoming an energy superpower. Canada lost its status as one of the fastest-growing members of the Group of Seven nations; according to the October update of the International Monetary Fund, we now are No. 5, ahead of only Italy and Japan. And then last month, the U.S. Commerce Department released trade data for September. Those figures showed that America and China swapped goods worth $441.6 billion (US) in the first nine months of the year, compared with $438.1 billion between the U.S. and Canada.
Canadian diplomats will need a new reason for Americans to invite them to dinner. Here’s one: U.S. exporters still need Canada more than they need China. Economists at Nomura Securities recently took a look at American exports, which represent a bigger piece of the country’s gross domestic product than they did before the Great Recession. International shipments helped pull the U.S. economy out of the pit left by the financial crisis. Exporters have been less impressive this year. They are behind last year’s pace, while imports from China and elsewhere are flooding in. That makes trade a drag on growth. (Exports add to GDP, while imports subtract from it because money exits the country to buy them.)
Everyone’s favourite explanation for weaker U.S. exports is the dollar, which has appreciated by more than 15% against an index of the U.S.’s biggest trading partners since the middle of 2014. That’s made American goods less competitive and imports cheaper. But Nomura says the strong dollar is only part of the story. Just as important is weak demand in the places abroad where Americans sell their stuff. Nomura’s team of analysts, which included Charles St-Arnaud, a former economist at the Bank of Canada, showed that U.S. exports to countries that are net exporters of commodities dropped sharply this year compared with shipments to nations that are net importers of commodities. St-Arnaud and his colleagues concluded that U.S. exporters are paying the price for being exposed to markets that were devastated by the collapse of commodity prices—places such as Colombia, Brazil and (especially) Canada.
The Nomura crew didn’t stop there. It followed various types of shipments to destination as a proxy for inflation-adjusted exports. (The analysts assumed the price of something made in the U.S. was roughly the same, no matter where it was sold.) Nominal exports of capital goods dropped dramatically this year. That points to Canada as a big part of the U.S.’s export problem, since the country represents 20% of American exports of capital goods. “The importance of the U.S. economy for the Canadian economy is well known,” the Nomura report said. “However, many investors seem to forget that Canada is also a major market for U.S. products.” Almost 20% of total U.S. exports go to Canada, compared with 8% for China and 15% for Mexico, Nomura said. The firm estimates that Canadian factories are the single biggest buyers of U.S. exports.
U.S. exports to China, on the other hand, have remained relatively stable. That’s probably because the country’s economy still is managing decent economic growth and authorities in Beijing prevented the yuan from declining significantly against the dollar. By contrast, economic growth in Canada contracted in the first half of the year and business investment—the most important factor in demand for imports—collapsed along with oil prices.
To be sure, the slowing of China’s economy from double-digit rates a few years ago to 6–7% now has had an outsized effect on commodities. That makes China a secondary culprit in America’s struggle to revive its exports. But Canada is a direct source of the pain. That’s something Prime Minister Justin Trudeau and his diplomatic corps can point out the next time they ask for Washington’s help to speed up traffic at the border.
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