Canada’s Trade Ties: Harper Heads to China

Canadian Prime Minister Stephen Harper heads to China today on a much-anticipated trip, his first since 2009, when his trip was far overshadowed by President Obama’s first trip. He has the privilege of being one of the first global leaders to visit China after the holiday period, though we expect Chinese leaders will again be more focused on Xi Jinping’s upcoming Valentine’s trip to Washington. The tour, involving Harper and his ministers of Finance, Trade, Foreign Affairs and Natural resources, will focus on economic linkages, which have remained largely tied to energy and resources, and Harper will likely have to remain relatively mum on geopolitical issues (Syria and Iran) as well as human rights, lest he keep Canada further on the cooler list. The leaders are again hoping to conclude an investment treaty, but this may be some years off.

Canada’s trade with China has been increasing over the last decade, as the resource share of its exports boomed and China’s demand also increased. Adjusting for an increase in USD value and volumes, China absorbed about 3% of Canada’s exports in 2010, more than triple the 1% in 2000. Early evidence suggests the export volumes rose to about 5% in 2011 – still tiny. Canada’s trade with the U.S. still trumps any other trading partner, including in energy.

In fact it is in investment channels that Canada-Chinese ties have really soared.  Chinese buyers including PetroChina have dominated the oil patch, as Chinese companies seek to not only make returns on resource investments but also gain access to unconventional fuel technologies.  Such joint goals have also driven investment in the U.S. including in shale gas. By virtue of its large state in mining giant Teck, Canada forms a large part of the Chinese investment company portfolio and we anticipate that Chinese government investment in Canada is likely to rise in coming years. We anticipate the Prime minister will look to sign some joint deals that could see Canadian companies helping to meet Chinese energy needs.

Harper will likely have to answer Chinese questions about the speed at which Canada could start selling more energy.  So far, just about all of Canada’s energy heads south to the oversupplied U.S. Building new infrastructure to take advantage of the more lucrative Asian market is a priority and one in which Chinese interests in Canada are set to support. The Chinese have been particularly impatient about a series of pipeline delays, ranging from the Mackenzie natural gas pipeline to the current drawn out review process for the Northern Gateway, which we have discussed in previous weeklies. Given the recent USG delay on the Keystone pipeline, the long-desired trade diversification mission gains new strength. We do ultimately expect that the U.S. will approve a routing of Canadian bitumen, but Canada will want to encourage more buyers, particularly ones that are not increasing domestic production. Increasing demand of oil in both North Dakota and Alberta is adding to over supply at Cushing, depressing WTI and adding to the discount for Canadian bitumen. Similarly, with U.S. natural gas supplies ample there is less demand for more expensive Canadian natural gas, some of which is starting to head west.

Chinese investment is not limited to government linkages, with rich Chinese and Chinese property developers playing a major role in key property markets within Canada, particularly in Vancouver and Toronto. These markets are seen as a safe haven both for Chinese, splitting time between the mainland and Canada, but also as an alternate property venture. A withdrawal of Chinese liquidity could put some of these still frothy markets at risk.

Finally, Harper will push for services exports of both tourism and education, two areas, which Canada should be making inroads in China, especially given the large personal connections between the two countries.

Figure 1: No one Rivals the U.S. in Absorbing Canada’s Exports (% of total Exports)

Source:  IMF, Haver Analytics

Figure 2: China Now Accounting for 10% of Canada’s Exports

Source: Haver Analytics

Figure 3: China- Canada Trade on the Rise, but Dominated by Canadian Imports

Source: Haver Analytics

Rini Sen, Associate Economist contributed to this post.