Study: The changing composition of the merchandise trade surplus

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After peaking at $71 billion in 2001, Canada's merchandise trade surplus has since hovered around $65 billion. This apparent stability, however, masks several new trends in the commodity composition of this surplus, according to a new study published today in the Canadian Economic Observer.

In 2001, the trade surplus was rising because of gains in five of the seven largest sectors: consumer goods, autos, forestry, food and machinery and equipment. Now, the surplus is being sustained by gains in just two sectors, energy and industrial goods. (Data on merchandise trade in this release are up to August 2006.)

The trade balance by sector reflects a country's industrial structure and spending patterns. Since these underlying determinants usually change only slowly over time, sectoral trends in the trade balance typically persist for long periods. This is particularly true for Canada.

Of the seven largest sectors, three have always posted a trade surplus since 1971. These three are rooted in Canadian traditional resources of forestry, energy and agricultural products. Conversely, Canada has always run trade deficits for machinery and equipment and consumer goods.

Autos and industrial goods were the only sectors that posted both surpluses and deficits over the past 35 years. The auto sector posted chronic deficits from 1972 to 1981. Since then, it has consistently posted surpluses, with the exception of 1986 and 1987.

Industrial goods sector (which include metals and chemicals) posted surpluses in 32 of the last 35 years, with the three deficits occurring consecutively from 1998 to 2000.

The strong appreciation of the Canadian dollar after 2002 had a major impact on prices outside of energy and industrial goods. Exports for the other five sectors actually rose in volume over the last four years, but these gains were offset by lower prices received by producers.

Meanwhile, prices fell across the board for all non-energy imports since 2002, a reflection of the loonie's appreciation and low inflation in most of our major trading partners.

The stable long-time pattern of sectoral trade balances makes some of the recent changes all the more remarkable. Autos, which in 1999 had the largest surplus of any sector except forestry, swung to outright deficit in the summer of 2006.

The surplus in energy surpassed forestry for the first time ever in 2001, and by last year was nearly twice as large at $53 billion. Rising commodity prices have also pushed the surplus for industrial goods to a record high so far in 2006.

Fuelled by the income generated from the commodity boom, consumers and businesses in Canada have gone on a spending spree. This has sent the deficit in consumer goods to new highs, while the deficit for machinery and equipment was the largest so far this decade. These deficits would have been even higher, if not for the dampening effect on prices of the rising exchange rate.

Definitions, data sources and methods: survey number 2202.

The study "The changing composition of the merchandise trade surplus" is included in the November 2006 Internet edition of Canadian Economic Observer, Vol. 19, no. 11 (11-010-XIB, free), which is now available from the Publications module of our website. The monthly paper version of Canadian Economic Observer, Volume 19, no. 11 (11-010-XPB, $25/$243) will be available Thursday, November 16.

For more information, or to enquire about the concepts, methods or data quality of this release, contact Philip Cross (613-951-9162; ceo@statcan.gc.ca), Current Economic Analysis Group.