Canada's trade deficit in line with global reset

WASHINGTON -- Say goodbye to Canada's status as a net exporter to the world - at least for now.

But don't fret too much. It may not be entirely a bad thing.

Unwinding the distortions and excesses of the past decade is all part of the natural - perhaps even healthy - recovery process for the ailing global economy.

At the epicentre of this massive shift in global trade flows is Canada's main trading partner, the United States, which for too long has consumed too much and produced too little.

Now that's changing. Aided by a falling greenback, the massive U.S. trade deficit is shrinking fast. Americans are saving more, spending less, and the country's exporters are regaining their competitive footing in world markets.

The U.S. trade deficit shrank for a second successive month in August to $30.7-billion (U.S.) - less than half the record $64.9-billion gap reached last year, the U.S. Commerce Department reported yesterday.

We may not like it, but Canada is playing its part to put the global economy back on a more sustainable path. The Canadian trade deficit widened to $2-billion (Canadian) in August from $1.3-billion in July.

And excluding the energy sector, the gap is even larger.

After years of trade surpluses, Canada is now facing at least a few years of deficits, said BMO Nesbitt Burns economist Douglas Porter.

"Canadian firms will find it very tough to compete with the United States," Mr. Porter said. "One way or another, we have to get the U.S. trade deficit down and what that means is that Americans have to produce more, and possibly consume less. And unfortunately that means we are going to produce a bit less and consume a bit more."

It's a dynamic that exporters like John Hayward, president of industrial pump maker Hayward Gordon Ltd. of Halton Hills, Ont., find all too familiar. He's nervously watching the Canadian dollar's ascent as he vies against a U.S. rival for a multimillion-dollar contract with a gold miner in Chile that is priced in U.S. dollars.

The Canadian dollar, now flirting with 96 cents (U.S.), is already up 4 per cent since he bid on the contract, and Mr. Hayward says the customer recently asked him to freeze his price for another 30 days.

"We said, no. We had to float it," meaning the customer would have to pick up any additional cost related to a higher dollar, Mr. Hayward explained, acknowledging that the decision could cost him the much-needed business.

Even winning the contract comes with risk. Deliveries wouldn't start until 2011, leaving the company dangerously exposed to any further rise in the loonie.

"It's the speed that currency fluctuates that's tough to manage for a lot of companies like us that have long sales cycles," he said. "I've got to get on a huge currency management program if we get a contract like that. It's tough to manage over a month, let alone a year."

Mr. Hayward said the company is doing two things to cope with the new reality. It's invested in more efficient machinery. And second, he's begun shifting some production to U.S. suppliers, in part to get around Buy American rules on government contracts.

"Companies in Canada should be thinking of getting more of their cost base in U.S. dollars," he said. "I've had to shift some production to U.S. suppliers, and I'd be wanting to keep it that way."

Canada's swelling trade deficit is a reflection of the fact that the Canadian economy is emerging from the recession in relatively good shape. Its banks are healthy and consumer credit is growing again.

And, unlike the U.S., the job market has stabilized.

Canadian consumption is holding up pretty well, driving demand for all the things that Canadians routinely import - from cars and electronics, to machinery and equipment.

"For now, recovery north of the border will remain a two-speed affair, with domestic sectors like housing and consumers leading, while the still-beleaguered trade sector restrains gross domestic product growth," CIBC World Markets economist Peter Buchanan said in a research note.

And with the loonie at its highest level in a year - near 96 cents (U.S.) - Canadians are finding those imported items cheaper to buy.

Toronto-Dominion Bank economist Grant Bishop said the "silver lining" of the widening trade deficit is that Canadian companies can take advantage of the high dollar to boost "imports of productivity-enhancing" machinery and equipment.

Imports of machinery and equipment - in volume, though not price - are up 50 per cent so far in July and August compared with the entire second quarter.

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By the numbers

CANADA

Deficit: $2-billion

Exports: $29.2-billion,

down 5.1 per cent v. July

Energy, flat

Industrial goods and materials,

down 3.3 per cent

Machinery and equipment,

down 10.4 per cent

Automotive products, down 5.5 per cent

Imports: $31.2-billion, down 2.8 per cent

Energy, down 9.8 per cent

Industrial goods and materials, down 3.4 per cent

Machinery and equipment, down 4.9 per cent

Automotive products, up 3.8 per cent

UNITED STATES

Deficit: $30.7-billion (U.S.)

Exports: $128.2-billion, up 0.2 per cent v. July

Automobiles, up 7.3 per cent

Civilian aircraft, down 40.3 per cent

Telecommunications equipment, up 2.7 per cent

Food, up 1.2 per cent

Imports: $158.9-billion,

down 0.6 per cent

Automobiles, up 8.6 per cent

Civilian aircraft, down 59.3 per cent

Consumer goods, down 2 per cent

Capital goods, down 0.2 per cent

Figures as of August, 2009

"Barrie McKenna"