Canada-China Trade: Q1 2022

Q1 2022 saw a sudden shift away from the trend of constant growth in Canada-China trade observed in the past few years. This is due to a sharp decrease in Canadian exports to China during Q1 2022. Canadian imports from China, however, continued to grow at a steady rate. 

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 6-digit identification code is used to identify individual products.

Canada-China Trade: 2022 YTD

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

Canadian exports to China had a weak Q1 2022, falling -15.17% year-over-year. This is a somewhat sudden reversal of a steady pattern of growth in Canadian exports to China that has persisted throughout the pandemic and is in sharp contrast to the overall year-over-year growth in total Canadian exports during the first quarter of 2022.

All three months of the first quarter saw a sharp decline in Canadian exports to China when compared to 2021: a large drop in January 2022 (-19.04% YoY) was followed by a smaller drop in February ( -8.96% YoY) and another large drop in March (-16.37% YoY)

Bituminous coal was Canada’s top export category to China in Q1 2022, continuing the dramatic growth in Canadian coal exports to China observed throughout 2021 ($1.02 billion, +96.69% YoY). Exports of chemical wood pulp ($391.69 million, -11.21% YoY), iron ore ($306.16 million, -35.64% YoY), and canola seed ($294.46 million, -27.32% YoY) to China all fell year-over-year. Copper ore ($292.52 million, +19.85%) rounds out the top five export categories in Q1 2022.

Growth in Canadian imports from China was far steadier when compared with exports, posting 14.51% year-over-year growth in Q1 2022, in line with 15.40% growth in Canadian imports from all countries.

January 2022 saw a modest 3.42% YoY growth, but February and March saw significant year-over-year increases in Canadian imports from China (21.50% and 18.98%, respectively).

Laptops ($1.50 billion, -2.57% YoY) and smartphones[1] ($1.23 billion)[2] were the top two import categories from China in Q1 2022. Diagnostic or laboratory reagents, a product category that includes COVID-19 test kits, was third ($925.08 million).[3] Network devices such as modems and routers ($564.25 million, -0.64%) and toys ($297.04 million, +10.31%) round out the top five product categories.

Canada-China Trade: Last 24 months (April 2020 – March 2022)

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

Q1 2022 Canada-China Trade: By Province/Territory

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

Trends & Topics in Canada/China Trade

Ukraine war: Disruptions and tensions in Canada/China trade

Russia’s invasion of Ukraine has been one of the biggest stories of 2022, creating serious consequences worldwide. In addition to the enormous human cost of the war, Russia’s invasion has led to a major disruption in global economic activity and trade. Despite the conflict’s limited geographical scope, the economic consequences have been strongly felt throughout the globe, stemming from the wide-ranging consequences of the conflict: sanctions, geopolitical tensions, uncertainty in global markets, disruptions to global supply chains, and soaring commodity prices (particularly food and energy). No economy or economic relationship is unaffected by these disruptions, including Canada and China.

The most immediate response of Western nations to the invasion was the imposition of extensive sanctions on Russian individuals, businesses, and other entities. While China has strongly condemned the use of sanctions, Chinese corporations and SOEs have mostly complied with them. However, the deep economic ties between China and Russia make Western sanctions difficult for Chinese businesses to navigate. This has led to, for example, media reports that the China National Offshore Oil Corporation (CNOOC) seeks to exit Canada and other Western nations over fears that the Ukraine conflict would lead to further sanctions on the company. Sanctions, if they continue in the long term, may prove an increasingly challenging roadblock for Chinese entities like CNOOC looking to operate in the West, hampering investment, trade, and other economic activity.  

Ukraine is known as the “breadbasket of Europe,” and the war’s disruption of Ukrainian agriculture has sent global food prices soaring. China’s emphasis on domestic wheat and corn has meant the direct impact of the war on Chinese food prices has been limited; nonetheless, the sheer size of the population China must feed and the importance of food security to China means that rising food prices are of concern. Moreover, poor and inconsistent harvests worldwide – including China’s domestic harvest – compound the issue of food prices in China. The war in Ukraine places Canadian agricultural exports, particularly grain, to China in an interesting position. China has been a top destination for Canadian agricultural exports for many years, and increasing Chinese concern about food supply and prices might allow agriculture to be a point of re-engagement between the two nations. On the other hand, the wider geopolitical tensions sparked by the war may prove damaging for Canadian agricultural exports. Hours after Russian troops crossed into Ukraine, China lifted import restrictions on Russian wheat, a move widely seen as deepening ties between Beijing and Moscow. An article in state-owned Yicai floated the idea of China continuing to wean itself off Canadian wheat in favour of Russian wheat. This is a potential sign that China’s food security strategy could increasingly move away from significant agricultural imports from Western nations like Canada. Canadian exports of wheat to China have already had a poor showing in 2022 so far, and the continued divide between democratic and authoritarian nations may continue to direct Canadian agricultural products away from China.

More broadly, the Canada-China trade relationship must contend with the Ukraine conflict deepening and exasperating geopolitical tensions – what President Biden has called the “battle between democracy and autocracy.” The introduction of armed conflict into the divide does not seem to bode well for trade relationships that bridge the two sides, including Canada and China. Then again, Canada-China trade remained mostly unaffected during the detention of Meng Wanzhou and the Two Michaels. For now, it seems that while overall Canada-China trade will continue despite geopolitical tensions, certain industries (including agriculture) will find the trade relationship increasingly difficult to navigate. Long-term, however, talks about decoupling and diversification of Canadian trade away from China will continue with a renewed urgency due to the Ukraine conflict. The next story is an excellent example of this.

Canada seeks “friendly” trade partners as an alternative to China – including Taiwan

Trade and export diversification has been a priority of various Canadian governments for some time. However, Global Affairs Canada’s announcement they are developing a new comprehensive Indo-Pacific strategy puts trade diversification at its forefront. While there is not necessarily a desire for a hard break in Canada-China trade, it is clear that, in light of increased competition and tension with China, Canada’s new Indo-Pacific strategy will push for a greater variety of trading partners in the Indo-Pacific.

To that effect, we have already seen the Trudeau government working to build trade links with Indo-Pacific nations other than China. In late 2021, ASEAN and Canada officially launched talks for a free trade agreement. Separately, Canada and Indonesia have been engaged in trade talks throughout 2021, and into 2022. A trip by International Trade Minister Ng in early 2022 resulted in India and Canada relaunching long-awaited trade talks. Other similar efforts have continued into Q2 and will likely continue throughout 2022.

Of particular note is Canada’s announcement in early 2022 of negotiations for a foreign investment protection agreement with Taiwan. Any agreement with Taiwan must navigate the thorny politics between the island and mainland China, particularly as the Chinese government has become more assertive on the issue in recent years. That Canada would move quickly ahead with negotiations like these, despite the possibility of Beijing’s ire, is perhaps the strongest sign that Canada is accelerating its trade diversification efforts from China.

Canada will likely continue its Indo-Pacific trade diversification throughout 2022, as we continue to await the release of Canada’s Indo-Pacific strategy. Canada might also join wider economic and trade efforts with its allies; already, business leaders are pressuring the Trudeau government to join in President Biden’s Indo-Pacific Economic Framework.  

Canada joins in on EU Challenge to China over Lithuania

In July 2021, Lithuania drew the ire of Beijing over its decision to allow Taiwan to open a diplomatic mission in the Baltic country. In response, China implemented a series of trade restrictions on Lithuania, halting both exports from Lithuania and Chinese exports to Lithuania – a lack of Chinese imports was particularly devastating to Lithuanian manufacturers.

In January 2022 the European Union, on Lithuania’s behalf, launched a case against China in response to China’s action. A month later, Canada announced it will seek to join the challenge, along with the United States, the United Kingdom, and Australia. This action seems particularly significant to Canada in a few ways.

Firstly, it shows the increasingly likelihood of trade disputes being rooted in political spats between Western nations and China, and the solidarity between Western nations when utilizing the WTO’s arbitration mechanisms. This is of interest to Canadians who have run into similar trade disputes with China. Although China’s ban on Canadian canola has ended (a topic we will cover in our Q2 report), it is not difficult to imagine another dispute arising in the near future, particularly if Canada-China relations remain tense. Canadian observers will certainly be hopeful that, should another trade dispute with China arise, Canada will receive similar solidarity at the WTO from the EU, United States, and others.

Moreover, the case of Lithuania seems to confirm what many in Canada have already suspected – that China is willing to use trade as a tool to punish those who act against its interests. While China has maintained actions like the ban on Canadian canola are unrelated to political considerations, Lithuania’s case clearly pointed to the opposite. Another cooling of Canada-China relations will likely bring a return of trade tensions and even disputes with China.  

[1] Due to significant changes implemented by the World Customs Organization to the Harmonized system nomenclature as of January 1, 2022, some comparisons of specific products may be imprecise or unavailable.

[2] Smartphones are now classified under HS code 8517.13; before January 2022, they were classified under code 8517.12. In Q1 2021, Canadian imports of 8517.12 were $614.73 million. This is a difference of 198.61%, if we compare the two values. This may not be accurate, however, due to differing definitions between the two codes.

[3] These reagents are classified under HS code 3822.19, a new designation as of January 2022.