Canada WT/TPR/S/112
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I. RECENT ECONOMIC DEVELOPMENTS
1. After a decade of strong expansion, Canadian economic growth slowed in the fourth quarter
of 2000.  This was followed by a contraction in output in the third quarter of 2001, ending
37 consecutive quarters of economic growth.  The Bank of Canada provided substantial monetary
stimulus is 2001, in the face of a series of major external shocks.  The economy started to show signs
of recovery towards the end of 2001.  In the first half of the year, the fiscal discipline of previousyears, combined with low inflation, made it possible  for Canada to use a counter-cyclical fiscal policy
stance to stimulate growth.  This resulted in a relatively strong economic performance at the time of
reduced global economic growth;  growth in the first half of 2002 averaged well over 4% at an
annualized rate.
2. Trade plays an important role in Canada's economy.  Two-way trade flows represented nearly
80% of GDP in the first half of 2002, and exports of goods and services have been a major component
of growth in recent years.  The United States is the destination for some 87% of Canadian
merchandise exports and the source of about two thirds of its imports.
1  Although this makes the
Canadian economy potentially vulnerable to events in the United States, Canada has successfully
weathered the U.S. slowdown since 2000.
3.  Canada renewed its successful inflation target policy in 2001, and aims to stabilize inflation
at around 2%.  Canada has also made remarkable progress in reducing its public debt burden, as the
debt/GDP ratio fell to 49% in 2002 from 71% in 1995.
(1) OUTPUT , EMPLOYMENT AND PRICES
4. The Canadian economy experienced four years of strong growth up to late 2000 underpinned
by expanding exports and investment (Table I.1).  Economic growth began to slow down in the fourth
quarter of 2000, and contracted in the third quarter of 2001, largely reflecting the impact of theeconomic downturn in the United States.  Real gr owth for the whole of 2001 fell to 1.5%, the lowest
rate since the early 1990s, led by a sharp fall in exports of goods and services and strong inventory
decumulation.  In contrast to developments in the previous years, when the contribution of net exports
largely supported GDP growth, in 2001 domestic demand supported growth, particularly consumer
and government expenditure, since non-residential investment stalled.
5. Faster growth resumed in the fourth quarter of 2001, and GDP expanded at an annualized rate
of 5.7% in the first quarter of 2002, driven mainly by slower inventory reduction , a sharp increase in
residential investment, and strong export expansion.  Growth moderated slightly in the second and
third quarters of 2002 but remained solid at 4.4% and 3.1%, respectively.  With strong gains in real
personal disposable income since the fourth quarter of 2001, Canadian growth is expected to continueto be supported by residential investment and consumer expenditure.  Recent income strength has
been aided by both a reduction in personal income taxes and stronger growth in income from
employment and transfers from the Government.  The increase in real personal disposable income has
helped lift the personal savings rate from its historical low of 3.7% in the third quarter of 2001 to
4.7% in the third quarter of 2002.  However, that rate remains well below the level of 13-14%observed in the early 1990s.
6. Although investment in residential structures soared in the first three quarters of 2002 (taken
as a whole), non-residential private investment started to recover only in the second quarter, after
declining in 2001 and the first quarter.  Part of this decline is linked to reduced export opportunities to
the U.S. market.  Consumer and mortgage debt le vels have been rising sharply, and the household
                                                     
1 Estimates based on UNSD, Comtrade database.WT/TPR/S/112 Trade Policy Review
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debt-to-income ratio reached 99.4% in the second quarter of 2002.  However, historically low interest
rates and rising income are helping to sustain housing demand, by keeping housing affordability near
its record best levels.
Table I.1
Selected macroeconomic indicators, 1997-02
(Can$ billion and per cent, annualized values, except as indicated)
1997 1998 1999 2000 2001 2002 QI 2002 Q2 2002 Q3
GDP (current Can$ billion) 882.7 915.0 980.5 1,065.0 1,092.2 1,106.2 1,138.0 1,151.8
Change in per cent
Real GDP 4.2 4.1 5.4 4.5 1.5 5.7 4.4 3.1
Final domestic demand 5.4 2.8 4.3 4.0 2.5 3.7 4.4 2.0
Consumer expenditure 4.6 2.8 3.9 3.7 2.6 2.9 4.2 0.5
Goods 5.5 3.4 4.4 3.8 2.6 5.3 1.5 -1.0
Services 3.9 2.3 3.4 3.7 2.6 0.9 6.7 1.9
Government expenditure
Goods and services -1.0a3.2 1.9 2.3 3.3 1.7 3.3 2.8
Gross fixed capital -3.2 -0.7 12.7 3.0 11.5 7.1 8.3 0.7
Residential investment 8.2 -3.5 5.4 3.5 4.7 35.2 -1.7 15.9
Business fixed investment 18.1 2.8 7.2 6.9 0.4 8.1 5.8 6.2
Non-residential construction 17.7 0.3 2.0 6.4 0.8 -7.7 -1.9 -2.3
Machinery and equipment 26.0 8.6 11.4 9.3 -2.2 1.8 16.7 4.8
Business inventory investment (Can$ billion)
Period Change (Can $ billion)8.2
5.66.0
-2.26.5
0.69.9
3.4-3.5
-13.5-7.8
4.97.2
14.96.4
-0.8
Real exports of goods and services 8.3 9.1 10.0 8.0 -3.8 5.3 2.0 9.6
Goods 8.5 8.5 11.1 8.6 -4.1 6.5 1.6 10.3
Services 7.1 13.1 2.7 3.9 -1.7 -2.6 4.7 4.2
Real imports of goods and services 14.2 5.1 7.8 8.2 -5.8 5.2 18.9 6.3
Goods 16.5 6.1 8.5 8.9 -5.9 7.0 18.3 7.9
Services 3.7 -0.1 4.1 4.1 -4.8 -4.0 22.0 -1.6
Real personal disposable income 1.3 2.8 2.7 6.9 4.4 7.2 4.5 4.1
Prices Change in per cent
CPI (period average) 1.6 0.9 1.7 2.7 2.6 1.5 1.3 2.3
Core CPI (excluding eight most volatile items and indirect
taxes)1.9 1.3 1.4 1.2 2.1 2.1 2.2 2.4
GDP deflator (implicit) 0.8 -0.6 1.6 3.9 1.1 3.5 7.4 1.9
Unit labour costs 2.0 2.9 -2.3 3.8 3.2 0.4 -0.5 ..
Wage settlements 1.4 1.7 2.2 2.5 3.2 2.9 2.6 ..
Commodity price index (1982-90=100 (US$)
Energy 83.4 64.6 78.9 122.9 116.1 .. .. ..
Non energy 118.4 103.6 105.2 108.8 101.9 .. .. ..
Employment/unemployment
Employment (changes in per cent) 2.3 2.7 2.8 2.6 1.1 2.8 3.7 3.4
Unemployment rate (end-of-period for quarters) 9.2 8.3 7.6 6.8 7.2 7.7 7.5 7.7
.. Not available.
a Includes gross fixed capital expenditure.
Source: Statistics Canada [Online]. Available at:  http://www.statcan.ca/english/Pgdb/;  Department of Finance, The Economy in
Brief , various issues [Online].  Available at:  http://www.fin.gc.ca/purl/econbr-e.html;  Bank of Canada [Online].
Available at: http://www.bankofcanada.ca/en/inflation/index.htm;  and IMF, International Financial Statistics , August
2002.
7. Strong output and consumption growth was acc ompanied by high import growth throughout
the late 1990s and in 2000, particularly of goods.  In 2001, however, imports of goods and services
contracted by 5.8%, linked partly to falling exports, which, in Canada, have a high import content.  InCanada WT/TPR/S/112
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the first three quarters of 2002, stronger-than-expected growth was accompanied by substantial
increases in imports.
8. Personal expenditure on services represents over half of total personal expenditure, about
30% of real GDP, and made a strong contribution to GDP growth in 2000 and 2001.  As one of the
most stable components of GDP, and considering the slowdown in personal expenditure on durable
goods and other cyclical components of GDP during the downturn in economic activity, the relativecontribution of personal expenditures on services to GDP increased in 2000 and 2001.  However, the
strong housing sector and financing incentives in the auto sector helped push up personal expenditures
on durable goods at the end of 2001 and the beginning of 2002, reducing the relative contribution of
services in economic activity in 2002 with resp ect to the previous two years.  Government
expenditure, particularly gross capital formation has also underpinned growth in most of the 2000-02period.
9. Despite the generally rapid expansion of the economy, inflation has remained low, and within
the inflation target of 1-3% set by the Bank of Canada (see below);  the annual increase in the
consumer price index (CPI) averaged 1.9% in the period 1997-01 (Table I.1).  The rate of increase of
the CPI accelerated somewhat in 2000 and 2001, due partly to an increase in oil prices and to theeffect on import prices of the real depreciation of the Canadian dollar vis-à-vis  the U.S. dollar.  Core
inflation, however, increased by less.
2  The increase in the CPI decelerated in late 2001 linked with
the slowdown of the economy and the effects of redu ctions in crude oil and natural gas prices, but
edged up in the first three quarters of 2002, to reach 3.2% in October, reflecting higher food,
transportation, shelter, and especially crude prices.  Core CPI increased at a year-over-year rate of
2.5% in September and October, largely reflecting increases in insurance premiums and electricity
prices.
10. The unemployment rate rose during 2001 to a peak of 8% in December 2001.  This rate fell to
7.5% by November 2002.  The overall decline has been moderated by strong employment growth
accompanied by an increase in labour-force par ticipation. Most gains in employment since the
beginning of 2002 have been concentrated in Ontario (in manufacturing), followed by Quebec
(in construction and services).  In the first eleven months of 2002, the economy created about502,000 jobs, up from 167,000 for the whole of 2001.  The total number of employed persons reached
15.6 million in November 2002;  the labour force participation rate, calculated quarterly, stood at
67.3% in the third quarter of 2002, up from 66% in 2001 and 65% in 1997.
11. Canada’s labour productivity growth averaged 2% from 1997 to 2001, up from 1.2% in
the 1990-96 period, but slowed to 0.8% in 2001.  The authorities have noted that the improvement inlabour productivity growth in the business sector in the second half of the 1990s was due mainly to
higher productivity growth in the services sector.  The rebound in Canadian labour productivity
growth since 1997 has reduced the average produc tivity growth gap between Canada and its main
trading partner, the United States, over the period.  Although growth in unit labour costs remained
moderate in 2000 and 2001, it was above productivity growth.  Nevertheless, Canadian firmsimproved their competitive position vis-à-vis  the United States:  adjusted for exchange rate
movements, unit labour costs with respect to the United States were down 2.9% in 2001.
                                                     
2 The "core" measure of CPI inflation that the Bank of Canada has been using since May 2001 excludes
the eight most volatile components of the CPI (fruit, vegetables, gasoline, fuel oil, natural gas, mortgageinterest, inter-city transportation, and tobacco products)  and adjusts the remaining components to remove the
effect of changes in indirect taxes.WT/TPR/S/112 Trade Policy Review
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(2) MONETARY POLICY AND EXCHANGE RATES
12. Canadian monetary policy is aimed at keeping a low, stable inflation rate.  To this end, the
Bank of Canada and the Government have set an inflation target range of 1% to 3%, as measured by
increase in the CPI.  The Bank considers that by focusing on inflation the output gap between the
potential and actual performance of the economy is kept as narrow as possible thus avoiding
inflationary "boom-and-bust" cycles.  Inflation targeting has been in place since 1991, and has beenrenewed three times, in 1995, 1998, and 2001.  In the 2001 renewal, which is for a period of five
years, the Bank of Canada maintained the target range at between 1% and 3%, with policy aimed at
keeping the trend of inflation at the 2% target midpoint;  this would allow deviations of 1% up or
down as a result of demand or supply shocks.
3
13. The Bank of Canada conducts monetary policy mainly through changes in its target for the
overnight interest rate, which is the middle of the operating band for overnight financing.  Changes in
the target for the overnight rate influence, to varying degrees, other interest rates along the term
structure, and also has an impact on the exchange rate.  Starting in December 2000, the Bank of
Canada introduced a system of eight  pre-specified dates each year for announcing any changes to the
policy rate.4  This replaced the previous system whereby rate changes could be introduced at any time.
14. The Bank of Canada, in its conduct of monetary policy, recognizes the importance of
international trade for the Canadian economy.  In this respect, the Bank considers that, in an open
economy with a flexible exchange rate like Canada's, it must take into account the exchange rate when
changing the target for the overnight rate, since it is the combined effect of interest rates and
the exchange rate that determines monetary c onditions.  While the former capture the effect of
domestic economic conditions, movements in the latter take into account economic conditions abroad
and their effect on the Canadian economy.  The Bank considers that these changes in the monetaryconditions of the economy will be transmitted to the real economy with a lag of 18 to 24 months.
15. Due to the slowdown of the economy, and given that inflation was low, the Bank of Canada
eased monetary policy substantially during 2001 to  support aggregate demand.  From January 2001
through January 2002, the Bank lowered its target for the overnight rate ten times, by a total of
375 basis points, to 2% (Table I.2).  As signs of economic recovery appeared in early 2002, the Bankreduced the amount of monetary stimulus in the economy, increasing its target for the overnight rate
three times between April and July 2002, to 2.75%.
16. Monetary aggregates have expanded rapidly since 2000, at rates higher than the rate of
nominal GDP growth.  The expansion has been particularly brisk in the case of narrow monetary
aggregates (such as Gross M1 and M1++), for which demand has expanded due to the easing ofmonetary conditions, and the low rates of return on other assets, which have reduced the opportunity
cost of holding money.  The demand for narrow money also increased for precautionary purposes,
given the heightened uncertainty about the performance of the stock and money markets.
17. In 2000 and 2001, the Canadian dollar depreciated vis-à-vis  the U.S. dollar, falling to a
historical low of US$0.62 in January 2002 before appreciating in the first half of 2002.  Over the2000-01 period, there was also a real effective depreciation of the Canadian dollar, which turned to a
real appreciation in 2002.
                                                     
3 See Bank of Canada (2001), Renewal of the Inflation-Control Target , Background Information,
May 2001.
4 See Bank of Canada (2001), A New System of Fixed Dates for Announcing Changes to the Bank
Rate, on Internet address http://www.bankofcanada.ca/fixed-dates/.Canada WT/TPR/S/112
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Table I.2
Selected monetary and exchange rate indicators, 1997-02
1997 1998 1999 2000 2001 2002 Q1 2002 Q2 2002 Q3
Money stock (end of period, per cent change)a
Gross M1 14.7 7.0 9.8 15.6 14.3 12.2 12.9 11.2
M1++ 5.3 1.0 6.8 10.1 13.9 15.6 15.0 12.1
M2++ 6.1 5.5 5.5 7.9 7.1 6.7 6.6 6.5 (Aug)
Interest rates (%)
Overnight rate (policy instrument) 425 5.0 4.75 5.75 2.25 2.0 2.5 2.74
Prime lending rate 4.96 6.60 6.44 7.27 5.81 3.75 4.08 4.50
90-day commercial paper 4.8 5.02 5.27 5.71 2.08 2.36 2.78 2.90
Exchange rate (yearly average)
Nominal effective exchange rate  (1995=100) 101.9 95.8 95.2 96.3 93.5 91.4 93.1 ..
C- 6 Trade-weighted exchange rateb85.84 78.32 83.9 81.66 78.33 78.45 80.99 77.97
Real effective exchange rate (1995=100) 103.5 97.0 95.9 96.0 91.1 91.0 93.7 ..
Can$ per US$ 1.38 1.48 1.48 1.48 1.54 1.58 1.53 1.57
Can$ per £ 2.26 2.45 2.40 2.24 2.22 2.25 2.27 2.45
Can per Euro .. .. 1.58 1.37 1.38 1.39 1.46 1.54
.. Not available/applicable.
a Gross M1 :  Currency outside banks plus personal checking accounts plus current accounts plus some adjustments to M1;  M1++:    M1+
plus non-chequable notice deposits held at chartered banks, trust and mortgage loan companies, and credit unions and    caisses  populaires
less interbank non- chequable notice deposits plus continuity adjustments.  M2++: includes Canada Savings Bonds plus cumulative  net
contributions to mutual funds other than Canadian dollar money market mutual funds.
b The C-6 exchange rate is an index of the weighted- average foreign exchange value of the Canadian dollar against major foreign
currencies.   Weights for each country are derived from Canadian merchandise trade flows with other countries over the three years from
1994 through 1996.  The index has been based to 1992.
Source:  Bank of Canada, Monetary Policy Report , April 2002, and other online information, available at:
http://www.bankofcanada (http://www.bankofcanada.ca/en/graphs/a1-table.htm and http://www.bank-banque-
canada.ca/pdf/wfs.pdf);  and International Monetary Fund, International Financial Statistics   (August 2002).
(3) FISCAL POLICY
18. As a result of a deficit-reducing policy, Canada has achieved a budget surplus at a federal
level in every fiscal year between 1997/98 and 20 01/02.  Moreover, the ratio of federal debt-to-GDP
ratio fell from a post-World War II peak of 71% in 1995-96 to about 49% in 2001-02.  Key in this
fiscal turnaround has been the decline in programme spending as a percentage of GDP, from 16.4% in
1993-94 to 11.3% in 2000-01.5
19. Canada adopted a more expansionary fiscal stance starting in 2000.  The Government cut
taxes in February 2000 and restored full indexation of the personal income tax system to inflation in
order to spur economic growth.  The tax cuts will be implemented over a period of five years, during
which it is estimated that taxes will be reduced by a cumulative amount of at least Can$58 billion.6
The middle income tax rate was reduced from 26% to 23%, starting with a 2 percentage pointreduction to 24% in July 2000.  It was also decided that the 5% income surtax established to reducethe deficit would be eliminated for incomes of up to about Can$85,000 and reduced for incomes
above that level by 2004.
                                                     
5 The Government estimates that nearly three quarters of the improvement in the budgetary balance
since 1993-94 is attributable to the decline in programme spending.  See, The Economic and Fiscal Policy
Update , 30 October 2002 [Online].  Available at:  http://www.fin.gc.ca/.
6 Government of Canada (2000). Budget 2000 [Online].  Available at: http://www.fin.gc.ca/budget00/
features/bud_tax_e.html.WT/TPR/S/112 Trade Policy Review
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20. In October 2000, new expansionary measures we re adopted under the Government's Four-
Part Plan, which include stepping up federal transfers to Canada Health by some Can$21.1 billion to
strengthen Canada's system of universal health care, as well as increasing spending in education and
environmental protection.  It was also decided to cut taxes faster and further than set out in Budget
2000, leading to an average personal income tax cut of 21%, instead of 15% and combined with the
measures in Budget 2000, providing total cumulative tax relief of Can$100 billion by 2004.7  Other
measures of fiscal stimulus to the economy adopted in 2000 included corporate income tax rate
reductions for the highest-taxed sectors, such as services.8  Also, the capital gains inclusion rate for
individuals and corporations was cut to one-half of the gain.
21. The overall Federal Government's fiscal balance rose to 1.9% in 2000-01, before declining to
0.9% of GDP in 2001-02 (Table I.3).  The reduction of the surplus in 2001-02 resulted from a 4.8%increase in expenditures, the tax cuts introduced in 2000, and lower economic growth.  The latter had
an impact on most major revenue components, particularly corporate income tax revenues, and
resulted in an overall 3.5% decline in revenue compared to the previous fiscal year.
Table I.3
Selected fiscal indicators, 1997-02
1997-98 1998-99 1999-00 2000-01 2001-02a
Federal fiscal balance (per cent of GDP)
Revenues 17.3 17.0 17.0 16.6 15.9
Spending -12.3 -12.2 -11.5 -10.8 -11.5
Operating balance 5.0 4.8 5.5 5.8 4.4
Public debt charges -4.6 -4.5 -4.3 -3.9 -3.5
Budgetary balance 0.4 0.3 1.3 1.9 0.9
Non-budgetary transactions 1.0 0.9 0.2 -0.1 -0.4
Financial requirements 1.4 1.3 1.5 1.8 0.5
Provincial fiscal balance -0.4 -0.3 0.3 1.1 ..
Public debt (Can$ billion, fiscal year) 583.2 579.7 576.8 564.5 547.4
Public debt (% of GDP) 65.6 63.0 57.9 51.8 49.1
.. Not available.
a Preliminary data, to be subject to end-on-year accounting adjustments.
Source : Department of Finance (2002), The Fiscal Monitor , May;  and Budget 2002.
22. At a provincial level, fiscal reform and economic growth have resulted in surpluses in the
majority of provinces, including those with the larger economies (Ontario, Quebec, and Alberta).9
The overall provincial fiscal balance was in surplus in both fiscal years 1999-00 and 2000-01, thelatest for which complete information is available.  In 2001-02, the provincial sector as a whole is
expected to have achieved close to a balanced budget.  British Columbia, Yukon and the Atlanticprovinces, except New Brunswick, were expected to have recorded budgetary deficits.
                                                     
7 For details see Canadian Government online information.  Available at: http://www.fin.gc.ca/toce/
2000/ec00e.htm.
8 From 28% in 2000, to 27% in 2001, 25% in 2002, 23% in 2003 and 21% in 2004 and subsequent
years.  The corporate tax rate on small business income between Can$200,000 and Can$300,000 earned by a
Canadian-controlled private corporation from an active business carried on in Canada was reduced from 28% to
21% effective 1 January 2001.
9 More information on the fiscal accounts of the Canadian provinces is available online at:
http://www.fin.gc.ca/frt/2002/frt02_4e.html#Provincial%20and%20Territorial%20Governments%20Public%20Accounts.Canada WT/TPR/S/112
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23. The overall fiscal surplus of the past few years has allowed a reduction in public debt as a
share of GDP, to 49.1% in fiscal year 2001-02, down from 65.6% in fiscal year 1997-98 (Table I.3).
Assuming balanced budgets, the Government aims to reduce this ratio to 40% by 2005, using any
overall fiscal surplus to further pay down the debt.
(4) BALANCE OF PAYMENTS
24. Foreign trade has played a major role in Canada's economic growth during the 1990s and
early 2000s.  Both exports and imports have in general expanded faster than GDP.  Exports of goods
represented some 38% of GDP in 2001, up from 24% 20 years earlier.
25. The current account has been in surplus since 1999 (Table I.4).  As a result of a strong surplus
in the trade balance, triggered by a sharp increase in exports of goods, the current account surplus
increased substantially in 2000 with respect to the previous year.  In 2001, the surplus toppedCan$30 billion, or some 2.8% of GDP, as imports contracted more than exports and the trade surplus
increased.
26. While the trade in goods balance showed a surplus in both 2000 and 2001, the services
balance was in deficit.  This deficit worsened slightly in 2001, while the trade in goods surplus
increased.  Although the capital account continued to post a surplus, the deficit in the financialaccount has increased substantially since 1999, mainly due to a surge of Canadian direct and portfolio
investment abroad, which exceeded the large investment inflows.
(5) T
RADE AND INVESTMENT PATTERNS
27. Canada accounts for 5.5% of total world exports and for 4.5% of world imports.  In 2001,
Canada was the fifth largest trader, having been replaced at fourth place by China.10
(i) Trade in goods
28. Using Comtrade data, exports expanded rapidly in 1999 and 2000, but contracted in 2001
mainly reflecting weaker import demand in the United States (Table AI.1).  Some of the more
affected sectors were office machines and telecommunication equipment, automotive products,
agricultural products, iron and steel.  Imports grew by more than 40% (in U.S. dollars) between 1996
and 2000, but fell in 2001 as growth decelerated (Table AI.2).11
29. Some two thirds of exports are manufactured goods.  In terms of product categories, in 2001
Canada's main merchandise exports were automotive products, especially passenger vehicles (21.2%
and 12.1%, respectively), mining products, especially fuels (18.4% and 14.1%, respectively), and
agricultural products (excluding agro-industry, 12.9%).  Since the mid 1990s, agriculture has been
losing market share in total exports, while mining products (especially natural gas) have gained
(Table AI.1).
                                                     
10 WTO (2002).
11 The increase was 53% using Statistics Canada's balance-of-payments-based statistics.WT/TPR/S/112 Trade Policy Review
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Table I.4
Canada's balance of international payments, 1997-02
(Can$ million)
1997 1998 1999 2000 2001 2002 QI 2002 Q2 2002 Q3
Current account
Total receipts 385,415 414,777 458, 767 528,643 513,264 122,122 125,391 128,249
Exports of goods and services 347,134 377,385 420,210 482,731 471,250 113,656 116,233 119,249
Goods 303,378 327,162 367,171 425,587 414,638 99,661 102,017 104,946
Services 43,755 50,223 53,039 57,144 56,612 13,994 14,216 14,303
Travel 12,221 14,019 15,141 16,098 16,682 4,054 3,903 3,967
Transportation 8,407 9,143 9,688 11,170 10,523 2,610 2,710 2,770
Other services 23,128 27,062 28,210 29,876 29,407 7,331 7,602 7,567
Investment income 33,252 32,338 32,913 39,815 34,990 6,723 7,552 7,382
Direct investments 15,164 12,955 14,148 18,403 15,791 2,712 3,547 3,402
Portfolio investments 4,972 5,741 6,074 6,949 7,683 1,954 1,997 1,932
Other investments 13,115 13,643 12,692 14,463 11,515 2,057 2,007 2,047
Transfers 5,029 5,054 5,644 6,097 7,024 1,743 1,607 1,618
Total payments 396,812 426,140 456,771 500,862 483,216 116,785 120,680 123,146
Imports of goods and services 330,346 359,947 387,152 427,997 415,617 101,547 104,985 107,389
Goods 277,727 303,399 326,961 363,432 350,623 85,779 88,526 90,943
Services 52,619 56,549 60,191 64,565 64,994 15,768 16,459 16,446
Travel 15,873 16,029 17,049 18,313 17,998 4,365 4,515 4,547
Transportation 11,417 11,759 12,288 14,004 14,209 3,261 3,507 3,676
Other services 25,329 28,761 30,853 32,249 32,787 8,142 8,437 8,222
Investment income 62,133 61,965 64,983 68,241 62,524 13,938 14,458 14,497
Direct investments 18,885 16,271 20,578 23,470 20,920 4,617 5,134 5,130
Portfolio investments 29,519 31,302 30,453 29,240 29,652 7,198 7,238 7,382
Other investments 13,730 14,391 13,952 15,531 11,951 2,123 2,087 1,985
Transfers 4,333 4,228 4,636 4,624 5,074 1,300 1,238 1,259
Current account balance -11,397 -11,363 1,996 27,781 30,049 5,336 4,711 5,104
Goods and services 16,788 17,438 33,058 54,735 55,633 12,109 11,248 11,860
Goods 25,652 23,763 40,210 62,155 64,016 13,883 13,491 14,003
Services -8,864 -6,325 -7,152 -7,421 -8,382 -1,774 -2,243 -2,143
Investment income -28,882 -29,627 -32,070 -28,427 -27,534 -7,215 -6,906 -7,116
Transfers 697 826 1,008 1,473 1,949 443 369 359
Capital account
Total capital and financial accounts, net fl ow 15,764 4,530 -13, 192 -21,518 -20,918 2,321 564 -7,574
Capital account, net flow 7,508 4,934 5,049 5, 270 5,678 1, 500 1,678 934
Capital account, inflows 8,107 5,617 5,736 6, 003 6,482 1,654 1,835 1,265
Capital account, outflows -599 -682 -687 -733 -804 -154 -157 -331
Financial account, net flows 8,256 - 405 -18,241 -26,788 -26, 596 821 -1,114 -8,507
Canadian assets, net flows -62,546 -67,161 -40,710 -142,429 -110,385 -25,747 -11,837 -13,118
Canadian direct investments abroad -31,937 -50,957 -23,182 -70,545 -54,924 -7,052 -8,620 -12,814
Canadian portfolio investments -11,849 -22,497 -23,067 -62,274 -37,718 -11,382 -6,316 -2,068
Other Canadian investments -18,760 6,292 5,540 -9,610 -17,743 -7,313 3,100 1,764
of which official international reserves 3,389 -7,452 -8,818 -5,480 -3,353 -696 -1,450 1,885
Canadian liabilities, net flow 70,803 66,757 22,468 115,641 83,789 26,568 10,724 4,611
Foreign direct investments in Canada 15,958 33,828 36,306 98,940 42,527 17,466 7,027 1,569
Foreign portfolio investments 16,181 24,779 3,255 14,025 30,868 2,281 6,633 -3,557
Other foreign investments 38,664 8,149 -17,092 2,677 10,394 6,821 -2,936 6,599
Statistical discrepancy -4,367 6,833 11,196 -6,264 -9,130 -6,236 -4,385 798
Memorandum:  Current account balance/GDP -1.3 -1.2 0.1 2.6 2.8 0.5 0.4 0.4
.. Not available.
Note: A minus sign denotes an outflow of capital resulting from an increase in claims on non-residents or a decrease in liabilit ies to non-
residents.
Source: Statistics Canada.Canada WT/TPR/S/112
Page 9
30. Among imports, over 80% are manufactured goods.  Machinery and equipment and
automotive products account for about half of goods imports.  In 2001, automotive products were the
main single item, with some 19% of the total, followed by office machines and telecommunications
equipment and non-electrical machinery (Table AI.2).  Following a trend already observed in
Canada's previous Reviews, the shares of automotive products and iron and steel, have tended to fall,
while the shares of chemicals and fuels have increased.  The authorities have noted that increases inthe share of fuels respond mainly to changes in energy prices.
31. Some 90% of Canada's exports and over two-thirds of its imports take place with preferential
partners.  Canada's main trading partner remains the United States, the destination for 87% of
Canada's exports in 2001 and the source of some two thirds of its imports (Tables AI.3 and AI.4).
Canada and the United States remain each other's largest trading partner due to geographic proximity,and the effect of preferential trade agreements, including the previous Free Trade Agreement
(CUSFTA) and the NAFTA.  Since its last Review, Canada's share of exports going to the United
States has continued to increase (from 79% in 1995 to 87% in 2001).  Canada-U.S. trade is mostly
intra-industry and intra-firm trade in industrial goods;  a large part comprises automotive products.
32. Of Canada's remaining trading partners, only the United Kingdom, Japan and China account
for export shares above 1%.  Although two-way merchandise trade between Canada and Mexico has
grown rapidly since the NAFTA, its share in Canada's total trade remains small.  Imports sources are
more diversified, with the European Union and East Asia each accounting for some 11-14% of
Canada's total imports.
(ii) Trade in services
33. Canada has traditionally been a net importer of services.  Using balance-of-payments
statistics, Canadian global trade in services has lagged behind trade in goods.  In 2001, about half of
Canada's transactions were in commercial services, with transportation and travel accounting for theremainder (Table I.5).
Table I.5
International transactions in services, by category, 1998-01
(Can$ billion)
1998 1999 2000 2001Category
abcabcab cab c
Total 50.2 56.5 -6.3 53.0 60.2 -7.2 57.1 64.6 -7.4 56.6 65.0 -8.4
Travel 14.0 16.0 -2.0 15.1 17.0 -1.9 16.1 18.3 -2.2 16.7 18.0 -1.3
Transportation 9.1 11.8 -2.6 9.7 12.3 -2.6 11.2 14.0 -2.8 10.5 14.2 -3.7
Commercial services 25.9 28.0 -2.2 26.9 30.1 -3.2 28.5 31.5 -3.0 28.0 32.0 -4.0
Communications 2.2 2.3 -0.0 2.0 2.0 0.0 2.0 2.0 -0.1 1.9 2.0 -0.1
Insurance 3.5 4.3 -0.8 3.3 4.4 -1.1 2.9 4.2 -1.3 3.1 4.5 -1.4
Other financial services 1.2 2.1 -0.9 1.4 2.0 -0.5 2.0 2.4 -0.5 2.3 2.6 -0.2
Computer and information 
services2.1 1.1 0.9 2.4 1.3 1.1 2.4 1.3 1.1 2.2 1.4 0.9
Royalties and licence fees 2.1 4.0 -1.9 2.3 5.0 -2.6 2.3 5.4 -3.0 2.3 5.4 -3.1
Management services 2.2 3.7 -1.5 2.7 4.2 -1.5 3.0 4.6 -1.6 3.2 4.8 -1.6
Research and development 2.7 1.3 1.5 3.1 1.6 1.6 4.1 1.7 2.4 3.2 1.4 1.8
Architectural, engineering 
& other technical services3.2 1.5 1.7 2.4 1.3 1.1 2.5 1.5 1.0 2.6 1.8 0.8
Government services 1.2 0.7 0.5 1.3 0.8 0.6 1.4 0.8 0.6 1.4 0.8 0.7
a Receipts.
bP a y m e n t s .c Balance.
Source: Statistics Canada Catalogue No. 67-203-XIB [Online].  Available at: http://www.dfait-maeci.gc.ca/eet/ CIMT/
transactions_services-e.pdf.WT/TPR/S/112 Trade Policy Review
Page 10
34. The United States is Canada's major trading partner in services trade, accounting for about
60% of payments and receipts.  The EU is the second largest, with the United Kingdom accounting
for about 40% of total trade with the European Union.
(iii) Foreign investment
35. Canada is active both as an investor abroad and as a recipient of foreign direct investment
(FDI), to which is linked a significant proportion of its merchandise exports, particularly ofmanufactured goods.  Canada also  receives a substantial amount of  portfolio and other kinds of
investment.  Continuing to attract foreign investment has thus become a main objective of Canada’s
economic policy.
36. Canada is a net investor with respect to FDI, but a net recipient with respect to other kinds of
investment and overall foreign investment.  Outward FDI stock reached Can$389.4 billion in 2001,
78% up from 1997;  inward FDI totalled Can$320.9 billion, up 65% from 1997 (Table I.6).  Total
investment assets reached Can$904.5 billion in 2001, up 51% from 1997, while Canada's liabilities
reached Can$1.1 trillion in the same year, up 24.5% from 1997.  Canada's negative balance shrank
over the period 1997-01 as Canadian investment abroad increased faster than investment inflows.  The
authorities consider this decline in Canada's foreign investment deficit a result of the booming U.S.economy, which acted as a magnet for Canadian and other investment during the late 1990s.  In 2001,
the decline began to reverse as the Canadian economy started to accelerate.  The authorities expected
this trend to be reinforced in 2002 as interest rates rose in Canada while they fell in most other major
industrial countries.
Table I.6
Canada's international investment position, 1997-01(Can$ million, end of year)
1997 1998 1999 2000 2001
Total assets 599,483 686,347 717,297 819,114 904,505
Canadian direct investments abroad 218,607 262,909 283,228 340,366 389,426
Canadian portfolio investments 130,366 157,405 179,812 215,328 231,182
Portfolio foreign bonds 26,586 33,254 30,733 34,976 35,125
Portfolio foreign stocks 103,780 124,151 149,079 180,352 196,057
Other Canadian investments 250,510 266,033 254,256 263,421 283,898
Loans 70,638 60,459 56,011 60,508 69,018
Allowances -10,327 -10,802 -10,777 -11,568 -11,785
Deposits 102,104 118,449 108,826 108,591 108,714
Official international reserves 25,705 35,921 41,463 47,801 53,327
Other assets 62,391 62,006 58,733 58,089 64,623
Total liabilities 889,707 986,008 964,277 1,021,593 1,107,931
Foreign direct investments in Canada 194,277 219,389 248,618 302,299 320,931
Foreign portfolio investments 459,801 511,384 486,269 485,215 527,083
Portfolio Canadian bonds 367,899 405,772 389,693 371,081 417,132
Portfolio Canadian stocks 51,402 64,344 69,107 85,501 87,780
Portfolio Canadian money market instruments 40,501 41,269 27,469 28,632 22,171
Other foreign investments 235,629 255,235 229,390 234,079 259,918
Loans 51,676 55,402 56,807 57,251 49,486
Deposits 165,357 180,685 152,012 155,174 188,726
Other liabilities 18,596 19,148 20,572 21,653 21,707
Canada's net international investment position -290,224 -299,661 -246,980 -202,478 -203,426
Source : Statistics Canada, CANSIM II, Table 376-0037 and Catalogue No. 67-202-XIB.Canada WT/TPR/S/112
Page 11
37. Most FDI in Canada is concentrated in resource-based activities (mainly energy), services
(mostly financial services), transportation equipment, chemical products, textiles, food and beverages,
and electrical and electronic products.  The United States, the United Kingdom and France are
Canada's largest sources of FDI, with 67%, 7.7%  and 7.2% of the total, respectively, in 2001,
followed by the Netherlands, Japan, Germany, Italy, and Sweden.  France has made the largest gains
in market share over the past decade, while the United Kingdom, Japan, and Germany have lostmarket share.  The United States is also Canada's  main investment destination, for both FDI and other
kinds of investment, particularly portfolio investme nt, accounting for over half of total outward direct
investment, followed by the United Kingdom and other EU Members
(6) O
UTLOOK
38. Growth is expected to slow in the first half of 2003 from the high rates observed in 2002.  The
authorities anticipate that, with the U.S. ec onomy projected to gain momentum through 2003 and
global financial conditions assumed to improve, Canada’s GDP growth may rise above the growth
rate of potential output in the second half of 2003.  CPI inflation was expected to return to about 2%
in the second half of 2003, as the effects on inflation of a number of one-off movements in relative
prices diminish.12
39. Canadian private-sector forecasters expect real GDP to grow by 3.3% in 2002 and 3.2% in
2003.  The IMF and the OECD expect Canadian growth to be the highest among G-7 countries in both
2002 and 2003.
40. The external current account is expected to remain in surplus, despite a slight expected
appreciation of the Canadian dollar vis-à-vis  the U.S. dollar, resulting from the differential in interest
rates.  Fiscal accounts are also likely to continue  showing a surplus, with any increase, as the
economy recovers, mitigating the effects of the tax cuts decided in 2000.
                                                     
12 Bank of Canada (2002b).