Canada-China Trade: Q2 2022

Q2 2022 saw a continued decline in Canadian exports to China and a steady increase in imports from China to Canada. Overall, these trends carry on from Q1 2022, when Canada-China trade realized its first exports decline after years of growth in both exports and imports.

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.[1]

Canada-China Trade: 2022 YTD

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

Canadian exports to China continued to have a weak 2022, falling 14.42% compared to the same time last year. In contrast, exports to other countries rose by 29.21%, showing that declining exports to China is an outlier in Canada’s broader export growth, which increased 27.11% overall.

Exports to China were down year-on-year in all three months of Q2: a large drop in April 2022 (-14.4% YoY) was followed by another large drop in May (-19.3% YoY) and then a smaller drop in June (-8.8% YoY).

Coal was Canada’s top export category (by value) to China in the first six months of 2022 ($2.19 billion, +84.2% YoY), continuing its dramatic growth from Q1 2022 as an export category to China. Canada’s next two largest exports of Chemical Woodpulp ($979.05 million, -19.2% YoY), and Iron Ores and Concentrates ($946.04 million, -31.4% YoY), both fell compared to the first six months of 2021. Rounding out the top five exports are Copper Ore ($745.37 million, 6.0% YoY) and newcomer Potassic Fertilizers ($572.00 million, 167.2% YoY) which only broke into the top five this year.

Unlike exports, imports from China grew, posting 18.96% year-over-year increase over the first six months of 2022, in line with, though slightly lower than, the 21.15% growth in Canadian imports from all countries.

All three months of Q2 saw significant year-over-year increases in imports from China (20.5%, 17.7% and 17.8%, respectively).

Automatic Data Processing Machines (4.94 billion, 12.0% YoY) and Telephone Sets including smartphones[2] ($3.68 billion, 3.2% YoY) were the top two import categories from China in 2022. Diagnostic or Laboratory Reagents, a product category that includes COVID-19 test kits, was third ($1.08 billion, 2,559.0% YoY). Motor Vehicle Parts (1.06 billion, 16.4% YoY) and Furniture (994.34 million, 1.7% YoY) came in at fourth and fifth, respectively.

Canada-China Trade: Last 24 months (July 2021-June 2022)

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

H1 2022 Canada-China Trade: By Province/Territory

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

Trends & Topics in Canada/China Trade

Canola Export Barriers Lifted but Diplomatic Tensions Remain High

After over three years, China reinstated access to two major Canola exporters, Richardson and Viterra, on May 18th 2022. The two exporters had been unable to export Canola seeds to China since March 2019, when Chinese authorities claimed to have detected pests in Canola shipments. Many viewed the suspension of exporting licenses by China to be politically motivated and a consequence of Canada’s decision to arrest Huawei executive Meng Wanzhou in December 2018 on extradition orders to the US. Canada disputed the formal reasons given for the ban and, after years of negotiations, appealed the dispute to the WTO. In September 2021, Meng Wanzhou secured a deal with U.S. prosecutors which allowed her to return to China and shortly thereafter two Canadian citizens were returned to Canada, normalizing relations considerably. Before the WTO made a ruling, China reinstated the exporter licenses of Richardson and Viterra. 

In the months following the decisions, Canadian-Chinese relations have seen some limited improvement. However, the relations are not tension-free as China still denies that any actions were retaliatory measures over Meng and Canada chose to ban Huawei from its 5G network on May 19^th 2022. While imports of communications equipment have remained high in the first half of 2022, it is unclear how this ban will affect imports in the long term or if China will issue any retaliatory measures, as they did against Australia where they blocked coal from Australia over political disputes, including the banning of Huawei from 5G networks. 

Unfortunately for farmers, the lifting of Canola restrictions in May came far too late to adjust crops for this year. When combined with continued global supply chain disruptions, Canadian Canola exports to China are down 42.8% compared to last year and are no longer a top five export due to this decline. Coupled with increased droughts and hotter weather exacerbated by climate change in Canada’s prairies, Canola is becoming an increasingly risky investment for farmers. Canola exports for this crop year are expected to drop to 5.15 M, down over 50% from the last crop year. Canola seeds and oil exports have yet to rebound to their 2018 levels when the Canola ban first took effect and are not expected to reach those levels this year or in the near future. 

China’s COVID-Zero Policy Hurts Canada-China Trade

The second quarter was a turbulent one for China. Shanghai, one of China’s largest cities and a global financial and trade hub, whose urban area has over 39 million people, was locked down for the entirety of Q2, beginning on February 28th and ending on August 7th. Residents had their movement highly restricted and nearly all non-essential services were shut down. These strict restrictions are part of China’s COVID-Zero strategy which emphasizes keeping total COVID cases to a minimum rather than reducing hospitalizations. In April 2022, an estimated 180 million people were in either full or partial lockdown in 27 cities across China, including the capital Beijing. These lockdowns have massive ramifications for the Chinese and global economy.

Many factories closed or faced massive reductions in production capacity. Radical measures have been implemented to keep factories running, such as having workers live at the factories in a “closed loop” system. However, even with these measures in place, factory productivity fell, further exacerbating existing supply chain issues. These troubles, however, did not reduce China’s overall exports to Canada, as Canada saw an increase in imports from China in all three months of the second quarter. 

The area in which Chinese lockdowns were a major issue for Canadian trade was in the decrease in consumer demand, which broadly drove the reduction in Canadian exports to China with limited exceptions. The largest exception was Coal, which is a critical component of China’s energy production. Surging domestic demand and low Chinese stockpiles drove Chinese need for Canadian coal, with exports nearly doubling compared to the first six months of 2021. However, other raw materials used for factory production such as Iron Ore and Wood Pulp fell considerably. Canadian food exports were particularly hard hit due in part to many restaurants closing for extended periods in lockdown. Pork and soybean exports were down 74.8% and 38.7% compared to the first six months of 2021. Declining pork exports are also likely caused by increased Chinese domestic swine production, whose recovery from devastating outbreaks of African Swine Fever (ASF) is reducing the need for imported pork. However, it remains evident that sustained lockdowns across China had a drastic impact on Canadian exports.

Continued War in Ukraine and International Instability 

As the war in Ukraine dragged into the second quarter of 2022, it became clear that the conflict was unlikely to end soon and that the ripple effects would continue wreaking havoc on global commodities. As Western countries continued to sanction Russia, the price of commodities that Russia exports skyrocketed. Fossil fuel prices were particularly inflated, with oil prices reaching near record levels in many countries, including Canada. This not only drove inflation in Canada, but also increased the already sky-high transportation costs for Canada-China trade. Prices of agricultural commodities which were major exports of Ukraine, specifically wheat and grains, have skyrocketed due to reduced supply which is now causing shortages world-wide. 

Seen by Western leaders as a close ally of Russia, China also faced intense scrutiny for its lack of condemnation of Russian aggression in Ukraine and there has been much speculation around whether China would face sanctions itself. While no direct sanctions have been placed on China, five Chinese firms have been blacklisted by the US for fears they would pass on technology to Russia. Although China has currently abided by all Western sanctions on Russia, the continuation of the Ukraine war further into 2022 creates continued uncertainty in investment in China given its complicated relationship with Russia. Joint military exercises have further angered Western nations, increasing tensions between Western powers and China and threatening China’s already strained relationship with Canada. As a result, there are increased risks of investing in China and general uncertainty in the Chinese stock markets. Action by China to aid Russia in any more significant manner, albeit unlikely, risks putting all trade relations between China and Canada at risk as Canada is likely to follow in the footsteps of the US on any sanctions against China.

In light of the uncertainty of its ability to import from Russia without facing sanctions, China bought commodities such as coal in bulk. In April 2022, China announced it would cut tariff rates on coal to zero to aid in this stockpiling. This massively boosted Canadian coal exports to China, which nearly doubled compared to the first six months of 2021 while overall exports to China were down through 2022. However, the downward trend was less significant in June, with exports only falling 8.8% YoY, indicating that exports could be on an upward trend with a possible increase in Q3.

For more in-depth analysis explaining the broad trends in Canada-China trade in 2022, view our in-depth commentary.

[1] Previous quarterly briefs have used HS6 Individual Product classifications, however due to incomplete data and communication expediency, this report instead utilizes the slightly larger HS4 Product Groups classification.

[2] 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.