Show Transcript
Canada’s trade deficit widened amid the COVID-19 crisis, sending exports and imports well below pre-pandemic levels. Anthony Okolie speaks with Brian DePratto, Senior Economist, TD Bank, about some positive trends in Canada’s merchandise trade balance, and whether those trends are sustainable.
Print Transcript
- Brian, let's start with the big picture The Canadian trade balance widened again in June, with both exports and imports down well below pre-pandemic levels. Are we moving in the right direction? Or are things steadily getting worse?
- I think we're moving in the right direction. When you look at that headline-- widened deficit, you know, about $3.2 billion-- what you're really seeing there is a resumption of the supply chain. We saw a big jump in activity both on the export side and on the import side, a little bit more on the import side, of course. That's why you get that widening. But really, the underlying story is we are starting to see a little bit of improvement, even if we have a long way to go, about 20%, 15% off from those pre-pandemic levels on exports and imports, respectively. But again, I'd say this is more of a positive sign than anything too concerning.
- Excellent. So what were the major drivers of trade in June? Let's start with exports.
- Sure. The big theme, again, is that supply chain recovery. And for Canada and the US, our biggest trading partner, all about autos. So we saw a big resurgence in auto shipments, auto parts shipments. That was about 2/3 of the gain in terms of exports, so really, that key focus. And as well, we saw some metals gain, gold and others picking up a little bit. The signal there is a little less clear. But I think if we focus on that big driver, it really is that normalization of those supply chains across borders.
- Where do we stand today on our trade balance with the US, which is our biggest trade partner?
- We are starting to see a recovery in two-way trade. Again, with autos really being the big driver, most of that trade is happening with the US. What we saw through-- we're talking about June data. We saw through late May and early June, was a resumption of production a lot of those key auto plants-- so coming hand-in-hand with that, of course, those cross-border shipments, those well-integrated supply chains, things going back and forth across the border multiple times, a lot of those pieces of the bigger system starting to kick back into action. So again, the deficit itself may be a little bit misleading. Underlying what you're seeing is that recovery in terms of activity.
- OK, now I want to stay with the US because recently there's been a lot of news about President Trump, of course, reimposing tariffs of 10% on Canadian raw aluminum. And Canada's preparing to respond in kind to those tariffs. How big a deal is this latest trade row?
- It depends where you sit. For those in the aluminum industry, obviously this is going to be painful. It's sort of deja vu, so to speak. And particularly because of the areas affected, we have some indications that there's a little bit of a shifting, that as demand for some products were falling off, sending out the sort of raw materials, so to speak, was a little bit of a release valve for some of that capacity. So it's going to be a challenge there.
From that 10,000-foot view, this is a little bit smaller than what we saw earlier, the so-called Section 232 Tariff of a couple of years ago. We're talking about less than 1% of 2019 exports here. But we shouldn't dismiss the signal. We've only had the new CUSMA, the Canada, the US Mexico Agreement, the new Free Trade Agreement, in effect for about a month. And already, we're seeing these actions that, beyond their immediate impact, they're bringing back a lot of that uncertainty that we had a few years ago. And you don't want that at the best of times. And we certainly don't want that in the early days of what is hopefully an economic recovery.
- And I just want to touch on one point you mentioned. You said that the tariffs will be painful. Now, are you talking about Canadian exporters or American manufacturers?
- I think it's true on both sides of the border. It's going to be painful for the Canadians. And we've seen from the US Trade Association, a lot of their aluminum manufacturers, people using these products, they don't want to see it either, right? What tariffs do is they increase prices. They feed through and they hit consumers. Again, we're at a time where pocketbooks are not in the best of shape, to say the least. It's just not a great situation for anyone involved.
- So bottom line, what do these trade numbers tell you about Canada's path to economic recovery?
- There's a bit of a theme that's been emerging across all the economic indicators lately, not just the trade. And that's that we're starting to see that we're going to have an uneven recovery. In the case of exports, so you can see that in the standard trade data, the auto sector, again, coming back pretty strong. Flip over to the service side of things-- tourism, professional services-- very different story. Still very challenged, and that's something that's going to remain challenged for some time with all of the travel restrictions, border restrictions, those sorts of things. So that's one theme we're seeing as sort of a very different situations depending on who you are, where you sit, and what you're doing.
And secondly, I think what we're likely to see is something like a two-part recovery. What we're seeing right now is that first pretty decent but partial rebound over the summer months. Things are reopening. Things are getting back to normal a little bit. But again, there's some sectors that are going to have lingering restrictions. They're going to have issues around health concerns, things like that. And that's true not just for trade, of course, but more broadly.
And so as we move past the summer months, I think we're going to be looking at a second phase that's maybe a little bit more gradual. So we've seen a sprint so far. I think it could become a little bit more like a marathon in the fall.
- Brian, thank you very much for your time.
- Thank you for having me.
[MUSIC PLAYING]
- I think we're moving in the right direction. When you look at that headline-- widened deficit, you know, about $3.2 billion-- what you're really seeing there is a resumption of the supply chain. We saw a big jump in activity both on the export side and on the import side, a little bit more on the import side, of course. That's why you get that widening. But really, the underlying story is we are starting to see a little bit of improvement, even if we have a long way to go, about 20%, 15% off from those pre-pandemic levels on exports and imports, respectively. But again, I'd say this is more of a positive sign than anything too concerning.
- Excellent. So what were the major drivers of trade in June? Let's start with exports.
- Sure. The big theme, again, is that supply chain recovery. And for Canada and the US, our biggest trading partner, all about autos. So we saw a big resurgence in auto shipments, auto parts shipments. That was about 2/3 of the gain in terms of exports, so really, that key focus. And as well, we saw some metals gain, gold and others picking up a little bit. The signal there is a little less clear. But I think if we focus on that big driver, it really is that normalization of those supply chains across borders.
- Where do we stand today on our trade balance with the US, which is our biggest trade partner?
- We are starting to see a recovery in two-way trade. Again, with autos really being the big driver, most of that trade is happening with the US. What we saw through-- we're talking about June data. We saw through late May and early June, was a resumption of production a lot of those key auto plants-- so coming hand-in-hand with that, of course, those cross-border shipments, those well-integrated supply chains, things going back and forth across the border multiple times, a lot of those pieces of the bigger system starting to kick back into action. So again, the deficit itself may be a little bit misleading. Underlying what you're seeing is that recovery in terms of activity.
- OK, now I want to stay with the US because recently there's been a lot of news about President Trump, of course, reimposing tariffs of 10% on Canadian raw aluminum. And Canada's preparing to respond in kind to those tariffs. How big a deal is this latest trade row?
- It depends where you sit. For those in the aluminum industry, obviously this is going to be painful. It's sort of deja vu, so to speak. And particularly because of the areas affected, we have some indications that there's a little bit of a shifting, that as demand for some products were falling off, sending out the sort of raw materials, so to speak, was a little bit of a release valve for some of that capacity. So it's going to be a challenge there.
From that 10,000-foot view, this is a little bit smaller than what we saw earlier, the so-called Section 232 Tariff of a couple of years ago. We're talking about less than 1% of 2019 exports here. But we shouldn't dismiss the signal. We've only had the new CUSMA, the Canada, the US Mexico Agreement, the new Free Trade Agreement, in effect for about a month. And already, we're seeing these actions that, beyond their immediate impact, they're bringing back a lot of that uncertainty that we had a few years ago. And you don't want that at the best of times. And we certainly don't want that in the early days of what is hopefully an economic recovery.
- And I just want to touch on one point you mentioned. You said that the tariffs will be painful. Now, are you talking about Canadian exporters or American manufacturers?
- I think it's true on both sides of the border. It's going to be painful for the Canadians. And we've seen from the US Trade Association, a lot of their aluminum manufacturers, people using these products, they don't want to see it either, right? What tariffs do is they increase prices. They feed through and they hit consumers. Again, we're at a time where pocketbooks are not in the best of shape, to say the least. It's just not a great situation for anyone involved.
- So bottom line, what do these trade numbers tell you about Canada's path to economic recovery?
- There's a bit of a theme that's been emerging across all the economic indicators lately, not just the trade. And that's that we're starting to see that we're going to have an uneven recovery. In the case of exports, so you can see that in the standard trade data, the auto sector, again, coming back pretty strong. Flip over to the service side of things-- tourism, professional services-- very different story. Still very challenged, and that's something that's going to remain challenged for some time with all of the travel restrictions, border restrictions, those sorts of things. So that's one theme we're seeing as sort of a very different situations depending on who you are, where you sit, and what you're doing.
And secondly, I think what we're likely to see is something like a two-part recovery. What we're seeing right now is that first pretty decent but partial rebound over the summer months. Things are reopening. Things are getting back to normal a little bit. But again, there's some sectors that are going to have lingering restrictions. They're going to have issues around health concerns, things like that. And that's true not just for trade, of course, but more broadly.
And so as we move past the summer months, I think we're going to be looking at a second phase that's maybe a little bit more gradual. So we've seen a sprint so far. I think it could become a little bit more like a marathon in the fall.
- Brian, thank you very much for your time.
- Thank you for having me.
[MUSIC PLAYING]
