The China Effect

China’s economic rise is reshaping the global economy. Many Canadians may not be aware of how fundamentally this is changing our own economy.

A new report by the Conference Board of Canada’s Global Commerce Centre shows that Canada’s commercial relationships are changing dramatically, and that China’s rise is one of the key drivers behind this reshaping of what and with whom Canada trades. The report, “Walking the Silk Road: Understanding Canada’s Changing Trade Patterns,” shows that Canada did not grow its exports at all over the past decade. This is primarily due to China. As the chart below shows, Canada’s market share in the U.S. is falling – and China seems to be the beneficiary.

China’s impact on Canada’s trade (share of U.S. merchandise imports, per cent)

Sources: Conference Board of Canada, U.S. Department of Commerce.

This loss in market share is not just confined to one industry, but is instead felt in almost all Canadian sectors.

So, what should Canada do in the face of this China effect? The U.S. market is, and will continue to be, Canada’s bread and butter. It will remain Canada’s largest trading partner for the foreseeable future. In fact, some Canadian industries have maintained their market share in the U.S. even in the face of Chinese competition. The most resilient industries, according to this report, are generally service industries, such as financial services. We need to continue to build on these strengths in the U.S. market.

At the same time, however, we need to look for growth opportunities elsewhere. Fortunately, at the same time that opportunities are being squeezed in the U.S. market, the scale and growth rate of opportunities on offer in fast-growing markets elsewhere is massive. The China effect, for instance, cuts both ways: China represents a major market for our goods and services. Exports to China only account for about three per cent of our trade today, but, as I discussed in a previous Roundtable post, that is likely to more than double by 2025.

There are major opportunities in other large, fast-growing economies that match up with Canada’s strengths. Canada’s expertise in the auto sector, for instance, is a natural fit for India’s booming auto market. In fact, as I note here, hot opportunities for growth in India match up with key Canadian strengths. There are also many other fast-growing economies in Southeast Asia, the Middle East, Latin America, and Africa that represent significant opportunities for Canadian companies.

According to our analysis, Canadian companies are already accelerating their sales into these fast-growing markets. Still, these markets represent only a fraction of our trade. Canada’s economy is still heavily reliant on the slow-growing U.S. market, where we face stiff competition from the Chinese.

The China effect is here and playing a big role in changing Canada’s traditional trade relationships. And this is only the beginning.