Canada s Deteriorating Automotive Trade Performance. by Jim Stanford Economist Canadian Auto Workers

Transcription

1 Canada s Deteriorating Automotive Trade Performance by Jim Stanford Economist Canadian Auto Workers October 2007

2 Summary In recent decades, Canada has been a major net exporter of automotive products to global markets. The auto industry was one of a very small number of technology-intensive manufacturing sectors in which Canada was able to maintain a trade surplus. (For the most part, Canada experiences trade deficits in higher-technology manufacturing sectors, offset by surpluses in natural resources like energy and forestry.) In 1999, the best year ever for Canada s auto sector, our automotive trade surplus reached almost $15 billion. 1 During this decade, however, that traditional automotive trade surplus has evaporated, shockingly quickly. In 2006 Canada incurred a small automotive trade deficit the first in a generation. And a CAW analysis of monthly trade data indicates that deficit has become dramatically worse this year. During the first seven months of 2007, Canada s automotive trade deficit swelled to over $4 billion. Extrapolating year-to-date growth trends in both imports and exports, the automotive trade deficit for 2007 as a whole will likely reach almost $8 billion. That would represent by far the largest automotive trade deficit in Canada s history. Instead of being a net supplier of high-quality automotive products to the global economy, Canada is now a major net importer of automotive products. This trade deficit inevitably translates into a loss of jobs in domestic automotive production (since fewer jobs are supported by exports, and more jobs are displaced by imports). Indeed, the erosion of our automotive trade performance has gone hand-in-hand with the loss of well-paying automotive jobs. Over 10,000 auto assembly jobs have been lost since 1999, and over 10,000 auto parts jobs have been lost since Canada maintains a significant automotive trade surplus with the U.S., but this is now overwhelmed by a much larger combined deficit with other countries. Canada s largest automotive trade deficit is with Japan (exceeding $6 billion). Our most unbalanced automotive trade relationship is with Korea from whom we purchase 183 times as much automotive value as we sell there. The fastest-growing automotive imports have been from China (up by over 1200% in ten years) and Korea (up by almost 600%). Canada s automotive trade deficit with China (due mostly to imports of auto parts) will reach almost $1 billion this year. 1 See appendix for sector definitions and data sources. 1

3 Despite the decline in the automotive trade balance, the auto industry remains arguably Canada s most important export industry. Total automotive exports will exceed $70 billion for That represents a 20 per cent decline from the 1999 peak, yet still qualifies the industry as our most important export earner. This evidence calls deeply into question the current direction of federal economic and trade policy. The federal government and the Bank of Canada have tolerated the unprecedented run-up of the Canadian dollar (which has appreciated by over 60% against the U.S. dollar since 2002, clearly contributing to our deteriorating automotive trade performance). And trade officials are pushing to sign a new free trade agreement with Korea, which will enhance that country s already-large penetration of Canadian automotive markets. Industry Canada s own studies indicate that a Canada-Korea FTA will spur an increase in Canadian vehicle imports from Korea by 18,000-33,000 units per year. 2 Canadian and Korean trade negotiators will launch their 11 th round of FTA negotiations in Ottawa on October 9. Trade Minister David Emerson has indicated his determination to reach a deal with Korea, motivated by the fact that Canada has not signed any new FTAs in five years. The two sides are reported to be nearing a deal that would include the elimination of tariffs on Korean automotive sales in Canada, with no requirements of Korean automotive purchases from Canada. The CAW calls on the federal government to stop its FTA negotiations with Korea in light of the devastating deterioration of Canada s automotive trade performance, and other structural challenges facing the Canadian industry. This is the wrong time for our own government to expose this still-crucial export industry to even more damage from low-cost, one-sided imports. Future trade talks must be integrated with a broader strategy to support auto and other high-value Canadian industries, and must feature focused measures to ensure that our automotive imports are matched by equivalent automotive exports. 2 Partial Equilibrium Analysis of the Impact of a Canada - Korea FTA on the Canadian Automotive Industry, Industry Canada, 2006, 2

4 Canada Experienced a $4 Billion Automotive Trade Deficit in the First 7 Months of 2007 Canada s Automotive Trade Jan.-July 2007, $billion Vehicles Exports 30.2 Imports 22.1 Auto Parts (Incl. Bodies & Trailers) Exports 11.5 Imports 23.9 Total Exports 41.7 Imports 46.0 BALANCE -4.3 Source: CAW Research from Industry Canada Strategis. Canada s automotive exports (including both assembled vehicles and parts) declined by 5 per cent (year over year) during the first seven months of 2007, to under $42 billion in total. In contrast, Canada s automotive imports grew by 4 per cent. These contrasting trends created a net automotive trade deficit of $4.3 billion, during the January-July period alone. Canada maintains a net surplus in trade in finished vehicles, but this surplus narrowed by 27 per cent (year over year) during the first seven months of the year. Our long-standing trade deficit in auto parts (including truck and bus bodies and trailers) widened during the first seven months (to $12.4 billion). 3

5 For 2007 as a Whole, Canada Will Incur an Automotive Trade Deficit Approaching $8 billion Canada s Automotive Trade 2007 Year Total Forecast, $billion Vehicles Exports 51.6 Imports 37.9 Auto Parts (Incl. Bodies & Trailers) Exports 19.5 Imports 41.1 Total Exports 71.1 Imports 79.0 BALANCE -7.9 Source: CAW Research from Industry Canada Strategis. The year-over-year changes in each component of Canada s automotive trade balance can be extrapolated to 2007 as a whole, to develop a forecast of the year-end automotive trade balance. On this basis, a year-end surplus in finished vehicle trade of under $14 billion, will be offset by a much larger trade deficit in parts (of close to $22 billion). The bottom-line automotive trade deficit will therefore approach $8 billion for the year. This will represent by far the largest automotive trade deficit in Canadian history. The previous largest automotive trade deficit was $3 billion, incurred in 1979 (at the height of the post-opec surge in sales of small imported vehicles). 4

6 This Year s Automotive Trade Deficit is a Sharp Reversal from Recent Large Surpluses $20 Collapsing Trade Performance (I) Automotive Trade Balance ($bil) $15 $10 $5 $0 -$5 -$ Source: CAW Research from Industry Canada Strategis. fcst This year s expected automotive trade deficit of $8 billion represents a dramatic change from significant automotive trade surpluses experienced just a few years ago. Throughout the 1990s and the first part of this decade, Canada enjoyed significant automotive trade surpluses as a result of vibrant domestic production and strong exports. The largest surplus was experienced in 1999, reaching almost $15 billion. Since 2004, the automotive trade balance has deteriorated every year at the same time as Canada s currency was appreciating dramatically relative to the U.S. dollar (and most other currencies, as well). This year s deficit will represent a cumulative decline in the automotive trade balance of over $22 billion since

7 Annual Change, Automtv. Trade Bal.($bil) The One-Year Decline in Canada s Automotive Trade Balance in 2007 is the Worst-Ever $10 $8 $6 $4 $2 $0 -$2 -$4 -$6 -$8 Collapsing Trade Performance (II) Source: CAW Research from Industry Canada Strategis. fcst This year s deterioration in the automotive trade balance continues what is now a well-established (if unfortunate) trend marks the third consecutive year of deteriorating automotive trade performance. And the trade balance has deteriorated in seven of the past eight years. However, the single-year decline in the automotive trade balance expected in 2007 (a decline of almost $7 billion, compared to last year s small deficit) is dramatic. In fact, this year s decline in the trade balance would represent the worst single-year deterioration in automotive trade performance in Canadian history exceeding one-year declines of almost $6 billion that were experienced in 2002 and In other words, not only is Canada s automotive trade performance now the worst-ever; it is still deteriorating at a record rate. 6

8 Canada s Automotive Trade Surplus with the U.S. is Outweighed by Deficits With Other Countries U.S. surplus, RoW deficit ($bil) $30 $25 $20 $15 $10 $5 U.S. and Other Traders U.S. Surplus RoW Deficit $ Source: CAW Research from Industry Canada Strategis. fcst Canada will still enjoy an automotive trade surplus with the U.S. this year of close to $10 billion although this is down sharply from the $25 billion bilateral surplus recorded in Canadian vehicle exports to the U.S. have been squeezed out by a rapid rise in offshore import penetration to the U.S. market. However, that bilateral trade surplus with the U.S. is now far outweighed by Canada s growing automotive trade deficit with the rest of the world (RoW). That cumulative non-u.s. automotive trade deficit will likely equal $17.5 billion this year the highest ever, and twice as large as a decade ago. For every $1 in automotive trade surplus Canada continues to enjoy with the U.S., we now incur a $1.82 deficit with the rest of the world. 7

9 Canada s Largest Bilateral Automotive Trade Deficit is with Japan $0 Canada's Largest Auto Deficits Automotive trade deficit ($bil) -$1 -$2 -$3 -$4 -$5 -$6 -$7 Japan Mexico Germany Korea China Source: CAW Research from Industry Canada Strategis.2006 actual. Almost 90 per cent of Canada s automotive trade deficit with the rest of the world is due to five large bilateral deficits with particular countries. Canada s automotive trade deficit with Japan is the largest, exceeding $6 billion. The bilateral deficit with Mexico is next largest, over $4 billion. Bilateral deficits with Germany and Korea add about $2 billion each to the toll. Rapidly growing imports of auto parts from China have now created a significant bilateral trade deficit with that country as well. The deficit equaled $800 million in Year-over-year trends from January through July indicate that the automotive trade deficit for 2007 will come close to $1 billion. As recently as 2003, Canada maintained a small automotive trade surplus with China, but that has shifted quickly into a now-large and rapidly-growing deficit. 8

10 Canada s Automotive Imports are Growing Fastest From China and Korea Growth auto imports (10-yr) 1400% 1200% 1000% 800% 600% 400% 200% Fastest Growing Auto Imports 1255% 586% 171% 75% 55% 32% 17% 0% China Korea Germany Mexico Japan AVERAGE U.S. Source: CAW Research from Industry Canada Strategis.2007 fcst. total over 1997 actual. Over the past decade, Canada s total imports of automotive products have grown by about one-third. But this relatively modest overall rate of import growth masks dramatic differences in the sourcing of automotive imports. Automotive imports from the U.S. have grown half as fast as total imports during this time. As a result, the U.S. share of total Canadian automotive imports has fallen from 85 per cent to 75 per cent over the decade. The fastest growth in automotive imports has been from China and Korea. Automotive imports from China (consisting mostly of auto parts for now, anyway) have expanded twelve-fold over the decade. Automotive imports from Korea (consisting mostly of finished vehicles) have expanded six-fold. 9

11 Our Automotive Trade is More Unbalanced With Korea Than Any Other Major Trading Partner Ratio of Auto Imports to Exports Largest Auto Trade Imbalances Korea Japan Germany Mexico China U.S. Source: CAW Research from Industry Canada Strategis mos. Data. Canada s bilateral automotive trade with the U.S. is relatively balanced: Canada enjoys a significant surplus, but that surplus is relatively small compared to a very large two-way flow of both finished vehicles and parts. This intense two-way trade represents the legacy of continental integration in the industry, dating back to the 1965 Canada-U.S. Auto Pact. In contrast, Canada s automotive trade with other major trading partners is precariously unbalanced. With other players, Canada s automotive exports are very small in relation to the inflow of automotive imports. This imbalance is represented in the preceding figure by the ratio of Canada s automotive imports to its exports, for our six largest automotive trading partners. The most extreme imbalance is experienced between Canada and Korea. During the first seven months of 2007, Korea exported 183 times as much automotive value to Canada, as Canada exported to Korea. (Canada s automotive exports to Korea so far this year have totaled just $5 million, mostly parts.) Canada s automotive exports to Korea (which were never significant) actually declined by 90 per cent between 2000 and 2006; Korea tightened its own limits on imports, while simultaneously promoting automotive exports, to spur its recovery from the financial crisis of the late 1990s. 10

12 The Auto Industry is Still Arguably Canada s Most Important Export Industry Canada s Top Exports (4-digit level, 2006, $billion) Passenger Vehicles 42.9 Crude Petroleum 37.9 Natural Gas / LPGs 30.8 Auto Parts 14.9 Refined Petroleum 12.2 Trucks 10.1 Lumber 9.3 Aircraft 7.4 Aluminum 7.2 Gold 5.4 Source: Industry Canada Strategis. Despite a 20 per cent decline in Canada s automotive exports since 1999, the auto industry is still arguably Canada s most important export industry, accounting for almost one-fifth of total exports. The table above lists the ten most important Canadian export products, measured by product category at the 4-digit level of disaggregation. By this measure, finished passenger vehicles still constitute Canada s largest export. Motor vehicle parts and assembled trucks also appear in the list of our top ten exports. Canada s role in the global economy is changing quickly, as a result of recordhigh commodity prices and massive exports of oil and other resources. However, it would be a glaring mistake to therefore conclude that the auto industry no longer matters to Canada s global performance. Auto products are still our most important exports. The deterioration in our automotive trade balance has been a major factor in Canada s poor recent trade performance in non-resource industries. Arresting that decline, and restoring Canada s status as a major net automotive exporter, should be a crucial priority for federal economic policy. 11

13 Conclusion and Policy Implications What was once a unique success story regarding Canada s high-value participation in world markets, has turned remarkably quickly into an industrial nightmare. Canada was once a major net exporter of automotive products, allowing our economy to capture a more-than-proportionate share of good auto jobs, productivity benefits, and positive macroeconomic spin-offs. Now we are a major net importer of automotive products and our auto trade performance continues to deteriorate at a record rate (in the face of an overvalued dollar and a one-way flood of imports from Asia and Europe). It would be folly for Canada to place its entire economic future in the basket of resource exports. We must work to preserve our ability to participate in world markets with other products products which embody knowledge, technology, and productivity, not just the resources that happen to lie under our feet. A focused national strategy to support Canada s auto industry is essential. And the evidence is overwhelming that managing our growing automotive trade deficit must be part of that strategy. Unfortunately, Canada s government is heading in exactly the wrong direction. A free-trade agreement with Korea would grant still greater access to our market by Korean producers, undoubtedly widening our substantial bilateral auto deficit. In fact, Korea has been one of the worst offenders behind the deterioration of Canada s automotive trade performance. Auto imports from Korea have grown almost 600% in the past decade, and outweigh our exports by a 183-to-1 ratio (the worst of any major trading partner). Korea s automotive purchases from Canada, in contrast, have declined by 90 percent since Given the mounting evidence of a trade crisis in what is still Canada s most important export industry, the federal government should stop FTA negotiations with Korea. Future trade talks must be integrated with a broader strategy to support auto and other high-value Canadian industries, and must feature focused measures to ensure that our automotive imports are matched by equivalent automotive exports. Appendix The trade data presented in this report are obtained from the Industry Canada Strategis web site, based on Statistics Canada data collection. Automotive exports and imports are defined as those arising from NAICS industry sectors 3361 (Motor Vehicle Manufacturing), 3362 (Motor Vehicle Body and Trailer Manufacturing), and 3363 (Motor Vehicle Parts Manufacturing). For the purposes of the tables on pages 3 and 4, NAICS sector 3362 is considered within the category of parts. The data in the table of top export products (on page 11) reflect a 4-digit harmonized product code definition rather than an industry definition. 12