International trade is the buying and selling of goods and services between members of different countries. This exchange has been a key part of the Canadian economy since the first settlers came. Canadian settlers depended on exports of resources such as timber and grain (see Timber Trade History; Wheat). In the 20th century, Canada’s exports shifted to services, manufactured goods and commodities such as oil and metals.
Since the 1980s, Canada has signed free trade agreements with dozens of countries to increase global trade and investment.
Canada’s three biggest trading partners are the United States, the European Union and China. The United States is Canada largest trading partner by far. However, trade with China grew quickly in the 2010s, and this trend will likely continue.
Click here for definitions of key terms used in this article.
In Canada’s early history, settlers depended on demand from Europe for resource staples. Staples, in this context, means a colony’s main commodities. Canada’s staples included fur, grain and timber (see Fur Trade in Canada). European colonial powers, including France and England, believed that economic prosperity depended on exporting more than they imported. This model left colonies dependent on the production of staples (see Mercantilism; Staple Thesis).
In the early 20th century, Canada began to export more commodities such as iron ore, nickel and copper. During the Great Depression, many countries tried to improve their economies through protectionism. Those policies made the economic situation worse, however, so nations sought more open trade after the Second World War. Canada signed onto the first General Agreement on Tariffs and Trade (GATT) in 1947. By reducing barriers like tariffs, GATT promoted freer trade between 23 nations.
The 1965 Canada-United States Automotive Products Agreement, or the Auto Pact, was another key trade milestone. The Canadian government agreed to remove tariffs on vehicles and vehicle parts. However, the Auto Pact also required assemblers to use a minimum percentage of Canadian parts. Further, for every vehicle sold in Canada, a vehicle had to be made in Canada. As a result, autos and auto parts became one of Canada’s most important exports. (See also Automotive Industry; Canada-US Economic Relations.)
By 1967, Canada’s centennial, imports and exports made up one-third of Canada’s gross domestic product. The United States and Canada continued to integrate their economies throughout the 1970s and 1980s.
In the late 20th century, countries around the world signed free trade agreements. Canada and the United States signed the Canada-United States Free Trade Agreement in 1988. The deal was replaced in 1994 by the North American Free Trade Agreement (NAFTA), which included Mexico. Canada joined the World Trade Organization (WTO) in 1994. The Auto Pact ended in 2001 after it was found to break WTO rules.
China’s entry into the WTO in 2001 had a large impact on Canada. China’s rapid economic development created high demand for commodities. This demand benefitted Canadian exporters of oil, coal and ores. But with the worldwide recession in 2008, global demand declined sharply. The recovery in the following years was weak.
In 2017, Canada began negotiating a new agreement with the United States and Mexico to replace NAFTA. While these talks took place, the United States imposed high tariffs on Canadian steel and aluminum. This prompted Canada to impose its own tariffs in response.
The new Canada-United States-Mexico Agreement (CUSMA) came into effect on 1 July 2020. It is expected to have only a modest impact on economic growth. The deal could, however, affect Canada’s ability to negotiate future trade deals. It could also limit Canada’s options to create policies related to the digital economy.
In addition to CUSMA, Canada had 14 free trade agreements in force as of 2020. These deals included the Canada-European Union Comprehensive Economic and Trade Agreement (CETA) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).
Since 2009, Canada has run a trade deficit with the rest of the world. By comparison, in all except three of the preceding 50 years, Canada ran a trade surplus.
Canadian Trade Policy
Over time, Canadian governments have played a leading role in building trading systems between three or more countries. Examples of these systems include GATT and the WTO. Canada has joined trading blocs (groups of trading partners) such as the CPTPP. It has also signed a number of two-way free trade agreements. Such deals include agreements with Israel and Chile.
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Two-way international trade accounted for around 65 per cent of Canada’s gross domestic product in 2020, according to Global Affairs Canada.
While Canada is party to 15 trade agreements, it also takes measures to protect its own industries. For example, the supply management system of the milk industry controls the supply — and therefore the price — of milk. This system also creates barriers for foreign milk producers who sell milk in Canada.
The Canadian government takes various measures to protect cultural industries. For example, Canadian content rules and subsidies help promote Canadian publishing and broadcasting. (See Cultural Policy.) NAFTA, and later CUSMA, both allowed these cultural exemptions from free trade rules. However, CUSMA set certain new limits on these safeguards.
Free trade has led to economic growth around the world. However, because it encourages specialization, it can also lead to unfair labour practices and sudden losses of income. Specialization is the process by which countries focus on trading goods in which they have a comparative advantage (i.e., what they do best compared to other countries). Some regions can come to depend on commodity crops, such as coffee or cocoa. If the market is flooded with product or demand drops unexpectedly, the resulting collapse of global prices can destroy the livelihoods of local farmers.
The first fair trade labelling organizations were born in the 1980s. Their goal was to ensure that farmers received fair pay for their products. Fair trade shops go back further, to at least the end of the Second World War. The broader movement began with fair trade coffee. It has since grown to include many different commodities. Today, groups such as Fairtrade Canada certify that companies commit to certain standards. These standards include a set minimum price for products, environmentally sustainable practices and longer-term contracts with producers.
Managing Human and Environmental Resources
Modern trade agreements now address issues beyond reducing trade barriers. In particular, new trade agreements include sections on fair labour practices and stewardship of environmental resources. Yet these sections vary in strength and are often non-binding.
Chapters on labour and the environment appeared in a North American trade agreement for the first time with CUSMA in 2020. Member nations of CETA committed to terms on the environment and labour. So did Canada and the 10 countries in the Asia-Pacific region that signed the CPTPP. The new labour chapters of these deals commit nations to upholding the basic rights of workers. These rights include freedom of association and the right to collective bargaining. (See also Labour Organization.) Environment chapters largely focus on the effective enforcement of each country’s environmental laws.
Tariff A tax on imported goods and services, aimed at making these products more expensive. Tariffs have been used throughout history to protect domestic businesses from foreign competition (see Protectionism).
Quota A limit to the number or the value of a foreign country’s products that can be sold.
Free trade Trade without barriers, such as tariffs, quotas and other restrictions. A government that practises free trade does not create a disadvantage for imported goods and services (see Free Trade).
Subsidy Money that governments give to companies or organizations to keep the prices of their goods competitive, avoid laying off workers or provide a service that is in the public interest.
Trade balance The difference between what a country sells to residents in other countries and what it buys from them. If a nation sells more than it buys, it has a positive trade balance or a trade surplus. If a nation buys more goods and services than it sells to other countries, it has a negative trade balance or a trade deficit.