Canada WT/TPR/S/53
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I. ECONOMIC ENVIRONMENT
(1) INTRODUCTION
1. Canada has consolidated many of the macroeconomic gains noted in its 1996 Trade Policy
Review, including steady output growth and low inflation while eliminating fiscal deficits.  Exports
continued to benefit from the United States' cyclical lead, supported by efficiency gains from internal
deregulation and greater internal market integration (Chapter II(2)).  The secular shift away fromcommodity exports has continued, although primary products still account for slightly over 30% of
total merchandise exports.  The financial crisis in Asia has had so far only a limited impact on
Canada's overall economic growth, although slower growth in Asia has reduced Canadian exports of
goods and services to the region.  Nevertheless, a protracted crisis could have significant indirect
effects on the Canadian economy.  Commodity prices have already fallen for a broad range of exportproducts, which, together with volatility in financial markets, has put downward pressure on the
relative value of the Canadian dollar and required interest rate increases at various times in 1997 and
the first half of 1998 (followed by a reduction in September 1998). Canadian exports and aggregate
output remain vulnerable to slower growth in the United States, which absorbs some 85% of Canada's
exports.  These factors create particular concerns because the high debt to GDP ratio leaves Canadaexposed to interest rate increases or slow-downs in economic activity.  Unemployment also remains a
significant issue.
(2) R
ECENT MACROECONOMIC PERFORMANCE1
(i) Output and employment
2. The pace of economic growth quickened during 1991-94;  after peaking at 4% in 1994, the
expansion decelerated in 1995 and slowed down sharply in 1996 (Table I.1).  The latter resulted from
a reduction in business inventory investment and sl ower export growth, which in turn reflected a
temporary slow-down in the U.S. economy.  Economic  activity regained momentum in late 1996 and
1997, largely thanks to a boost in private consumption and investment supported by accommodative
monetary conditions and strong growth in the U.S. economy.  During that period, private domestic
investment - concentrated in the finance, oil and gas and, to a lesser extent, the telecommunications
industries - replaced exports as the most dynamic sector.  The rate of economic expansion slowed in
early 1998 in the wake of the Asian financial crisis, lower commodity prices, and one-time events
such as strikes and a severe ice storm.2  The slump in commodity prices in particular has led to
reduced exports and output in mining and mineral refining, lumber and pulp and paper industries, as
well as oil and gas (section (3) below).
3. Domestic demand growth, which lagged be hind GDP during 1992-95, has made a major
contribution to economic expansion since 1996.  Consumer expenditure recovered from the slump in
1995, reflecting strengthened consumer confidence as well as reduced interest and unemployment
rates.  In contrast, government expenditure has declined each year since 1994 as fiscal policy has been
tightened (section (ii) below).  Although the upsurge in domestic spending in 1997 helped to reduce
the budgetary deficit by generating higher revenues,  it also contributed to a sharp reduction in the
merchandise trade surplus.
                                                     
1This section is based on statistics available up to the second quarter of 1998.  As the Asian financial
crisis unravels, the picture drawn here may change.
2Bank of Canada (1998b), p.5.  The Bank estimates that the January 1998 ice storm in eastern Canada
lowered real GDP growth in the first quarter of 1998 by about 0.2 percentage points.WT/TPR/S/53 Trade Policy Review
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Table I.1
Performance of the Canadian economy, 1992-98a
1992 1993 1994 1995 1996 1997 1998(Q1)c1998(Q2)c
(Annual pe rcentage change)
Real GDP 0.8 2.2 4.1 2.3 1.2 3.7 3.4 1.8
Consumer expenditure 1.3 1.6 2.9 1.4 2.4 4.1 0.6 5.5
Government expenditure 0.9 0.5 -0.8 -0.3 -1.5 -0.7 0.7 3.5
Residential investment 7.9 -4.2 1.8 -15.1 10.9 13.1 -0.6 -6.4
Business fixed investment -5.5 2.7 9.4 5.2 4.2 14.5 2.7 11.5
Final domestic demand 0.6 1.1 2.9 0.7 2.0 4.5 0.8 5.1
Exports (goods and services) 7.6 10.4 14.2 11.8 5.7 8.0 6.3 5.3
Imports (goods and services) 5.6 8.8 10.5 9.0 5.2 13.3 0.1 6.1
GDP price deflator 1.3 1.2 1.2 2.6 1.4 0.5 -0.7 ...
Consumer price index – all items 1.5 1.8 0.2 2.2 1.6 1.6 1.0 …
Unit labour costs 1.6 -0.5 -1.4 0.8 1.3 0.1 0.2 0.3
Monetary expansion (M2+) 5.6 3.7 2.2 4.1 3.9 0.9 -0.8 …
(Per cent)
Interest rates (short-term)b6.5 4.9 5.4 7.0 4.3 3.1 4.5 4.7
Capacity utilization – manufacturing 76.0 79.8 83.2 83.2 82.5 84.8 86.7 …
Unemployment 11.3 11.2 10.4 9.5 9.7 9.2 8.6 8.4
(Per cent GDP)
Current account -3.8 -4.0 -3.0 -1.4 0.6 -1.5 -2.0 -1.9
… Not available.
a Calendar years.
b Three-month treasury bills.
c Annual rates.
Source: Department of Finance, The Economy in Brief , September 1998;  Bank of Canada Review , Summer 1998;  and GATT (1994)
and WTO (1996), Trade Policy Reviews - Canada.
4. After peaking in 1992 in the wake of the 1991 recession, unemployment has generally
retreated (Table I.1).  A temporary setback in 1996, in part due to public sector cutbacks and weakeroverall growth, was followed by a gradual fall in the unemployment rate, which stood at 8.4% in the
second quarter of 1998, its lowest level since mid-1990.  Since late 1997, private firms have
accounted for most of the increase in jobs.  Significant variations in unemployment persisted across
provinces.
3
5. The Bank of Canada has estimated that demand during 1997 grew faster than the economy's
capacity to produce, narrowing the output gap – the difference between actual output and estimated
potential output – to about 1.25% by the end of that year.  The authorities consider that this and the
slowing in economic growth in 1998 suggest that the slack in the Canadian economy will disappear
                                                     
3In July 1998, unemployment was highest in the maritime provinces of Newfoundland (17.5%), Prince
Edward Island (12.4%) and New Brunswick (11.2%), reflecting the decline of the fisheries sector;  it was lowest
in Manitoba (5.3%), Alberta (5 .4%) and Saskatchewan (6.0%).Canada WT/TPR/S/53
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within the next two years.  Nevertheless, there s eems to exist considerable scope to increase potential
output in the longer term by reducing structural unemployment.
(ii) Public finance and debt
6. The authorities have continued their efforts to restore sound public finances after the marked
deterioration during the 1980s and early 1990s.  The federal deficit fell to Can$8.9 billion in 1996/97,
equivalent to 1.1% of GDP, the lowest since 1970/ 71 (Table I.2).  The improvements are largely due
to the reduction and reform of programme spending complemented by increasing budgetary revenues
reflecting sustained economic growth.  Since fiscal year 1995, budgetary revenues have exceeded
programme spending but the resulting operating surpluses have not covered interest charges on the
public debt (Box I.1).  The provinces and territories have also moved to eliminate their deficits.
Table I.2
Summary statement of the Federal Budget, 1994-2000a
(Can$ billion and per cent)
1994 1995 1996 1997 1998b1999b2000b
Revenues 116.0 123.3 130.3 140.9 147.5 151.0 155.0
Spending -120.0 -118.7 -112.0 -104.8 -106.0 -104.5 -107.0
Operating balance -4.0 4.6 18.3 36.1 41.5 46.5 48.0
Public debt charges -38.0 -42.0 -46.9 -45.0 -41.5 -43.5 -45.0
Underlying balance -42.0 -37.5 -28.6  -8.9 0.0 3.0 3.0
Contingency reservec0000 0 . 0 3 . 0 3 . 0
Budgetary balance -42.0 -37.5 -28.6 -8.9 0.0 0.0 0.0
(% of GDP) (-5.8) (-4.9) (-3.6) (-1.1) (0.0) (0.0) (0.0)
Non-budgetary transactions 12.2 11.6 11.4 10.2 12.0 6.0 9.0
Financial requirementsd-29.8 -25.8 -17.2 1.3 12.0 6.0 9.0
Net public debt 508.2  545.7 574.3 583.2 583.2 583.2 583.2
(% of GDP) (70.1) (71.6) (71.9) (71.1) (68.1) (65.4) (62.9)
Memorandum items:
Total governmente
Revenues 343.9 361.5 374.9 396.1 … … …
Expenditures 379.7 389.7 385.8 385.3 … … …
Capital accounts -6.5 -6.5 -5.2 -3.3 … … …
Balance -42.2 -34.7 -16.1 7.5 … … …
… Not available.
a Fiscal years ending 31 March.
b Projections.c The contingency reserve is intended to protect the deficit target from unpredictable events or macroeconomic forecast errors.
d Excluding foreign exchange transactions.
e Federal and provincial governments including Canada Pension Plan and Quebec Pension Plan;  calendar years.
Note: Numbers may not add due to rounding.
Source: Department of Finance, The Budget in Brief 1998
, 24 February 1998;  and Fiscal Reference Tables , October 1997.WT/TPR/S/53 Trade Policy Review
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Insert Box I.1:  Canada's fiscal strategy
The Federal Government's fiscal strategy, based on two-year rolling fiscal targets, has targeted budgetary
balance in each year to 2000.  This target implies holding programme spending about constant in nominal
terms throughout the period, declining relative to GDP, and achieving a small underlying surplus in 1999 and2000.
The federal deficit fell to Can$8.9 billion in 1996/97,  the lowest deficit since 1976/77 and the third
consecutive deficit coming below target.  Since fiscal year 1995, budgetary revenues have exceeded
programme spending (total spending excluding interest charges), resulting in operating surpluses that
reached Can$36.1 billion, or some 4% of GDP, in fiscal year 1997.  These surpluses have not, however,
covered interest charges on the net public debt, which reached an all time high of just under Can$47 billion
(almost 6% of GDP) in 1995/96 but fell slightly in 1996/97 as decreasing interest rates more than offsetincreases in interest-bearing debt.
The authorities recognize that the large share of revenue going to pay inte rest on the public debt, about 32%,
significantly reduces their ability to address other pr iorities (Department of Finance, The Economic and
Fiscal Update, 15 Octobe r 1997).  They seek to overcome the pu blic debt problem through sustained
economic growth and a debt repayment plan.  This relies on achieving balance or surplus budgets during
1998-2000 and prudent planning assu mptions, including a Contingency Reserve of Can$3 billion.  The
Government expects the net federal public debt to GDP ratio to fall to just under 63% in 1999/2000.
The budget position of the provinces and territories deteri orated in the early 1990s, leading to a peak deficit
of Can$25.0 billion, some 3.5% of GDP, in 1992/93.  Tighter fiscal programmes in recent years cut back the
provincial-territorial budgetary deficit, which declined  to Can$7.1 billion (just unde r 1% of GDP) in 1996/97.
Five provinces reported budgetary surpluses that year;  provinces still in deficit, including Ontario andQuebec, are committed to eliminating their deficits by the year 2000/1 at the latest.  Programme spending at
the aggregate provincial-territorial level, which is larger than spending at the federal level, fell from
Can$140.4 billion in  1992/93 to Can$137.4 billion in 1996/97.  A ll provinces realized an operating surplus in
1996/97.
Given the expected budget surpluses, the focus of the fiscal policy debate has shifted to the issue of how to use
the surpluses (the so-called fiscal dividend), including the appropriate balance among debt reduction, taxcuts, and spending increases.  For example, arguments have been put forward that maintaining balancedbudgets is a better strategy than running surpluses, which by requiring an excess of taxation over spending
can potentially limit demand and GDP growth.  The Gover nment has indicated that it would seek to devote
half of the budget surpluses to increase spending, and half to reduce the federal public debt as well as taxes.
The fiscal dividend may allow reduction of the tax burden of business and individuals.  In March 1996, the
Minister of Finance appointed an independent advisory committee, the Technical Committee on BusinessTaxation, to review business taxes.  The Committee's report was released on 6 April 1998 (the full report isavailable in Internet, http:/www.fin.gc.ca/taxstudy/grie-e.html).  In releasing the report, the authoritiesindicated that the priority was tax relief for individuals, building on the personal income tax reductions
introduced in the 1998 Budget.
Source: WTO Secretariat.Canada WT/TPR/S/53
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7. Reflecting the accumulation of annual deficits, the federal net public debt reached an all time
high of Can$583.2 billion in 1996/97, equivalent to ju st over 71% of GDP (Table I.2).  As a share of
GDP, the federal debt has increased almost conti nuously since 1974/75, more than doubling since the
early 1980s.  The net debt to GDP ratio of the provinces and territories has also increased, to reach
about 28% in 1995/96 but declining slightly th e year after.  Thus, the combined federal-
provincial-territorial debt to GDP ratio rose to just under 100% in 1995/96.  The authorities seereducing the debt burden as their main fiscal challenge.  They recognize that the high debt to GDP
ratio leaves Canada's fiscal situation vulnerable to interest rate increases or slow-downs in economic
activity.  It also undermines economic efficiency and growth by making necessary high levels of
taxation and pushing up interest rates to offset the risk premium associated with high debt.
(iii) Monetary, exchange rate and balance-of-payments developments
8. The stated objective of Canada's monetary policy is to contribute to sustainable economic
expansion, high levels of employment, and rising standards of living by creating an environment of
stable low inflation.  In conducting monetary policy, the Bank of Canada aims to influence the rate of
inflation over four to eight quarters into the future, and to direct monetary conditions along a path that
will, over time, hold inflation inside the target range.  In 1991, the Federal Government and the Bankof Canada established the target range at 1 to 3%;  they extended it in 1993 and again in February
1998,  to the end of 2001
9. Since mid-1995, the Bank of Canada has adopted a generally accommodative monetary
policy, with a modest tightening since late 1997.  In implementing monetary policy, the Bank focuses
on the overnight (one-day) interest rate.  The Bank  announces a band of 0.5 of a percentage point for
movements of this rate and sets the Bank Rate – the Bank's official lending rate – at the upper limit of
the band.  In 1997, this band was raised three times by 0.25 of a percentage point and once by 0.5 of apercentage point;  during the first semester of 1998, the band was raised once by 0.5 of a percentage
point.  On 29 September 1998, the Bank of Canada lowered the Bank Rate by 0.25 of one percentage
point to 5.75%.
4  The Bank also operates in the money market to keep the overnight rate within the
announced band.  During 1997, there were eight transactions to keep the rate from falling below the
band and 31 to keep it from rising above.5
10. Inflation pressures have remained subdued, with inflation, as measured by the Consumer
Price Index, remaining at the lower half of the Bank of Canada's target range in 1996 and 1997
(Table I.1).  The even lower level for the GDP price deflator reflected the nil inflation rate
experienced outside the consumer sector in 1997.  That year, prices dropped outright in the export and
government sector.  Growth in broad money suggests  that inflationary pressures will continue to be
subdued.6  According to various surveys of inflation expectations and the differential between the
yields on nominal and "real return" bonds, a low inflation mentality seems to be increasingly
embedded in the Canadian economy.7
                                                     
4The decrease followed a move by the U.S. Federal Reserve to lower the federal funds rate by 0.25 of
one percentage point
5Bank of Canada (1998a), p.23.  Additional information may be found in the Bank's Internet site
(http://www.bank-banque-canada.ca/).
6The term "broad money" replaced "M2+".  Bank of Canada (1998b), p.29 notes that "the enormous
shift from deposits to mutual funds has rendered the previously accepted definitions obsolete".
7Bank of Canada (1998b), pp. 26-27.WT/TPR/S/53 Trade Policy Review
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11. After having traded in a narrow range about US$0.73 since mid-1995, the Canadian dollar
weakened in 1997, reaching record lows during the first half of 1998.8 This was mainly due to the
uncertainty associated with the Asian crisis, and its effect on world currencies and financial markets,
as well as sporadic recurrence of nervousness about political developments in Quebec.9 To adjust
monetary conditions to where the Bank of Canada considered they should be and to avoid a potential
loss of confidence in Canadian dollar assets, the Bank responded with increases in the Bank Rate (seeabove).
12. After improving consistently up to early 1997, the terms of trade turned against Canada as
export prices fell slightly due to weaker commodity demand (Table I.3).  Imports surged in 1997
because the domestic spending increase was particularly large in import-intensive areas such as
machinery and equipment, and consumer durables (Table I.4 and section (3) below).  Thecombination of lower export prices and increased imports caused Canada's traditional merchandise
trade surplus (which had reached a 1990s high in 1996) to shrink sharply and, as a result, combined
with an increased net outflow on the income account, the current account balance slipped into a deficit
in 1997.  On the other hand, the capital and financial account shifted back into a sizable surplus in
1997, owing to sharp increases in net portfolio as we ll as other capital and investment inflows which
easily offset larger net direct investment outflows.
Table I.3
Commodity prices and Canada's terms of trade, 1990-98
(1990 = 100)
World primary commodity pricesbCanadian trade:  implicit price indexcPeriodAgricultural
raw
materialsaMetals Non-fuel
commoditiesPetroleumAll
commodities Exports Imports Terms of
trade
1990 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
1991 96.4 85.7 94.3 84.3 90.1 94.6 96.8 97.7
1992 99.0 83.7 94.4 82.8 89.5 97.1 98.8 98.3
1993 115.0 71.9 96.1 73.0 86.4 101.9 102.4 99.4
1994 125.9 83.8 109.0 69.4 92.2 107.1 106.2 100.9
1995 131.3 100.2 118.1 74.8 99.8 111.3 107.3 103.6
1996 127.7 88.2 116.7 88.6 104.9 112.9 105.4 107.1
1997(Q1) 126.8 92.0 116.6 91.7 106.1 112.6 103.3 108.9
1997(Q2) 123.0 92.8 117.2 80.5 101.7 111.2 103.7 107.2
1997(Q3) 117.8 93.4 111.2 81.2 98.5 110.0 100.8 109.1
1997(Q4) 108.7 85.4 106.5 82.0 96.1 … … …
1998(Q1) 102.8 79.6 102.2 61.6 85.1 … … …
1998(Q2) 103.0 77.6 98.2 57.8 81.1 … … …
… Not available.
a Includes forestry products.
b In terms of US$.
c Paasche index;  original series 1986 = 100.
Source: Bank of Canada Review , Spring 1998;  and International Monetary Fund, Primary Commodity Prices .
                                                     
8As noted in the Secretariat reports for previous Trade Policy Reviews, exchange rates in Canada are
market-determined.
9Bank of Canada (1998b), p.18.Canada WT/TPR/S/53
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Table I.4
Balance of payments, 1991-97
(US$ million)
1991 1992 1993 1994 1995 1996 1997
Current account balance -22,173 -21,014 -21,758 -14,725 -5,305 2,808 -12,247
   Merchandise trade balance 6,126 7,381 9,905 14,106 24,642 30,062 16,908
      Merchandise exports, f.o.b. 128,914 135,153 147,549 166,788 193,085 205,799 217,780
      Merchandise imports, f.o.b. 122,788 127,772 137,644 152,682 168,443 175,737 200,872
   Services balance -9,958 -10,083 -10,383 -8,681 -7,555 -7,260 -6,389
   Income balance -17,398 -17,512 -20,821 -19,907 -22,380 -20,312 -23,009
   Current transfers balance  -943 -800 -459 -244 -13 318 243
Direct investment, net -2,963 1,230 -1,111 -651 -349 -2,117 -4,727
Portfolio investment, net 17,348 10,706 27,768 10,619 11,957 1,158 6,980
Other capital and investment, n.i.e. 6,279 1,413 1,356 3,308 -6,456 1,384 10,122
Net errors and omissions -340 2,879 -5,352 1,057 2,862 2,265 -2,521
Overall balance -1,848 -4,786 904 -392 2,710 5,498 -2392
Change in reserve assets -1,848 -4,786 904 -392 2,710 5,498 -2,392
Memorandum items:
Total reserves except gold 16,252 11,431 12,481 12,286 15,049 20,422 17,823
Market exchange rate (US$/Can$)a0.8621 0.7874 0.7576 0.7143 0.7353 0.7299 0.6993
Real effective exchange rate  (1990=100) 103.3 96.1 88.4 82.4 79.8 82.7 82.2
a End of period.
Source: IMF, International Financial Statistics , June 1998;  and Bank of Canada Review , Spring 1998.
(3) TRADE AND INVESTMENT PATTERNS
(i) Trade in goods
13. Foreign trade has been one of Canada's main engines of economic growth during most of the
decade.  The authorities have noted that exports as a percentage of GDP grew from 18% in 1977 to
about 41% in 1997, and that this growth has been a significant factor in the creation of jobs:  39% ofnet jobs created between 1990 and 1995 resulted from exports.
10  One in three Canadian jobs depends
on trade with the rest of the world, and every Can$1 billion in new exports creates an estimated 6,000
to 8,000 new jobs in Canada.   Large firms account for a high proportion of export activity:  the top
five exporters account for 21% of Canada's exports, and the next 45 largest for almost 30%.
14. After double-digit expansion in 1994 and 1995, growth in merchandise exports and imports
weakened considerably in 1996, to about 5% and 4% respectively in U.S. dollar value (Tables AI.1 to
AI.4).  In 1997, import growth outpaced exports for the first time in six years:  the value of exports
grew by 6.5%, while imports increased by 14.5%.  Th e rate of growth in both imports and exports
appeared to have abated again in early 1998, ma inly reflecting a slow- down in the auto sector
throughout North America;  export growth was also affected by reduced Asian demand (see below).
                                                     
10Department of Foreign Affairs and International Trade (1998), section 1.WT/TPR/S/53 Trade Policy Review
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15. Canadian trade is dominated by the bilateral flows with the United States;  Canada and the
United States are each other's largest trading partner (Chart I.1).  This reflects the natural advantages
offered by geographic proximity, reinforced through preferential trade agreements, including the
previous Free Trade Agreement (CUSFTA) and the NAFTA.  Since the implementation of the
CUSFTA in 1989, two-way merchandise trade has almost doubled:  the U.S. share in total Canadian
exports increased to almost 83% in 1997, while the U.S. share in total Canadian imports rose to over67%.  In 1997, automotive product shipments to the United States alone represented more than
Canada's total exports to the rest of the world.  The pattern of Canada-U.S. trade is also special in that
intra-industry and intra-firm trade in industrial goods is more significant with the United States than
with the rest of the world.  Intra-firm trade of U.S.-controlled firms alone accounts for close to 45% of
bilateral trade.
16. Two-way merchandise trade between Canada and Mexico has grown rapidly since the
NAFTA was implemented in 1994, but its share in the total remains small.  However, there is
evidence to suggest that the recorded value of Canada's exports may be underestimated, perhaps by as
much as 50%, due, for example, to goods from Canada being re-exported through the United States
and not measured as exports to Mexico.
11  The statistical agencies of the three NAFTA countries are
currently working at reconciling their trade data.
17. Canada's MFN trade is dominated by the European Union and Japan.  The relative importance
of MFN trade has tended to shrink:  in 1997, the shares in total Canadian exports of the European
Union and Japan reached their lowest point in recent years, about 5% and 4%;  their shares of
Canadian imports also fell, to under 10% and 5% respectively.  In the wake of the financial crisis in
Asia, exports to that region have fallen considerably:  exports to Canada's main Asian trading
partners – Japan;  the Republic of Korea;  China;  Hong Kong, China;  Chinese Taipei;  Indonesia;Malaysia;  Thailand;  India;  and Singapore – fell by 34% in the first five months of 1998 compared
with the same period in 1997.  On the other hand, as Asian currencies depreciated, Canadian imports
from these countries rose more strongly than total imports.
18. In terms of product categories, Canada's merchandise exports are dominated by automotive,
mining and agricultural products;  together these three categories accounted for about 55% of totalexports in 1997 (Chart I.2).  A different categorization shows that forestry products are also an
important export group, lumber shaped conifers, and newsprint and other paper products contributing
4.3% and 2.3% of total exports (Table AI.1).  The share of primary products in total exports has
continued its gradual downward trend, having fallen from 36.4% in 1990 to 31.9% in 1997.
19. Reflecting the high import content of motor vehicle exports, automotive products also
dominate imports with about 22% of the total (Chart I.2).  The two next largest import categories are
non-electrical machinery, and office machines and telecommunications equipment, reflecting the
extensive use of foreign technology and capital equipment throughout Canada's economy and
accounting for the growth in the relative importance of manufactured imports (Table AI.2)  On the
other hand, the shares of passenger motor vehicles (but not other automotive products) and clothinghave tended to fall.
                                                     
11Department of Foreign Affairs and International Trade (1998), section 4,
URL: http://www.infoexport.gc.ca/.Canada WT/TPR/S/53
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Chart I.1
Merchandise trade by region, 1990 and 1997
1990 1997
(a)    Ex ports
United States
75.8
Japan
5.5EU15
8.4United States
82.6
Other 
4.0
Other Asia
4.6
EU15
5.1Japan
3.7
Total:   US$125.1 billion Total:   US$212.0 billion
(b)    Imports
Japan
7.0Other 
8.3United States
64.5
EU15
12.8Other Asia
7.4United States
67.5
Other
9.5
Japan
4.6EU15
9.9Other Asia
8.5
Total:   US$115.9 billion Total:   US$195.0 billion
Source :  UNSD, Comtrade database (SITC Rev.1).Other 
5.1
Other Asia
5.2Per centWT/TPR/S/53 Trade Policy Review
Page 10
Chart I.2
Merchandise trade by sector, 1990 and 1997
1990 1997
(a)    Ex ports
Agriculture
17.8
Other semi-
manufactures
9.8Other
15.8
Other auto-
motive prod.
7.2
Chemcials
5.4Mining
18.6Agriculture
15.6Other 
17.5
Other auto-
motive prod.
6.2
Parts
4.1Mining
16.4
Other semi-
manufactures
9.8Cars
12.6 Chemicals
5.9
Total:   US$125.1 billion Total:   US$212.0 billion
(b)    Im ports
Chemicals
70Mining 
9.1
Other semi-
manufactures
7.2
Non-electrical 
machinery
10.9Other 
22.7Agriculture
7.8
Office machines 
& telecomm. equip.
8.7Cars
8.0Textiles & 
clothing
4.1
Other auto-
motive prod.
6.2
Parts
8.3Agriculture
7.0Other
22.8
Other auto-
motive prod.
6.6Textiles & 
clothing
3.5
Cars
6.6Other semi-
manufactures
7.4
Office machines & 
telecomm. equip 
11.3Mining
7.0
Parts
8.3
Non-electrical 
machinery
11.1Chemicals
8.4
Total:   US$115.9 billion Total:   US$195.0 billion
Source :  UNSD, Comtrade database (SITC Rev.1).Non-electrical 
machinery
5.0Office machines & 
telecomm. equip.
4.4Cars
11.2Parts
4.8
Non-electrical 
machinery
5.7Office machines & 
telecommunication equip.
6.2Per centCanada WT/TPR/S/53
Page 11
20. Growth in merchandise exports in 1996 and 1997 was mainly driven by fuel and
manufactured products.  In 1997, this mainly reflected the strong demand in the United States for
energy products, consumer goods, and machinery and transport equipment.  The increase of just over
15% in the lorries and trucks category was due to the popularity in the U.S. market of vans and sports
utility vehicles, many assembled in Canada.  Growth in energy exports was based on a booming
natural gas industry also servicing U.S. markets.  Although exports of non-energy commodities grew
in 1997, in spite of price declines, weak industrial demand in Asia helped to check exports of metal
and forestry products.
21. The boom in merchandise imports in 1997 was underpinned by rapid growth in each major
product category, reflecting the strengthening of demand for both investment and consumer goodsduring the year.  The surge in imports of machinery and transport equipment had a particularly large
impact given the weight of those products in the total.  The upturn was particularly fast for motor
vehicles, while parts used in factories lagged behind.  This reflected stronger growth in auto sales in
Canada than in the United States, where most of Canada's auto factory output is shipped.
(ii) Trade in services
22. Services account for some two thirds of production and close to three quarters of employment
in Canada.  In recent years, global trade in services has grown faster than trade in goods:  over
1977-97, Canada's services exports grew from Can$5.3 billion to Can$41.6 billion (Table 1.5).
Canada has historically imported more services than it has exported, in contrast to the surplus usually
recorded in trade in goods.  Purchases by Canadian importers amounted to around Can$50.3 billion.
The trade in services deficit dropped in 1997 for the fourth consecutive year.  This stems largely from
a narrowing deficit in commercial services since 1996.
Table I.5
International transactions in services, by category, 1997(Can$ million)
Category Receipts Payments Balance
Total 41,572 50,316 -8,744
Travel 12,141 15,649 -3,508
     Business 2,276 3,428 -1,153
     Personal 9,865 12,220 -2,355
Trans portation 8 ,323 11 ,514 -3 ,191
     Water transport 1,883 3,778 -1,895
     Air transport 3,475 5,354 -1,879
     Land and other transport 2,965 2,382 583
Commercial services 20 ,100 22 ,576 -2 ,477
     Communications 1,917 1,815 103
     Insurance 3,762 4,883 -1,121
          Primary life and non-life 887 1,319 -432
          Reinsurance, life 1,729 1,849 -120
          Reinsurance, non-life 870 1,447 577
     Other financial services 1,160 1,626 -466
     Computer and information services 1,721 9452 779
     Royalties and licence fees 686 2,766 -2,080
          Patents and industrial design 230 1,006 -776
     Management services 1,966 2,765 -799
     Research and development 1,774 802 972
     Architectural, engineering and other technical services 2,578 894 1,684
     Tooling and other 1,267 2,437 -1,170
Government services 1 ,008 577 431
Source: Statistics Canada, Canada's international transactions in services, 1997.WT/TPR/S/53 Trade Policy Review
Page 12
23. Based on data by geographic region available only for commercial services, the United States
was by far Canada's major trading partner in 1997, accounting for 70% of payments and 63% of
receipts.  That year, Canada's trade in commercial services with the United States showed an overall
deficit of Can$3 billion.  The European Union members, excluding the United Kingdom, represented
Canada's second trading partner, accounting for 7% of payments and 8.5% of receipts;  the
United Kingdom accounted for 7% of payments and 6% of Canadian receipts.  Trade with foreignaffiliated companies has historically made up an important share of Canada's trade in commercial
services:  in 1996, 50% of payments were made to parents, subsidiaries or affiliates located abroad,
while receipts from foreign affiliates amounted to 35% of receipts.
(iii) Foreign direct investment
24. The authorities have pointed out that Canada depends on foreign direct investment (FDI) to
finance a significant proportion of its economic development.  They estimate that one job in ten, about
50% of Canada's total exports, and 75% of manufactur ing exports derive from inward FDI.  Moreover,
they estimate that a Can$1 billion increase in new inward FDI generates, over a five-year period, about
45,000 jobs and Can$4.5 billion in GDP.
12  On the other hand, the authorities have also noted that
Canada's share of global inward FDI stock has decl ined sharply, from 9% of the world total in 1985,
to an estimated 4% in 1996.  Canada's share of North American bound FDI has also fallen, from 24%
in 1985 to 15% in 1996.  Attracting foreign investment has thus become a main objective of Canada’s
economic policy.
25. Inward and outward FDI have increased marked ly during the decade.  Canada's inward FDI
stock reached Can$188 billion in 1997 (Table I.6).  The Free Trade Agreement of 1989 and the
NAFTA have spurred cross-border investment betw een Canada and the United States:  FDI flows
from the United States grew at an average annual rate of 6.4% between 1990 and 1997, compared to4.4% during 1985-90.  In contrast, annual growth in total FDI in Canada fell to 5.3% during 1990-97,
from 7.7% during 1985-90.  Cumulative U.S. FDI in  Canada reached Can$130 billion in 1997;  far
behind, with Can$16 billion in 1997, the United Kingdom was the second largest source of FDI in
Canada.
26. The sectoral composition of inward investment shows a shift from resource-based to services
sectors (mostly finance and insurance activities), chemical products, food and beverages as well as
electronic and communications products.  The share of services in inward FDI increased from 24% in
1985 to 27% in 1997, while the share of resource and resource-based industries fell from 32% to 22%
during the same period.  The share of foreign-controlled operating revenues exceeds 50% in the
chemicals, electric and electronic products, and transportation equipment industries.
13
27. Canada is also a major global investor, Canadian FDI abroad having grown by an annual
average of 10% between 1990 and 1997.  In 1996, the stock of Canadian FDI abroad surpassed the
inward FDI stock for the first time in Canada's history.  In 1997, that stock reached close to
Can$194 billion, equivalent to 103% of Canada's inward FDI stock.
28. The United States is Canada's most important investment target, accounting for over 50% of
total outward direct investment, followed by the United Kingdom.  Canada's investment relationship
is diversifying toward other European Union members and developing countries.  In investing abroad,
Canadians have concentrated more heavily on services;  the share of services in Canadian FDI abroad
increased from 29% in 1990 to 45% in 1997.
                                                     
12Department of Foreign Affairs and International Trade (1998), section 3.
13Industry Canada (1998a).Canada WT/TPR/S/53
Page 13
Table I.6
Canada's inward and outward FDI stock, 1990 and 1997
(Can$ billion and per cent)
1990 1997
Inward stock
Total (Can$ billion) 130.9 187.6
Distribution by country or region (%)
United States 64.2 69.3
United Kingdom 13.1 8.3
Other European Union 10.9 11.9
Japan 4.0 3.8
Other OECD 4.5 3.4
All other 3.2 3.4
Distribution by activity (%)
Wood and paper 5.8 5.7
Energy and metallic minerals 24.1 16.7
Machinery and transport equipment 14.1 15.7
Finance and insurance 18.9 17.9
Services and retailing 7.5 9.6
Other 29.6 34.5
Outward stock
Total (Can$ billion) 98.4 193.7
Distribution by country and region (%)
United States 61.0 51.6
United Kingdom 13.7 11.2
Other European Union 7.2 10.0
Japan 0.9 1.4
Other OECD 4.1 3.9
All other 13.1 21.9
Distribution by activity (%)
Wood and paper 3.6 3.1
Energy and metallic minerals 21.2 22.8
Machinery and transport equipment 3.3 2.9
Finance and insurance 29.1 32.1
Services and retailing 8.4 13.2
Other 34.5 26.0
Source: Statistics Canada, Canada's International Investment Position, 1997 .