Canada WT/TPR/S/179 
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I. ECONOMIC ENVIRONMENT 
(1) OVERVIEW  
1. Canada's per capita GDP, at US$39,390, is among the world's highest.  Since 2002, Canada's 
economic performance has been impressive.  Annual average GDP growth between 2002 and 2005 
was just below the economy's potential of 3%;  GDP growth slowed during the second and third 
quarters of 2006.  This overall positive performance  is largely the result of sound macroeconomic 
management and structural reform .  Canada continues to apply the inflation targeting regime 
introduced in 1991.  On the fiscal front, Canada ha s posted federal surpluses si nce its last Review.  
The provinces have also practiced fiscal discipline,  resulting in a combined surplus of 1% of GDP in 
fiscal year 2005/06.  Canada has made remarkable progress in reducing its federal debt burden, as the 
debt-to-GDP ratio fell to 35% in 2005/06.  The Governme nt's target is to lower federal debt to 25% of 
GDP by 2012/13. 
2. The composition and direction of merchandise trade have changed considerably during the 
period under review.  The share of fuels in total exports jumped from 14% in 2001 to 20% in 2005, partly as a result of high energy prices, but for commodities such as crude oil, the higher share was 
also due to increased export volumes.  Although most  of Canada's trade continues to take place with 
the United States, merchandise imports have diversif ied away from this source, reflecting primarily 
the growing importance of China as a source of imports. 
3. Canada's robust performance in recent years re veals the economy's remarkable flexibility, as 
growth has taken place against the backdrop of significant shocks, including soaring energy prices, 
expanding oil and gas production, a nd exchange rate appreciation.  Despite this, relatively slow 
productivity growth is a feature of the economy, po ssibly as a result of a l ack of capital deepening 
during the 1990s.  Productivity gr owth could be accelerated by, among other things, eliminating 
barriers to agricultural imports, removing restric tions on foreign investment, minimizing subsidies 
that distort competition, and dismantling obstacles to internal trade. 
(2) R
ECENT ECONOMIC DEVELOPMENTS  
(i) Output, productivity, and employment 
4. The Canadian economy has expanded steadily since 2002.  Annual GDP growth averaged 
2.7% during the period 2002-05, underpinned by st rong domestic demand, particularly investment 
(Table I.1).  Although growth slowed down in 2003, it picked up thereafter, led by a sharp increase in residential and non-residential investment and cont inued strong consumer spending.  Gross exports 
expanded, but the contribution to GDP of net e xports was negative due to the faster increase in 
imports.  High import growth of both goods a nd services has gone hand-in-hand with strong 
consumption.  GDP growth in the second and third quarters of 2006 slowed to 2% and 1.7%, largely 
because of weaker housing investment and an easing in consumer spending growth. 
5. Domestic demand growth was underpinned by gains in real personal disposable income 
between 2004 and the third quarter of 2006.  Despite  the increase in real pers onal disposable income, 
the personal savings rate has contracted, reaching 1. 2% in the second quarter of 2006;  this contrasts 
with the 13-14% observed in the early 1990s. 
6. Although investment in residential struct ures was strong between 2002 and 2004, it has 
slowed down since 2005.  Non-residential privat e investment, particularly in machinery and 
equipment, has picked up since 2003, and has b een one of the main components underpinning GDP WT/TPR/S/179 Trade Policy Review 
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growth since then.  This reflects the high degree of capacity utilization.1  Since Canada's last Review, 
consumer and mortgage debt leve ls have continued to rise, and the household debt-to-income ratio 
reached 108% in the fourth quarter of 2005, comp ared with 99.4% in the second quarter of 2002. 
Table I.1 
Selected macroeconom ic indicators, 2002-06a 
(Can$ billion and per cent) 
 2002 2003 2004 2005 2006 QI 2006 Q2 2006 Q3
GDP (current Can$ billion) 1,152.9 1,213.4 1,290.8 1,371.4 1,427.0 1,432.8 1,440.8
GDP per capita (Can$) 36,807.0 38,359.0 40,403.9 42,514.1 43,978.7 44,053.6 44,164.7
 Per cent change 
Real GDP 2.9 1.8 3.3 2.9 3.8 2.0 1.7
Final domestic demand 3.0 3.8 4.2 4.3 5.6 3.6 2.8
 Consumer expenditure 3.6 3.0 3.3 3.9 4.8 3.8 4.2
  Goods 3.5 3.0 3.3 3.9 5.6 5.1 4.8
  Services 2.8 3.5 3.9 4.1 4.0 2.7 3.8
 Government expenditure 2.4 3.8 3.1 3.2 3.9 4.4 0.6
  Goods and services 2.5 3.5 3.0 2.7 3.3 4.9 0.7
  Gross fixed capital 3.7 5.8 3.3 6.8 6.7 3.4 0.5
 Residential investment 14.1 6.0 7.8 3.2 14.2 -4.8 -8.2
 Business fixed investment (non-residential) -4.1 7.0 9.1 9.4 8.1 5.4 7.0
  Non-residential construction -5.9 5.5 7.4 7.9 8.4 3.0 4.7
  Machinery and equipment -2.8 7.9 10.3 10.5 7.9 7.4 8.9
 Business inventory investment 
(Can$ billion) 0.6 8.7 9.7 15.5 11.5 18.6 15.3
 Real exports of goods and services 1.2 -2.4 5.2 2.1 -3.8 -1.7 3.6
  Goods 0.8 -2.2 5.5 2.5 -3.9 -2.7 5.0
  Services 3.9 -3.4 3.4 -0.1 -2.7 5.0 -5.6
 Real imports of goods and services 1.7 4.5 8.2 7.1 -2.0 8.6 4.1
  Goods 1.7 3.6 8.4 7.9 -3.6 9.2 6.1
  Services 1.7 8.4 7.2 3.5 6.6 5.4 -5.4
 Real personal disposable income 1.7 2.3 3.2 2.5 12.8 -3.8 5.6
  Gross national saving 21.1 21.3 22.8 23.6 23.3 23.3 23.3
Employment/unemployment and 
productivity   
Employment (per cent change) 2.4 2.4 1.8 1.4 1.6 3.1 0.4
Unemployment rate 7.7 7.6 7.2 6.8 6.4 6.2 6.4
Business sector labour productivity growth 1.4 0.0 0.3 2.1 1.7 -1.0 -0.3
 
.. Not available. 
a Annualized values, except as indicated. 
Source:  Statistics Canada.  Viewed at:  http://www.statcan.ca/english/Pgdb/. 
7. Consumer expenditure in services was an impor tant contributor to GDP growth during the 
period under review.  This type of  expenditure is one of the most stable components of GDP and has 
been growing at 3% to 4.5% since 2002.  Government  expenditure has been growing at an average of 
about 3-4%, with gross capital formation expanding mo re rapidly than spending in goods and services 
and supporting growth in 2002-06. 
                                                      
1 The Bank of Canada estimates the potential growth rate for the 2006-08 period at 2.8% (Bank of 
Canada, 2006b). Canada WT/TPR/S/179 
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8. Unemployment has continued to fall gradually  since 2002;  the unemployment rate fell to 
6.1% in May and June of 2006 and has remained at  about that level.  The overall decline in the 
unemployment rate has been triggered by strong em ployment growth, which has more than offset a 
modest increase in labour-force participation.  The labour force participation rate stood at 67.2% in 
the third quarter of 2006, slightly up from 66.9% in 2002. 
9. The growth of labour productivit y in Canada has been sluggish in recent years.  Business 
sector labour productivity averaged 1% from 2001 to 2005, compared with 3% between 1998 and 2000;  this means that growth has been linked main ly to increased labour participation rather than 
productivity.  One possible explanation is a lack of  capital deepening during the 1990s, a consequence 
of labour costs being low relative to the costs of mostly imported capital goods.
2  According to the 
OECD, productivity gains could be obtained by in troducing reforms in labour and product markets 
(Box I.1). 
Box I.1:  Policy reforms in product markets an d financial services recommended by the OECD 
Most of Canada's product markets function well, bu t there are some exceptions  where policy reforms are 
needed.  The OECD has thus recommended various reforms in product markets, including: 
• Liberalization of provincial electric ity markets to obtain more efficient generation and use of such energy as 
well as to provide clear price signals  for investment (Chapter IV(3)). 
• Removing restrictions on foreign direct investment in airlines, telecommunications and broadcasting to 
boost competition by making the threat of entry more credible and to allow for infusion of new technology 
and management into those sectors (Chapter II(4) and Chapter IV(8) and (5)). 
• Winding up agricultural supply management schemes and instead allowing prices in open markets to balance 
supply and demand. This would not only give all farmers more opportunities, but would also lead to 
significantly lower prices for Canadian consumers, especially for dairy products where large scarcity rents 
have been artificially created (Chapter IV(2)). 
• Minimizing subsidies that distort competition, which include some large one-off packages to specific 
companies and a plethora of programmes providing grants, soft loans, and advice (Chapter III(3)(iv)) and 
(4)(ii)).  This would reverse the rising tr end in government transfers to business. 
• Dismantling the remaining obstacles to inter-provincial trade in services and promoting more vigorous 
competition in services, for example through mutual recognition of occupational and professional 
qualifications, and a shared administrative system for recognition of credentia ls (Chapter II(3) and 
Chapter IV(9)). 
• Introducing employer experience rating for unemployment insurance to remove the significant and persistent 
cross-subsidy to firms that repeatedly use that sy stem to cover their seasonal and temporary workers. 
Alternatively, this subsidy element could be reduced by tightening the relevant eligibility criteria to limit 
access for seasonal and temporary workers. 
The OECD also notes that more efficient financial mark ets would contribute to the rate of growth.  Although 
Canada’s financial sector is well developed and diversified and has performed reasonably well, some policies, 
such as bank ownership restrictions and political approva ls for bank mergers, may impede gains in efficiency 
(Chapter IV(6)).  It pointed out that further streamlin ing entry requirements in banking would make it easier 
for new players, foreign or domestic, to enter the market , thereby adding to competitive forces in the sector. 
Source:  WTO Secretariat, based on OECD (2006), Economic Survey of Canada , Paris. 
 
10. The Bank of Canada attributes the recent sluggi sh performance of labour productivity to the 
economy's structural adjustment in the face of larg e movements in commodity prices, the appreciation 
                                                      
2 International Monetary Fund (2006). WT/TPR/S/179 Trade Policy Review 
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of the Canadian dollar, and external competition.3  According to the Bank, in general capital and 
labour tend to be less productive during such an ad justment, which involves a reallocation of labour 
and capital towards commodities with higher pri ces, and towards non-tradable goods and services. 
(ii) Monetary policy, exchange rates, and prices 
11. Canada's monetary policy is aimed at keeping a lo w and stable inflation rate.  To this end, and 
to increase public accountability, the Federal Govern ment and the Bank of Canada jointly announce 
an inflation-control target range.  The inflation targ et is 2%, as measured by the consumer price index, 
with a control range of 1% to 3% around this targ et.  In November 2006, the Federal Government and 
the Bank of Canada agreed to renew the inflati on-control target for a five-year period ending in 
December 2011.4  The Bank of Canada considers that low inflation contributes to better economic 
growth and moderates cyclical fluctuations in output  and employment.  Inflation targeting has been in 
place in Canada since 1991. 
12. The Bank of Canada's main monetary policy instru ment consists of changes in the target for 
the overnight interest rate, which is the middle of  the operating band for overnight financing.  Rate 
changes are announced on eight pr e-specified dates each year.5  The Bank of Canada has adjusted the 
policy interest rate several times in recent years (Table I.2). 
13. Inflation has remained within the inflation ta rget of 1-3% set by the Bank of Canada 
(Table I.2).  The annual increase in the consumer pr ice index (CPI) averaged slightly above 2% in the 
period 2003 to the third quarter 2006, which is the middle level of the inflation target range.  The 
appreciation of the Canadian dollar has been a positiv e factor in maintaining low inflation, dampening 
the effect of increasing commodity prices.  Core infl ation has, on average, increased by less than the 
CPI since 2003.6 
14. The Canadian dollar appreciated by about 40%  in nominal terms against the U.S. dollar 
between 2002 and the third quarter of 2006.  There w as real effective appreciation of the Canadian 
dollar of some 36% during the same period.  This has had an impact on the real side of the economy 
and on trade.  The Canadian authorities consider that Canada has taken on a "disproportionate burden" 
in the context of global external imbalances, by a llowing the exchange rate to appreciate and real net 
exports to contract.7 
                                                      
3 Bank of Canada (2006b). 
4 Bank of Canada (2006d). 
5 Bank of Canada (2006c) and (2001). 
6 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, ve getables, gasoline, fuel oil, natural gas, mortgage 
interest, inter-city transportation, and tobacco products) and adjusts the remaining components to remove the 
effect of changes in indirect taxes. 
7 International Monetary Fund (2006). Canada WT/TPR/S/179 
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Table I.2 
Selected monetary and exchange rate indicators, 2002-06  
 2002 2003 2004 2005 2006 Q1 2006 Q2 2006 Q3
Monetary aggregates (end of period, per cent change)a 
Gross M1 7.0 9.6 11.0 10.7 10.9 10.5 12.0
M1++ 8.2 7.6 10.4 7.4 7.1 6.5 7.6
M2++ 3.9 3.9 5.5 6.3 6.4 6.5 7.1
   
Interest rates (%)  
Overnight rate (policy instrument) 2.75 2.75 2.50 3.25 3.75 4.25 4.25
Prime lending rate 4.2 4.5 4.0 4.4 5.3 5.9 6.0
90-day commercial paper  2.74 2.75 2.50 3.24 3.73 4.25 4.30
Prices (per cent change)  
CPI (end of period) 3.9 2.0 2.1 2.2 2.2 2.5 0.7
Core CPI (excluding eight most volatile items and 
indirect taxes) 2.7 2.2 1.7 1.6 1.7  1.7 2.3
Exchange rate (yearly average)   
C-6 Trade-weighted exchange rateb 79.2 92.9 97.9 104.1 103.3 107.2 108.0
Canadian dollar effective ex change rate index (CERI)c 80.5 93.3 99.2 106.1 106.3 109.8 109.5
Real effective exchange rate ( 2000=100) 96.0 106.7 112.5 119.3 125.0 127.5 126.8
Can$ per US$ 1.57 1.40 1.30 1.21 1.16 1.12 1.12
Can$ per Euro 1.48 1.58 1.62 1.51 1.39 1.41 1.42
Monetary conditions       
Monetary conditions index (1987=100)d 1.96 0.20 0.00 -3.02 -4.68 -9.80 -10.94
 
a Gross M1 is currency outside banks plus personal checking account s plus current accounts plus some adjustments to M1;  M1++ 
is M1+ plus non-chequable notice deposits held at chartered banks , trust and mortgage loan companies, and credit unions and 
caisses populaires less interbank non-chequabl e notice deposits plus continuity adjust ments.  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 th e weighted- average foreign exchange value of the Canadian dollar against major foreig n 
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. 
c The Canadian-dollar effective exchange rate  index (CERI) is a weighted average of bilateral exchange rates for the Canadian 
dollar against the U.S. dollar, the Europ ean Union euro, the Japanese yen, the U. K. pound, the Chinese yuan, and the Mexican 
peso.  The CERI replaced the C-6 index in October 2006. 
d The Monetary Conditions Index; (MCI) is a weighted sum of the changes in the short-term interest rate (the 90-day commercial 
paper rate) and the exchange rate (as measured  by the C-6 index) from a given base peri od.  The weight of the exchange rate is 
one-third that of the interest rate.  A change in the MCI gives a measure of the degree of tightening or easing in monetary 
conditions. 
 
Source:  Bank of Canada, Monetary Policy Report , October 2006, and other online information, viewed at:  
http://www.bankofcanada.ca/en/graphs/a1-table.htm and http://www.bank-banque-canada.ca/pdf/wfs.pdf. 
(iii) Fiscal policy 
15. As a result of a prudent fiscal policy, Canada has posted federal surpluses since its last 
Review, and the government debt has been falli ng.  Between 2001/02 and 2005/06, Canada posted 
operational surpluses of between 2.8% and 4.3% of GDP, while budgetary balances (taking into 
account public debt charges) were in the 0.1% to 1% range (Table I.3).  Throughout this period, 
Canada followed an informal fiscal rule to mainta in "balanced budgets or better", and maintained a 
0.25% of GDP contingency reserve.8  The continued overall fiscal surplus of the past few years and 
the Government policy of debt re duction have allowed a reduction in federal debt as a share of GDP, 
to 35.1% in 2005/06, down from 46.2% in 2001/02. 
                                                      
8 International Monetary Fund (2006). WT/TPR/S/179 Trade Policy Review 
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16. The Federal Government plans annual fi scal surpluses of between Can$2 billion and 
Can$4.2 billion between 2006/07 and 2011/12, and a nnual federal debt reduc tions of Can$3 billion.9  
The Government seeks to reduce the federal debt-to-GDP  ratio to 25% by 2012/13.  It also intends to 
use the interest savings from debt reductions fo r personal income tax re ductions.  The Federal 
Government has indicated that it will keep the average growth of programme expenses below the 
average growth of the economy over the medium-term. 
Table I.3 
Selected fiscal indicators, 2001-06 
 2001/02 2002/03 2003/04 2004/05 2005/06
Federal fiscal balance (per cent of GDP)      
Revenues 16.6 16.5 16.4 16.4 16.2 
Tax revenue 13.7 13.6 13.6 13.5 13.6 
Spending -12.3 -12.7 -12.7 -13.7 -12.8 
Operating balance 4.3 3.8 3.7 2.8 3.4 
Public debt charges -3.6 -3.2 -2.9 -2.6 -2.5 
Budgetary balance 0.7 0.6 0.8 0.1 1.0 
Non-budgetary transactions -0.7 0.2 -0.1 0.4 -0.5 
Financial requirements 0.0 0.8 0.6 0.5 0.5 
Provincial fiscal balance 0.0 -0.2 -0.3 0.5 1.0 
Federal debt (Can$ billi on) 511.9 505.3 496.2 494.7 481.5 
Federal debt (% of GDP) 46.2 43.8 40.9 38.3 35.1 
 
Source : Department of Finance (2006), Fiscal Reference Tables.   Viewed at:  http://www. fin.gc.ca/purl/frt-e.html. 
17. After posting a deficit in 2002/03  and 2003/04, the overall provincial fiscal balance (taking 
into account debt repayments) was in surplus in the following two years.  In 2005/06, provincial 
governments posted a combined surplus of Can$13.2 b illion, or 1% of GDP.  Alberta was responsible 
for about two thirds of this surplus, and British Co lumbia for almost a quarter.  The only province or 
territory to post an operational deficit in 2005-06, albeit small, was Prince Edward Island;  Quebec's 
public finances were balanced, while the other prov inces registered surpluses in their fiscal accounts. 
18. From 2006/07, Government decisions in the budget are over a two-year planning horizon.  
The 2006/07 Budget proposed comprehensive tax re lief for individuals, valued at almost 
Can$20 billion over the next two years.10  The goods and services tax (GST) was reduced by 
1 percentage point as of July 2006, and the genera l corporate income tax rate will fall to 19% (from 
21%) by 2010.  The corporate surtax  will be eliminated for all corporations as of January 2008.  The 
12% tax rate applying to qualifying small business income will fall to 11.5% in 2008 and 11% in 
2009.  Personal income taxes were reduced.  The Budget 2006/07 allocated an additional 
Can$2 billion over two years to the farming sector, including Can$500 million for farm support, plus 
a one-time payment of Can$1 billion to assist farmer s in the transition to more effective programming 
for farm income stabilization and di saster relief (see Chapter IV(2)(iii)). 
19. To improve the transparency and accountab ility of government operations, the Federal 
Accountability Action Plan, released in April 200 6, introduced a set of wide-ranging reforms, 
including establishing the position of a Parliament ary Budget Officer and a commitment to provide 
quarterly updates of the fiscal outlook for the current fiscal year. 
                                                      
9 Department of Finance (2006d). 
10 Department of Finance (2006c). Canada WT/TPR/S/179 
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(3) BALANCE OF PAYMENTS  
20. The current account of the balance of payments  has been in surplus throughout the period 
under review (Table I.4).  The surplus reached Ca n$31.8 billion in 2005, or some 2.2% of GDP, but 
narrowed in the first half of 2006.  While the tr ade in goods balance showed a surplus between 2001 
and the first half of 2006, the services balance was in deficit (see below).  The capital account 
continued to post a surplus throughout the period un der review.  The deficit in the financial account 
increased sharply in 2004 and 2005, mainly due to a su rge of Canadian direct and portfolio investment 
abroad, triggered by the strong real currency and higher yields abroad. 
Table I.4 
Canada's balance of international payments, 2002-06a 
(Can$ million) 
 2002 2003 2004 2005 2006 QI 2006 Q2
Current account       
Total receipts 514,913 496,301 537,943 574,293 146,193 148,323 
Exports of goods and services 477,522 460,088 492,984 518,028 128,457 132,553 
Goods 414,039 398,954 429,121 453,060 113,598 116,103 
Services 63,483 61,134 63,863 64,968 14,859 16,450 
 Travel 16,741 14,776 16,745 16,460 2,899 4,219 
 Transportation 11,060 9,896 11,024 11,632 2,624 3,143 
 Other services 35,681 36,462 36,093 36,877 9,335 9,089 
Investment income  30,502 29,469 37,532 48,199 14,692 13,698 
 Direct investments  13,766 12,706 20,677 25,944 8,468 7,140 
 Portfolio investments 8,859 8,955 10,182 12,644 3,505 3,700 
 Other investments 7,877 6,807 6,673 9,561 2,720 2,858 
Transfers  6,890 6,744 7,427 8,066 3,044 2,072 
Total payments 495,135 482,197 510,310 542,491 138,118 144,859 
Imports of goods and services 427,434 415,672 440,218 466,896 117,812 125,336 
Goods 356,727 342,692 363,639 388,210 96,958 104,749 
Services 70,707 72,980 76,580 76,686 20,854 20,586 
Travel  18,401 18,727 20,747 22,260 6,858 6,017 
Transportation 14,438 14,366 16,001 17,528 4,442 4,750 
Other services 37,868 39,887 39,831 38,898 9,553 9,819 
Investment income  60,799 59,403 62,346 67,010 16,834 17,870 
 Direct investments 21,529 23,744 27,489 30,953 6,618 8,411 
 Portfolio investments 30,804 29,041 28,139 27,192 6,151 6,147 
 Other investments  8,466 6,618 6,717 8,865 4,066 3,312 
Transfers  6,902 7,122 7,746 8,585 3,471 1,653 
Current account balance 19,778 14,103 27,633 31,802 8,076 3,464 
Goods and services  50,088 44,416 52,765 51,132 10,645 7,217 
  Goods  57,311 56,262 65,482 64,850 16,641 11,353 
  Services  -7,224 -11,846 -12,717 -13,718 -5,996 -4,136 
Investment income  -30,297 -29,935 -24,814 -18,811 -2,142 -4,173 
Transfers  -12 -378 -319 -519 -427 419 
Capital and financial accounts, net -17,208 -15,697 -32,507 -29,177 -9,427 -1,324 
Capital account, net flow 4,936 4,171 4,449 5,932 1,007 998 
Financial account, net flows  -22,144 -19,868 -36,956 -35,109 -10,433 -2,322 
Canadian assets, net flow s -83,631 -66,287 -88,039 -115,116 -48,213 -52,314 
Table I.4 (cont'd) WT/TPR/S/179 Trade Policy Review 
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 2002 2003 2004 2005 2006 QI 2006 Q2
 Canadian direct investments abroad -42.052 -30,146 -56,274 -41,300 -8,143 -11,552 
 Canadian portfolio investme nts -29.319 -19.054 -24,369 -51,652 -19,817 -20,528 
 Other Canadian investment s -13,951 -17,088 -7,396 -22,164 -20,252 -20,235 
Canadian liabilities, net flow 61,487 46, 419 51,083 80,008 37,780 49,991 
 Foreign direct investment s in Canada .. 10,669 1,995 40,984 14,767 7,442 
 Foreign portfolio investments .. 19,362 54,267 8,472 8,534 10,720 
 Other foreign investments  16,389 -5,179 30,551 14,478 31,829 
Statistical discrepanc y -2,570 1,594 4,874 -2,625 1,351 -2,140 
Current account balance/GDP 1.7 1.2 2.1 2.3 1.5b 0.7b 
 
a Not seasonally adjusted. 
b Annualized estimates. 
 
Source:  Statistics Canada.  Viewed at:  h ttp://www40.statcan.ca /l01/cst01/ econ01a.htm. 
(4) TRADE AND INVESTMENT PATTERNS  
(i) Merchandise trade11 
21. Canada is among the world's top exporters and importers  of merchandise.  In  2005, its exports 
accounted for 3.4% of total world exports, and its imports for 3% of total world imports.  After a 
noticeable decline over the 2000-02 period, both export s and imports recovered, with exports reaching 
US$360 billion in 2005 and imports  totalling US$314 billion. 
22. The composition of exports has changed signifi cantly since Canada's last Review.  Fuels, 
particularly oil and natural gas accounted for just over 20% of total exports in 2005, up from 14% in 
2001 (Table AI.1).  For crude oil, this is th e result of higher world prices and increased export 
volumes;  for natural gas, the share increase is th e result of higher world prices, as the volume of 
exports declined slightly between 2001 and 2005.  In 2005, exports of natural gas amounted to 
US$30 billion and of crude oil to US$25 billion.  The United States was the main destination for 
virtually all oil and gas exports.  The share of manuf actures declined from 62% of Canada's exports to 
57% between 2001 and 2005, partly reflecting the falling share of automotive exports.  However, 
during the same period manufacturing exports incr eased by around 28% in absolute terms, to 
US$206.1 billion.  Similarly, exports of automotiv e products amounted to US$66.8 billion in 2005, up 
21% from 2001;  passenger vehicles remain Canada's  top manufacturing export category.  The share 
of agriculture, including agricultural raw materials such as wood and wood pulp, has also fallen since 
2001, to 11.4% in 2005. 
23. The share of manufactures in Canada's total imports has tended to decrease, falling to just 
under 80% in 2005 (Table AI.2).  However, manufact uring imports increased in absolute terms, from 
US$182.6 billion in 2001 to US$248.1 billion in 2005.  The share of machinery and transport 
equipment in total imports fell, while the share of chemicals and iron and steel increased.  Fuels 
accounted for another 9% of total imports in 2005, up from 6% in 2001.  The share of agricultural 
products in total imports has remained  relatively constant, at around 7%. 
24. Canada's exports continue to  be highly concentrated in terms of destination.  The 
United States accounted for 84% of total exports in 2005,  slightly less than in 2001 (Table AI.3).  All 
other trading partners accounted for less than 1% of  total exports (taking EC members individually), 
                                                      
11 Data in this section are from UNSD, Comtrade database (SITC Rev.3). Canada WT/TPR/S/179 
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except Japan (2.1%), the United Kingdom (1.9%), and China (1.6%).  The EC accounts for 5.7% of 
Canada's total exports. 
25. Import sources have diversified since 2001 (Table  AI.4):  although imports from the United 
States have increased in absolute terms since 2001, the U.S. share in total imports fell from 64% in 
2001 to 57% in 2005, reflecting primarily the fallin g share of imports of machinery and transport 
equipment.  Within machinery and transpor t equipment, imports of office machines and 
telecommunications equipment from the United States d ecreased both in absolute and relative terms.  
China has replaced Japan as Canada's  second largest source of imports:  its share increased from 4% 
in 2001 to almost 8% in 2005, while Japan's shar e declined slightly (from 4.3% in 2001 to 3.9% in 
2005).  Machinery and transport equipment account for a larger share of Canada's imports from China 
than from the United States.  Imports of offi ce machines and telecommunications equipment from 
China have expanded particularly ra pidly, and represented almost 27% of Canada's total imports from 
China.  The EC accounted for 12% of total imports. 
(ii) Trade in services 
26. Canada continues to be a net importer of servi ces.  The overall deficit in services transactions 
widened by Can$1 billion in 2005, to Can$13.7 billi on (Table AI.5).  This was Can$5.9 billion more 
than the deficit posted in 2001.  Over half of Cana da's transactions were in commercial services, with 
transportation and travel accounting for most of the remainder.  Although Canada has deficits in these 
three services, it is a net exporter of computer and information services;  architectural, engineering and other technical services;  communications services;  and research and development. 
27. Canada's services trade has diversified away  from the United States during the period under 
review, although the United States remains Canada's  principal trading partner with around 56% of 
services exports and 59% of imports (Tables AI.6 and AI.7).  The EC accounts for about 17% of 
Canada's services exports and the same share of impor ts, while Central and East Asia accounts for 9% 
of exports and 10% of imports. 
(iii) Foreign investment 
28. Canada is an active investor abroad, as well an important recipient of foreign direct 
investment (FDI), and of portfolio and other kinds of investment.  During the period under review, the 
growth of Canadian investment abroad has by far ex ceeded that of foreign investment in Canada.   
29. Canada is a net investor with respect to FDI, but remains a net recipient with respect to other 
kinds of investment and overall foreign investment.  FDI is the only type of investment where inflows 
grew more rapidly than outflows during the pe riod under review.  Between 2001 and 2005, the 
outward FDI stock increased by 16.5%, while inwa rd FDI grew by 22.1% (Table AI.8).  Total 
investment assets reached some 74.4% of GDP  in 2005, up 10.2% from 2001, while Canada's 
liabilities reached 83.4% of GDP in the same year, up 5% from 2001. 
30. The stock of FDI in Canada totalled some Can$415.6 billion in 2005.  Energy and metallic 
minerals accounted for 26% of FDI stock in 2005, and the financial services for another 45%.  Other 
areas where FDI is important include other servi ces and retailing, food an d beverages, chemical 
products, textiles, transportation equipment, and elect rical and electronic products.  The United States 
is the largest source, accounting for 45% of total FD I flows into Canada in 2005, followed by the EC 
(15%), among which the United Kingdom is the largest investor (7%), and other OECD countries (14%).  U.S. investors held 64% of Canada's stoc k of FDI in 2005, followed by investors from the 
United Kingdom and France, with about 7% each. WT/TPR/S/179 Trade Policy Review 
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31. The United States is Canada's main investment destination, for both FDI and other kinds of 
investment, particularly portfolio investment, accounting for some 46% of total outward direct 
investment, followed by the EC (24%). 
(5) OUTLOOK  
32. GDP growth is expected to slow down to 2.5% in 2007, compared with an estimated growth 
rate of 2.8% for 2006, according to the forecasts of  the Bank of Canada.  Gr owth should be supported 
by strong domestic demand, in par ticular private consumption, while the contribution of net exports to 
GDP growth is expected to continue to be negativ e.  GDP growth is estimated at 2.8% for 2008, 
driven again by domestic demand;  the contribution of  net exports is forecast to be neutral.  Labour 
productivity is expected to grow at around 1.5% a year, slightly above the recent average.  CPI 
inflation is estimated at 1.5% for the first half of 2007 and slightly above  2% for the second half, 
remaining at that level in 2008, as the eff ects on housing price pressure and excess demand 
diminish.12  In the context of this Review, the authorities indicated that the risks to the outlook remain 
largely external, and include uncertainty about comm odity prices, the risk of a larger-than-expected 
correction in U.S. house prices, and the risk of a disorderly adjustment to global imbalances. 
                                                      
12 Bank of Canada (2006b).