Assessing Shifts in Canada's Competitive Exposure in Its Home Markets: How Much Does China Matter?

EXECUTIVE SUMMARY Using the Market Overlap Measure statistic of Sawchuk and Yerger (2006), this research measures more precisely than has any prior research changes the past several years in the relative importance of Canada as a supplier for its home markets, and the rising importance of China vis-a-vis other Canadian trading partners. We first identify those industries most responsible for Canada's current exposure to China. We then identify the key industries driving Canada's increased exposure to China in recent years and find important differences in these two industry sets consistent with China's ongoing gains in the technological sophistication of its exports. Keywords: Canada, China, Competitive Exposure, Market Overlap FOCUS OF STUDY This paper seeks to better understand the changes that have occurred in Canadian-based firms' exposure to China, and other nations as well, on sales in Canadian home markets. By systematically and comprehensively comparing the impact of shifting market shares within Canada from 1993 to 2003, at a detailed industry level, we can better assess the extent to which China's aggregate Canadian market penetration implies a rising exposure for Canadian-based firms to China in Canadian home market sales. In addition, a deeper understanding of recent patterns of shifting market shares may facilitate more informed speculation regarding Canada's evolving future exposure to China in Canadian home market sales. The specific contributions of this paper are as follows. First, at the national level for Canada, this research will measure more precisely than has any prior research the changes over the past several years in the relative importance of Canada as a supplier for its home markets, and the rising importance of China vis-a-vis other Canadian trading partners such as the United States, Mexico, the European Union nations and other Asian countries. The study builds upon the novel approach introduced in Sawchuk and Yerger (2006) to do away with both the ad hoc nature of existing analyses and potentially misleading applications of similarity indices. Following Sawchuk and Yerger (2006), we instead use the recently developed measure of the market overlap exposure between nations, the Market Overlap Measure or MOM, to track the changes in Canada's exposure to China in Canadian home markets. The paper's second contribution focuses upon key industries driving Canada's exposure to China in Canadian home markets. We first identify those industries most responsible for Canada's current exposure to China. Next, we identify the key industries driving Canada's increased exposure to China in recent years. We find important differences in these two industry sets consistent with China's ongoing gains in the technological sophistication of its exports. BACKGROUND INFORMATION ON CANADIAN HOME-MARKET SALES China's Aggregate Growth in Canadian Markets This project matched Canadian export and import data at the three and four-digit NAIC industry sector level with Canadian production data over 61 different NAIC sectors (five at the three-digit NAIC and 56 at the four-digit NAIC level). The aggregate market share values reported in Table 1 are simply the nation's total sales in Canada divided by the total size of the Canadian markets summed across these 61 sectors having imports. Due to slight changes in the methodology for collecting Canadian shipments data, direct comparisons of changes from 1999 to 2000 are problematic. Instead, we will focus upon changes from 1993-1999 and from 2000-2003. The key patterns remain clear, however, even with the potential discontinuity between 1999 and 2000. The 1990's reflect the growing impact of NAFTA upon Canadian production and trade patterns. Canada's increasing levels of both exports and imports postNAFTA is reflected in Canada's decline of 11.4 percentage points in its home market share from 1993 to 1999. At this aggregate level, most of the decline in Canadian home market share was captured Canada's NAFTA partners as the United States and Mexican market shares rose 7. …

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