Canada-China Trade: 2022 Year in Review

Canada-China Trade: Year in Review 2022

2022 was one of the most turbulent years in Canada-China trade in recent history. In the first half of the year, Canada was on pace for an unprecedented drop in exports to China. A surprising recovery in the second half, however, resulted in a slight growth of Canadian exports to China. Overall, despite a rocky start, 2022 saw a return to growth in both exports and imports between the two countries. Because of the turbulence in exports and consistent growth in imports, Canada’s trade deficit (exports-imports) with China continued to grow.

The following data is gathered from Statistics Canada for goods (merchandise) trade with China, presented on an unadjusted customs basis in Canadian dollars (CAD). The relevant HS 4-digit identification code is used to identify product groups. All values are in Canadian dollars (CAD).[1]

Canada-China Trade: 2022

Exports:

Source: Trade Data Online (Statistics Canada – Customs Data)

Exports to China expanded dramatically in the last few months of 2022. While total exports only grew 2% between 2021 and 2022, for most of 2022, exports were expected to shrink. The rebound of exports can largely be explained by the easing of COVID-Zero restrictions in China and the country’s lifting of export restrictions on Canadian canola. Given that overall Canadian exports grew consistently throughout 2022 by 22.96% year-over-year (YOY), slow export growth to China was an outlier in Canada’s overall export markets.

Source: Trade Data Online (Statistics Canada – Customs Data)

Each month of Q4 recorded a significant expansion in exports to China. October saw the continued trend of exports rebound from September and holds the distinction of the largest value of exports of any month in 2022 at $3.56 billion (an increase of 26.8% YoY). While November’s export value decreased slightly, at $3.23 billion, it had the largest YoY growth at 38.9%. Rounding out Q4, December saw a lower total value of $2.76 billion and a lower YoY growth of 24.2%, however, both figures were still higher than any previous month in 2022 outside of Q4.

Coal and Solid Fuels Manufactured from Coal was the top export category for 2022, at $3.49 billion, which was a 0.3% contraction compared to 2021. Canola Seeds (broken and unbroken), formally known as Rape or Colza seed, were the second largest export category ($2.19 billion, an increase of 25.3%YoY). This was a surprising shift considering Canola wasn’t even in the top five exports in the Q3 update. The third and fourth product categories: Sulphate Chemical Woodpulp ($2.17 billion, -4.87%) and Iron Ores and Concentrates ($2.17 billion, -19.41%) both contracted YoY. Potassic Fertilizers ($1.54 billion) rounded out the top five and had a significant growth rate of 281.8% YoY.

Imports:

                        Source: Trade Data Online (Statistics Canada – Customs Data)

In line with past trends, imports from China in 2022 grew once again, at a rate of 16.36% compared to 2021. 2022 also marked the first time that imports from China surpassed $100 billion CAD,[2] with the total value of imports at $100.03 billion. However, the growth in imports from China still lagged behind Canada’s overall global import growth rate of 19.82%.

Source: Trade Data Online (Statistics Canada – Customs Data)

In sharp contrast with the dramatic expansion in exports in Q4, imports in Q4 recorded modest growth YoY. October was the strongest month of Q4 in total import value ($9.43 billion) and growth (10.4%, YoY). November had a middling marginal growth (2.8%, YoY) and average total value ($8.10 billion). December was not only one of the weakest months of the year in total value ($7.50 billion), but it was also the only month where imports contracted compared to 2021 (-7.9%).

In line with previous years, Telephone and Communication Technology was the top import product category of 2022, with a total value of $9.83 billion and a moderate growth rate of 7.5% YoY. Automatic Data Processing Machines were the second largest import category with a total value of $8.07 billion (-0.3% YoY). There is then a sharp drop-off in total value, as the remaining top five product categories combined did not equal either of the top two categories. In order of ranking, these product categories were Motor Vehicle Parts ($2.33 billion, 22.9% YoY), Non-Healthcare Related Furniture ($1.90 billion, 5.1% YoY), and Seats ($1.7 billion, 2.35% YoY).

Canada-China Trade: Last 24 months 

Source: Trade Data Online (Statistics Canada – Customs Data)

 2022 Canada-China Trade: By Province/Territory

Source: Trade Data Online (Statistics Canada – Customs Data)

Some figures are worth specific attention in this provincial data. First is the prominence of British Columbia on both lists (second in imports and first in exports). The general trend among provinces is that the more populous central provinces tend to be the largest in imports, while the more resource-rich provinces tend to be more export-oriented. British Columbia, however, continues to be both a major import and export market compared to its size. Second, smaller provinces are more susceptible to large percentage changes due to their size. For example, Nunavut had a 99.96% decline in exports to China, the largest percentage drop in exports. Manitoba, on the other hand, had the largest growth in exports at 43.12% YoY. As for imports, Newfoundland and Labrador had the largest contraction with -80.10% YoY, whereas Nova Scotia had the largest growth in imports at 62.76% YoY.

Trends & Topics in Canada-China Trade

Zero-Covid U-Turn: Exports Ride Restriction Rollercoaster

China’s response to the Covid pandemic and subsequent U-turn on its Zero-COVID policy significantly impacted Canada-China trade in 2022. In a matter of a few weeks in late autumn, China went from having the strictest lockdown in the world and some of the fewest cases per capita to having virtually no restrictions and exponential growth in its case count. For most of the year, China’s economy faced massively reduced consumer demand due to Covid restrictions and decreased factory output due to lockdowns, which impacted even the largest Chinese exporters.

In the lead-up to and during the 20th Party Congress, the Chinese government’s commitment to its Zero-Covid policy appeared unlikely to waver. This changed in November when China saw some of its largest public protests in decades, largely aimed at the strict Zero-Covid policy. Sparked in part by the deaths of 10 people in a building fire who many believe were unable to escape due to Covid lockdown policies, the protests soon spread throughout the country.

While there is some debate regarding whether the easing of restrictions had already begun before the protests, it is clear that the protests vastly accelerated the end of Zero-Covid. This led to a dramatic and often confusing loosening of restrictions, which led to increased consumer demand, a surge of Canadian exports to China, and heightened optimism within the investment market. There was, however, some hesitation by potential investors China due to the chaos of the reopening and the lack of clarity on China’s approach to the pandemic going forward.

Due to the impact of China’s Covid policy on its economy, Canada's exports to China closely mirrored China’s degree of lockdowns. During the early months of 2022 and parts of the summer, lockdowns across large swaths of the country led to a decrease in domestic consumption and thus a decrease in Canadian exports (see our quarterly reports for more analysis). The Covid restriction-export relationship was further demonstrated in Q4 of 2022 when the sudden reversal of Zero-Covid resulted in massive growth in Canada’s exports. In October 2022, the total value of exports nearly doubled compared to February 2022. Of course, not all export growth can be attributed to the easing of Covid restrictions, as not all exports are purely linked to domestic consumption. Other factors such as bilateral trade policy shifts also played a role in some industries.

The clearest example of an export which benefited from both China’s Covid policy shift and, more importantly, shifts in Chinese policy environment was Canola. While the reinstatement of the export license of two of Canada’s largest Canola producers (which had been in place since March 2019) occurred in May 2022, it took many months for the supply chains to adjust and production to resume. However, once the harvest finished and markets recovered, they came back with force in Q4. Canola farmers sold nearly five times as many seeds in November 2022, with a total of 477,000 tons, compared to the average of 100,000 tons per month in the first three quarters of 2022. While the degree of dramatic bilateral trade policy shifts perhaps makes Canola a unique case, it is clear that the end of Zero-Covid played an important role in the increase of Canadian exports to China, particularly those related to domestic consumption.

It is worth noting that Q4 2022 saw a meaningful decline in imports from China to Canada. The reason for this is not entirely clear, however, there are some possible connections between the easing of China’s Covid restrictions and the overall decline in imports from China into Canada. The disorganized nature of China’s easing of Covid restrictions left many businesses with a high degree of policy uncertainty, which led to disruptions in the production and transport of goods. The drop in imports can also be attributed to reductions in consumer confidence and demand in Canada. Given that China’s largest export category to Canada is cell phones, the cost of inflation, increased interest rates, and a generally dim economic outlook meant that Canadians have less disposable income and are more hesitant to use it. Analysts should keep a close eye on these trends in 2023 to determine whether this pattern will continue, or if it is merely an irregularity due to a remarkable year in Chinese domestic politics.

War Weary: Global Tensions from Ukraine to Taiwan

Q4 also saw a continuation of mounting tensions between Canada and China on both bilateral and multilateral grounds. The Ukraine War has resulted in deteriorating relations between Canada and China as well as broader global tensions between Western nations and Russia. China’s complex relations with Russia as it continues its War in Ukraine have impacted China’s relations with Western nations, Canada included. While China has yet to supply Russia with any weapons, its unwillingness to condemn Russian aggression has fueled the sense in the West that China and Russia are creating an anti-western alliance. Importantly, the perception of a close alliance alone has sown increased distrust of China and Russia in Western countries including Canada, which is experiencing historically low levels of favourability toward both countries.

While the initial economic shocks of the Russian invasion of Ukraine have somewhat stabilized in Q4 - with much of the supply chain disruption returning to normal - the continued uncertainty of the war and the degree to which it may spread to a larger conflict between Russia and NATO has driven uncertainty in international markets (see our previous quarterly reports for more analysis). Continued fear that China may increase its support of Russia and be drawn into the conflict has made investors and diplomats cautious. While not nearly as frosty as it was during the beginning of the Ukraine War, global investor confidence and optimism remain low, and expectations of slowing global economic growth have done little to help.

The War in Ukraine is not the only source of tension in global markets and geopolitics, as increased tension around Taiwan has dominated headlines. The Fallout from then-Speaker Nancy Pelosi’s August visit to Taiwan remained a sore subject in US-China relations, and the arrival of a Canadian delegation to Taiwan in October 2022 did little to aid Canada's image in China’s eyes. While the direct fallout of that October visit was limited, the following month would be perhaps one of the worst months for Canada-China bilateral relations in decades.

Notorious November: A Low Point in Bilateral Relations

November 2022 was a particularly tough month for Canada-China relations. The month was dominated by three major events:First, on November 2^nd, the Canadian government announced that it would force Chinese companies to divest from three critical mineral sites on national security grounds. This event did a lot to dissuade Chinese investment in Canada's natural resource sector, in particular natural minerals. It also signalled more broadly that investment in Canada may become subject to political barriers. While the Canadian government has since indicated that it would not order divestments by Chinese majority shareholders in large Canadian mining corporations, the action has had a chilling effect on the prospects for Chinese investment in Canada.

Second, on the 15^th of November, a brief but tense interaction between Prime Minister Trudeau and President Xi over different interpretations of the privacy of a previous conversation went viral. A frustrated President Xi stated that “everything we discuss has been leaked to the paper, that’s not appropriate.” Prime Minister Trudeau insisted that “in Canada, we believe in free and open and frank dialogue and that is what we will continue to have.” This led to increased tensions between the two countries and strong negative reactions from the Canadian public. This confrontation not only affected the highest level of dialogue between both countries but also served to reinforce the view held by some that there exists fundamental incompatibility in values between the nations - a view increasingly promoted by some in Canada.

The third event was the long-awaited publication of Canada’s Indo-Pacific Strategy which did little to de-escalate growing tensions between Canada and China. The strategy named China “an increasingly disruptive global power.” It also announced that Canada will have “a realistic and clear-eyed assessment of today’s China,” and vowed to dedicate $1.7 billion toward security in the Indo-Pacific region. The strategy was seen by experts as a monumental shift in Canada's formal policy towards China, one which is much more combative and increasingly active in the Indo-Pacific region. China responded by stating that the Indo-Pacific strategy was “full of ideological bias and baseless accusations against China,” and claiming Canada is “becoming bogged down deeper in serving as vassal of the US in countering China.” While the strategy does acknowledge the importance of China as an export market for Canada and an important ally in the fight against climate change, it undoubtedly signifies a more hardline approach to China which exacerbates growing tensions.

While November was a standout, broad relations between China and Canada chilled throughout 2022. This will unquestionably have some impact on the complexity of future trading and investment relations. It is important to note, however, that through this turbulence, Canada-China trade has continued to grow to historic levels and this growth is expected to continue into 2023. In many ways, 2022 continued the current trend in relations between Canada and China, one of increasingly fraught relations but deepening economic ties. It is hard to say what 2023 will bring, but if the first few months are any indication, warmer diplomatic relations are not on the horizon, despite the continued growth and deepening of trade relations.

[1] Please note that some sums and percentage points may not add up perfectly on tables and graphs due to rounding.

[2] It is worth noting that this report only analyses the value of goods and not their volumes so given the high levels of inflation experienced in 2022 the value of each unit of goods is higher and thus growth in value should not be equated with growth in volume of goods exported and imported.