TexBr/iStock via Getty Images
TexBr/iStock via Getty Images
For the first time in 20 years, China is no longer the main seller of goods to the US. That title is now held by Mexico. Derek Burleton, Deputy-Chief Economist at TD, discusses the changing globalization landscape and Canada's ability to compete.
Kim Parlee: While it may have been unthinkable not that long ago, for the first time in 20 years, China is no longer the main seller of goods to the United States. That title is now held by Mexico. The change highlights how global trade is evolving after recent supply chain issues, political disputes, and, of course, the pandemic.
So what does globalization look like now, and how competitive is Canada in this new environment? Derek Burleton is deputy chief economist at TD, and he joins us now for his perspective. Thank you for stopping in.
Derek Burleton: My pleasure.
Kim Parlee: So let's start - we'll get to Canada in a second, but let's just get a sense of where we are right now. How significant is it to start with that Mexico has usurped China in that role?
Derek Burleton: Yeah, I know it made huge headlines when it happened last year. Tracking it back, this was a story that began, really, in 2017. That's when China's export share to the US peaked at 21%, by far the largest supplier. And then, year by year, it's been coming down, now down to, what, 14%? So that's a good 1/3 drop in terms of that relative share. Mexico's gobbled up almost half of that. So it's seen about a three-point jump. And so I do think it's notable.
What's been driving it, clearly - when you think back at the time, right after Trump took office, imposing tariffs against China, clearly throwing up the tariff wall. And then, since that, it's been one event after the other. Geopolitical tensions have picked up globally. The regionalization of trade. The pandemic, which, just put the emphasis on the need to have reliable supply chains. And here we are today. So I do think it's a big event.
Kim Parlee: Yeah, we can pull up the chart. We can take a look just to see just the trend downwards, and you can see up there. Do you expect this trajectory to continue, or do you think it's going to stabilize at this point?
Derek Burleton: Yeah, you know what? I would have it creeping up. I think - or creeping down, rather, in the case of China. So I don't think we're all of a sudden going to hit it, and we're going to see no further decline.
Is it going to go to zero? No, I don't think so. But certainly these general headwinds in the way of China exporting to the US, the importance of NAFTA and USMCA, these aren't going to go away. So I would expect trend is your friend in the near term.
Kim Parlee: For those of us who have a few years and a bit of a memory, and I do, is NAF - or is Mexico, I should say - is it star rising again just because of proximity and the more established, perhaps industrial, base that it has right now? Just maybe give us a sense of what you see in Mexico. What's growing there?
Derek Burleton: We don't hear a lot about the Mexico economy. The fact that we haven't, I think, is a good thing. A lot of emerging markets, when they're in the news, usually it's because of bad news. Capital flight and all that kind of thing. High inflation.
But Mexico has been very quietly chalking up good, healthy growth. 3% last year. Track for 2% this year. It's dealing with many of the issues that the advanced economies are dealing with. Core inflation that's mid-single digits. It's got high interest rates, starting to think about taking them down. So that's the economic backdrop.
In terms of trade, yes, I think that's where a lot of its growth has been coming from. It's been coming from the production of motor vehicles, exports to the US. That's been certainly providing that foundation.
Now, is it the new China? I think that's a stretch. I wouldn't say that. When you think about still how important China's economy is in terms of global trade, it's still about six times Mexico. It's over 3 trillion in annual exports.
So Mexico is making share, but from a global perspective, certainly not there, even though it is within the North American market. And so I think it's not China. I think when you look at the diversity of Chinese exports and their areas of growth, a lot of the green tech. Solar panels. So Mexico has a less diverse export mix than does China.
And I think where this gets muddy, this whole story, we talk about the US de-risking from China, looking to Mexico and Canada for more exports. Where it gets muddy is that the US is also looking to ASEAN economies for more exports, the Vietnams of the world. And China, in turn, is supplying more to these economies.
So this de-risking does get muddy because a lot - we call these economies linking economies, such as Mexico, where they're open for business, and they're not that - in terms of who they deal with, they're just...
Kim Parlee: Yeah.
Derek Burleton: Yeah, so those economies. So in terms of de-risking, maybe less than what meets the eye, just looking at direct trade shares.
Kim Parlee: It's interesting. I want to bring that up because it's a great point. If we take a look at this chart, which comes from a report from your team, China still being the world manufacturer. So it's not just that China is exporting less to the States, but China is still exporting more to other places as well. They're both diversifying at the same time.
Derek Burleton: They are, and this is the regionalization of trade, the friendshoring that's happening. Look at China going after Middle East export share, not just in South East Asia but really across the world. Russia, of course. So it's been busy building its own ties. So this is where you get a bit off track if you think just because Mexico's export share is rising within the North America that that's because China is really falling by the wayside because it isn't.
Kim Parlee: What about China's own internal domestic issues, I'll say? Their economy has cooled off quite a bit. They've had some real estate issues. The government has been stepping in, as they do. It's a controlled environment anyway. But how much of that is going to influence, maybe, their trade flows or how they're managing things?
Derek Burleton: I do see it being a separate issue. I think a lot of China's problems right now are domestic and tied to the property sector. Now, clearly there is a link, but meanwhile, their export sector has been holding up reasonably well. Of course, it's been hit, to some extent, by a global slowdown that's been in place for a year or two, but it's holding up quite well. Its issues are more the domestic side, the spending, the lack of confidence.
Now, what's interesting is that certainly doesn't help the global economic outlook because China is still a very important part of it. We worry about its impact on commodities, albeit we're seeing offsets on the supply side in areas like oil, where supply has been cut back. And some of the geopolitical tensions are helping to keep commodities well supported, even as China's seen its growth slip down probably as low as 4% in the year ahead, which is very weak. So that's certainly one thing.
But one thing that I think is very much a silver lining is the fact that there is overcapacity within China's export sector right now, and that's exporting some deflation globally. So we worry about Middle East, some of the supply chain pressures because trade has to be rerouted and stuff. But that is a deflationary impulse that, right now, isn't such a bad thing. So a lot of moving parts there, but overall, it's still being quite impactful.
Kim Parlee: How is Canada trending in terms of what it exports to the States?
Derek Burleton: Well, it had been pretty tough sledding for a while for Canada, seeing a real decline, particularly in manufacturing share in terms of exporting to the US. Mexico had been stealing our lunch; China, and other Asian economies. The good news is, for Canada, we've seen that reverse modestly. We've seen about a percentage point increase in market share from the lows of 2017.
So it's been a modest increase, and a lot of it has been oil. I mean, really, it's been an oil story. I mean, food products. A couple of primary metals have helped. Autos haven't helped. We've seen a downtrend. That's where Mexico continues to steal our lunch. So yeah. But overall, some good news. And I do think that MCA agreement - Canada is within the tent in this near shoring, friend shoring trend. And it's helped the economy to scrape off its lows.
Kim Parlee: It's interesting because I was just - again, you detailed in the report, I think, our share of energy imports going into the States went from, I think, 41% in 2017 to 58%. That's pretty high. But Mexico's went up as well, I'll say, in parallel. Not by as much. So this is - again, it's a resource story when it comes to Canada again, it seems. Yeah?
Derek Burleton: It is, and I don't think that's going to change when I look, say, to this year, with Trans Mountain freeing up more capacity, more export. Some of that will make its way down to the US. I think Canada is going to be a leader in oil production. So if anything, our share accelerates in Canada.
I think we've got a reasonably competitive exchange rate. Again, being within the tent, a fairly strong US performance will help. So the export sector within Canada should have a decent year, I think, in 2024.
Kim Parlee: So a decent year in '24 based on that. But when you start thinking about politics - I'm not going to ask you to make a prediction about the election, but tell me just the things you think about in terms of how Canada will perform as an economy in, say, '24, to '25, with this election and the policies that could come from it.
Derek Burleton: Yeah, I mean, it's a big uncertainty, of course. Two very different parties. I think one thing, the deficit doesn't seem to be front and center on either sides, but different policies in terms of tax changes. Some of the tax changes that Trump supports, for example, amount to about a $6 trillion lower tax burden relative to Biden.
Kim Parlee: So very stimulative.
Derek Burleton: Well, because a lot of his tax cuts coming up for renewal, Biden would allow a number of them to lapse. Trump would pretty much renew all of them, plus add to some. So that's one thing. But of course, the trade policies can be quite different.
I mean, we know that Biden - like many countries, they're looking after their own interests first, and there are irritants with Canada. Trump has floated the idea of a 10% across-the-board tariff. Now, whether Canada gets a carve out if he were to take office and actually implement it, it's a very open question at that a stage. And that would be impactful, no doubt.
So these are things that we'll continue to keep our eyes on. Not something I would expect in 2024. But into 2025, we'll see how the policies evolve from here.
Kim Parlee: I have to ask, I mean because when you think about everything you're just saying to me, I just keep thinking that's inflation, that's inflation. That's because you have stimulative economies. You have tariffs. So, I mean, it's sounding sticky.
Derek Burleton: It does sound sticky, which has been an issue, particularly with Canadian inflation. Not a lot of that stickiness is on the shelter side. But we've seen goods - unlike the US, where a lot of their disinflation has been through lower goods prices, Canada has seen their goods prices actually rise, albeit fairly modestly, close to 2%. But yeah, I mean, it's a real worry. I mean, what we don't want is a big wave of tariffs.
I'm an optimist. I do think we've heard if it's Trump, for example, the threats are free to come. We were there in 2016, '17. Some of it was implemented, but a lot of it wasn't, and it was threatened. It keeps economists very busy in Canada.
So all that to say that it's something that, yeah, it's a risk. I think businesses need to start thinking about the potential risks. But he may go a very different route. We'll see.
Kim Parlee: I've only got about a minute left, Derek, but if I were to ask you just to characterize the Canadian economy, though, in terms of where you see the strength, maybe just even across Canada, or where - what's going to be notable for this upcoming year?
Derek Burleton: Well, the employment numbers, we had those out. We seem to have a fairly good, resilient backdrop for employment. Consumers are still going to be shelling out more for mortgages, so not expecting a whole lot of growth out of Canada.
What we need to see is inflation start to come down, and it risks pushing back. We had an April rate cut, but that's certainly looking - particularly after the employment numbers, looking less and less likely. I think the markets have moved on to June. And I do think that's looking more likely.