Canada Falls off a Foreign Trade Cliff and North Korea Ups the Ante

04/11/2013 by Alex Carrick

There’s a clear dividing line. The change occurred in November 2008, near the start of the recession in Canada.

Prior to then, the nation was able to count on a large merchandise trade surplus – i.e., goods exports that were far higher than goods imports. Since then, the trade balance has fluctuated around zero, leaning more towards the negative than the positive.

The latest month, February 2013, extended the losing streak. For the eleventh month in a row, Canada came up short in its trade balance with the world. Exports in February declined 0.6% month to month while imports rose 0.1%, according to Statistics Canada.

On a year-over-year basis, goods exports in February were -2.1%. Imports stayed almost flat (-0.2%). The annualized trade deficit was -$12.2 billion, deteriorating from -$9.0 billion in January.

There have been 51 months since November 2008 (inclusive). During that time frame, Canada has achieved a positive trade balance in only 14 months. The other 37 months have been in the red.

January 2012 was the single month in which the trade balance approached (at nearly +$40 billion) a figure similar to its previous habitual perch.

According to the Census Bureau, the U.S. trade balance (both goods and services) also worsened in February, but that doesn’t carry the same unfortunate implications as for Canada. The U.S. typically runs deeper trade deficits as its economy strengthens.

Due to an upsurge in oil and gas reserves, the U.S. is importing less energy these days. But American consumers still love to shop for cheap imported goods.

The most remarkable statistic in the latest U.S. trade data is the proportion of the total deficit belonging to China. For many years prior to the U.S. recession (which began in 2008’s first quarter), China accounted for about one-third of the U.S. foreign trade shortfall. That share has gradually risen over the intervening years to the point where, in the latest month, it was half, or 50%.

This is particularly interesting in a geopolitical sense, given North Korea’s current proclivity for sabre-rattling. The China of today is not the China of ten years ago, or the China of the 1950s, when the Korean War broke out on the peninsula.

I’ll have more to say on this in a moment, but first I’d like to examine Canada’s trade numbers in a little more detail. By far, Canada’s largest sub-category among trade goods is energy. Through February, our energy exports were -8.4% versus the first two months of last year. Canada still has a large surplus in energy trade, but it’s fallen by nearly 13% compared with the same January-February period in 2012.

Canada’s second largest sub-category of trade goods is motor vehicles and parts. Through February, our auto sector exports have fallen 8.8%, a sharper rate of drop than for imports, -1.1%. Consequently, our deficit in auto trade has worsened by 44%.

The major “plus” has occurred in the forestry sector where an improving U.S. homebuilding sector has lifted exports by 7.4% and the surplus by 14.6%.

Because Canada has such a wealth of natural resources, a chief factor governing the nation’s foreign trade is commodity prices. The Bank of Canada’s total commodity price index recorded a decline of 56% from a level of 900 in June 2008 to 400 in February 2009 (1972 = 100.0).

The index presently sits at about 650, or halfway between the peak and the trough. More significantly, with a few minor jogs up and down, the index has stayed level for the past two years dating back to January 2011.   

Led by improving gross domestic product (GDP) growth in the U.S., there have been indications of an imminent pick-up in world trade.

(There are blips in the U.S. growth pattern. For example, the weekly initial jobless claims figure jumped to 388,000 at the end of March, but it has thankfully fallen again, by 42,000 to 346,000, in the latest report for the week ending April 6.)

Japan is the world’s third largest economy. Tokyo is adopting all fiscal and monetary means to stimulate the economy. A drop in the value of the yen is sure to lead to a pick-up in export sales.

The value of South Korea’s won is also falling, but it has nothing to do with official government policy. Rather, a belligerent North Korea is destabilizing the region. The authorities in Pyongyang claim to possess missiles and nuclear weaponry of unknown strength and efficiency.

North Korea is engaging in blackmail to gain concessions from South Korea, the U.S. and even China concerning food, energy and other forms of aid.

Meanwhile, firms with production facilities in the region are contemplating contingency plans. General Motors has already expressed worry about the safety of its workers in South Korea.

As already pointed out, China has a strong stake in how well the U.S. economy performs. Present-day China is largely governed by economic circumstances. The communist party’s hold over the country depends on its ability to deliver ongoing improvements to the standard of living.

China wants to maintain access to North Korea’s resources. (Next to raw materials, North Korea’s major export earnings come from weapons shipments to other rogue regimes.) But Beijing also has production facilities and other business investments in neighboring Mongolia.

There are no easy answers for the super powers in response to North Korea’s reckless behavior.

The U.S. doesn’t need or want to become embroiled in another war zone. As for a clash of conventional forces in Korea, the U.S. (Canada as well) has already been there and done that.

China would no doubt like to see a strong buffer remain between itself and a U.S.-friendly government in Seoul. But due to its one-child policy, China has a declining work force in the young adult cohort. It wouldn’t want to see a further siphoning off of men into the military.

Many commentators would prefer to see a Chinese puppet-state in North Korea versus the status quo. But this would violate the image Beijing is trying to project to the world – that unlike Europe in an earlier era and the U.S. more recently, it has no imperialist ambitions.

What about re-unification? Due to the huge disparities in income between the citizens of the North and South, the cost of unification to South Korea would be much greater than it was for West Germany when it absorbed the East.

Maybe change will come from within North Korea in the form of a people’s movement, although something similar to the “Arab Spring” is hard to imagine, given the iron-fisted control exercised by the nation’s ruling family and the military.

In any event – and let’s not forget the possibility of a coup – there is likely to be regime change in North Korea. Meanwhile, the bluffing and blustering continue their extended run. 

But there’s a catch. If you want to be taken seriously, there’s a limit to how much violence can be promised without delivering on the threat. Should North Korea step over that line, history has shown that the full range of consequences is impossible to predict. 

U.S. foreign trade: goods and services balance
U.S. foreign trade: goods and services balance
Based on seasonally adjusted monthly figures, projected at an annual rate.
Analysis of the U.S. foreign trade position usually focuses on goods and services exports minus goods and services imports.
Data source: U.S. Bureau of the Census/Chart: Reed Construction Data - CanaData.
U.S. goods trade deficit with major countries and areas – February 2013
    Annualized Per cent
of Total
      Annualized Per cent
of Total
    Figure U.S. Goods       Figure U.S. Goods
    (U.S. $ billions) Trade Deficit       (U.S. $ billions) Trade Deficit
Canada 1 year ago -34.3 5.9%   Euro Area 1 year ago -69.7 12.0%
  3 months ago -33.6 4.4%     3 months ago -127.5 16.6%
  Latest month  -31.1 5.6%     Latest month  -97.1 17.6%
Mexico 1 year ago -69.8 12.0%   Indonesia* 1 year ago -9.8 1.7%
  3 months ago -58.4 7.6%     3 months ago -10.5 1.4%
  Latest month  -51.1 9.2%     Latest month  -8.7 1.6%
Germany 1 year ago -43.2 7.5%   OPEC 1 year ago -77.3 13.3%
  3 months ago -74.8 9.8%   Nations 3 months ago -79.4 10.4%
  Latest month  -53.7 9.7%     Latest month  -43.0 7.8%
China 1 year ago -232.4 40.1%   Nigeria 1 year ago -10.3 1.8%
  3 months ago -347.4 45.3%   (OPEC 3 months ago -12.3 1.6%
  Latest month  -280.9 50.8%   member) Latest month  -5.4 1.0%
Japan 1 year ago -83.9 14.5%   Saudi Arabia 1 year ago -32.9 5.7%
  3 months ago -74.3 9.7%   (OPEC 3 months ago -31.4 4.1%
  Latest month  -71.2 12.9%   member) Latest month  -21.3 3.8%
India 1 year ago -18.3 3.2%   Venezuela 1 year ago -22.2 3.8%
  3 months ago -18.0 2.4%   (OPEC 3 months ago -23.8 3.1%
  Latest month  -14.7 2.7%   member) Latest month  -13.7 2.5%
*Indonesia has a large trade surplus with the U.S. but it is mainly in products other than oil. In fact, the country has become a net importer of oil.
The five major suppliers of crude oil to the United States are Canada, Saudi Arabia, Mexico, Venezuela and Nigeria.
Data source: U.S. Census Bureau (Department of Commerce) (based on not seasonally adjusted current dollar monthly figures).
Table: Reed Construction Data - CanaData.
Canada’s foreign trade: the merchandise trade balance
Canada’s foreign trade: the merchandise trade balance
Based on seasonally adjusted monthly figures, projected at an annual rate.
Analysis of Canada's foreign trade position usually focuses on the Merchandise Trade Balance which is goods exports minus goods imports.
Data source: Statistics Canada / Chart: Reed Construction Data - CanaData.
Canada's trade by major goods and commodities - February 2013
<
Latest Period   Year to Date
JAN 13 FEB 13     Jan-FEB 12 Jan-FEB 13  
(Cdn $ billions) % Change   (Cdn $ billions) % Change
Farm, fishing &  Exports 2.360 2.284 -3.2%   4.544 4.644 2.2%
intermediate food Imports 1.096 1.108 1.1%   1.942 2.204 13.5%
Balance 1.264 1.176 -7.0%   2.602 2.440 -6.2%
Energy products Exports 8.938 8.923 -0.2%   19.507 17.861 -8.4%
  Imports 4.333 3.496 -19.3%   7.987 7.829 -2.0%
Balance 4.605 5.427 17.9%   11.520 10.032 -12.9%
Metal ores & non- Exports 1.376 1.476 7.3%   2.927 2.852 -2.6%
metallic minerals Imports 1.073 0.946 -11.8%   1.712 2.020 18.0%
Balance 0.303 0.530 74.9%   1.215 0.832 -31.5%
Intermediate metal Exports 5.043 4.692 -7.0%   9.414 9.734 3.4%
products Imports 3.192 3.294 3.2%   7.348 6.485 -11.7%
Balance 1.851 1.398 -24.5%   2.066 3.249 57.3%
Chemical, plastic Exports 2.958 2.831 -4.3%   5.548 5.790 4.4%
& rubber products Imports 3.050 3.365 10.3%   6.634 6.415 -3.3%
Balance -0.092 -0.534 480.4%   -1.086 -0.625 -42.4%
Forestry products Exports 2.656 2.722 2.5%   5.009 5.378 7.4%
  Imports 1.710 1.726 0.9%   3.314 3.436 3.7%
Balance 0.946 0.996 5.3%   1.695 1.942 14.6%
Industrial machinery Exports 2.155 2.145 -0.5%   4.597 4.299 -6.5%
& equipment Imports 3.659 3.732 2.0%   7.455 7.391 -0.9%
Balance -1.504 -1.587 5.5%   -2.858 -3.092 8.2%
Electronic &  Exports 1.868 1.772 -5.1%   3.908 3.640 -6.9%
electrical equip. Imports 4.548 4.535 -0.3%   9.453 9.083 -3.9%
Balance -2.680 -2.763 3.1%   -5.545 -5.443 -1.8%
Motor vehicles  Exports 5.095 5.378 5.6%   11.479 10.474 -8.8%
& parts Imports 6.484 6.839 5.5%   13.465 13.323 -1.1%
Balance -1.389 -1.461 5.2%   -1.986 -2.849 43.5%
Aircraft & other Exports 1.324 1.355 2.3%   2.467 2.679 8.6%
transport equip. Imports 1.218 1.036 -14.9%   2.040 2.254 10.5%
Balance 0.106 0.319 200.9%   0.427 0.425 -0.5%
Consumer goods Exports 4.099 4.062 -0.9%   7.914 8.160 3.1%
  Imports 7.843 8.025 2.3%   15.230 15.868 4.2%
Balance -3.744 -3.963 5.8%   -7.316 -7.708 5.4%
*Industrial goods include metals and minerals.
N/A or "not applicable" is when the signs don't match or the per cent is too high.
Data source: Statistics Canada (based on seasonally adjusted current dollar monthly figures).
Table: Reed Construction Data - CanaData.