Western Canada's Economic Relationship with Lac

Trade Patterns

Canadian Activity
Trade flow between Canada and LAC continues to grow at a rate well above the global average. Canadian exports to the region have increased by 82.8% between 2003 and 2007 compared to an 18.5% increase in total Canadian exports to all countries. In 2007, Canada's exports of goods to LAC amounted to $5.87 billion, down 31.5% from a record high of $8.40 billion in 2005. Canadian exports are comprised of 40% commodities and 60% semi-finished and fully finished products. Figure 1 illustrates the regional breakdown of Canadian exports to Latin America in which Western Canada accounts for 37% of the national total.

Figure 1: 2007 Canadian Exports to LAC

Western Canadian Activity
2007, the value of exports to LAC from Western Canada was $2.19 billion compared to $1.4 billion in 2003. Although the total value of exports indicate sufficient growth, the share of Western Canada's total exports accounted for by the LAC region has remained relatively steady, increasing from 1.33% to 1.53%. In comparison, the share to LAC from the rest of Canada increased from 0.73% to 1.34% in the same five-year period.

Figure 2 illustrates the growth of Canadian exports to Latin America. The annual percentage growth rate from 2003 to 2007 for Western Canada is 11.35% compared to the rest of Canada (ROC) at 20.56%. However, the average annual percentage growth rate between 1998 to 2007 for Western Canada and the rest of Canada are very similar at 3.26% and 3.28% respectively. This indicates that although the LAC region provides substantial market potential for Western Canadian commodity exports, in the past five years the rest of Canada has been successful in increasing merchandise exports in machinery and equipment, building materials, consumer goods, and food products to the LAC region. It is expected that the dollar value increase in Canadian exports may be attributed to an increase in commodity prices more so than a substantial increase in export volume.

Figure 2: Growth of Exports to LAC

Exports from the four resource rich Western provinces are heavily inclusive of commodities and agricultural equipment. Wheat is the top export product from the Prairie Provinces and Canada as a whole accounting for approximately 20% of the total export value to Latin America from Western Canada. Over the past five years, Saskatchewan has had the greatest presence in the LAC region largely due to increased demand in wheat and other grains and potash for fertilizer. Alberta's exports to LAC include oil, mining, and gas field manufacturing machinery as well as raw materials such as wheat, crude oil and natural gas. British Columbia's dominance in the mining and paper mill industries has generated exports of minerals and paper products to the LAC region. Manitoba's trade presence in Latin America is less significant than the other Western provinces. Exports include agricultural food products and manufacturing materials. Western Canada's availability of an abundance of natural resources will enable continued export growth to the LAC region.

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Figure 3: Western Canada's Exports to LAC ⁵

Western Canada's top 10 LAC export markets are illustrated in Figure 4. Brazil, Canada's largest trading partner represents 27.2% of the total Western Canadian export revenue from LAC in 2007. The Canada-Chile Free Trade Agreement has assisted in a 134% increase in exports from Western Canada to Chile in the past ten years since its inception. In the past five years export of Western Canadian products has increased the most to Venezuela, Peru, Argentina, and Colombia. Further negotiations of Free Trade Agreements with the Andean (Bolivia, Colombia, Ecuador, and Peru) community countries, Central America Four (El Salvador, Nicaragua, Guatemala and Honduras), and the Caribbean will further promote Western Canadian trade to Latin America.

Figure 4: Top 10 LAC Export Countries ⁶

Investment Patterns

LAC is experiencing strong economic growth and numerous major infrastructure projects are underway or planned. As a result there are huge infrastructure investment requirements and opportunities in sectors such as power and hospitals, ICT, oil and gas, agri-food, forestry, and bio-energy. Canadian firms are extending their reach into LAC and taking advantage of the region's growing economic opportunities through increased investment.

In the LAC market Canadian firms have to undertake supply chain investment in order to protect and grow market share. A case in point is Brazil, a country of high tariffs on both agricultural and manufactured products. The Brazilian tariffs on manufactured products, as of 2004, averaged about 13%⁷. Canadian companies can access the market in a substantial manner only through investment and joint ventures. For example, Brazil has numerous home grown mining equipment suppliers, less capable than their Canadian counterparts, and if Canadian companies wish to do business they need to joint venture with Brazilian counterparts.

Figure 5 illustrates the growth in Canadian Direct Investment Abroad (CDIA) in South and Central America over the past decade.⁸

Canadian private sector investment in the LAC region has grown substantially over the last decade. Canadian Direct Investment Abroad (CDIA) to South and Central America has grown from $7.9 billon in 1995 to $23.1 billion in 2006. In 2006, South and Central America accounted for 4.4% of Canada's total CDIA, down slightly from 4.9% in 1996. For comparison purposes, Asia/Oceania accounted for 6.5% of Canada's total CDIA in 2006.

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Figure 5: CDIA in South and Central America ⁹

Table 2 illustrates the importance of selected South and Central American countries, with Brazil and Chile standing out, as destinations for Canadian investment.

According to EDC, the following markets are best suited for Canadian investment: Brazil, Chile, Peru, Dominican Republic, Trinidad, Panama, and Colombia. Venezuela has been traditionally important for Canada, but political developments are complicating the existing and potential investment relationship.

Brazil
Canada is increasingly on Brazil's radar screen as a desirable investment location with several of Brazil's most prominent multinationals now established in Canada. Canada was Brazil's number one destination for outward investment in 2006, largely due to the recent acquisition of Canadian mining giant Inco by Brazilian-owned CVRD (Companhia Vale do Rio Doce). That single transaction created one of the top three diversified mining companies in the world and boosted Canada's stock of investment from Brazil to approximately $23 billion¹¹. Other examples of foreign direct investment to Canada from Brazilian interests includes Labatt's, St. Mary's Cement, and Nova Steel.

Table 3 illustrates how investment patterns have increased bilaterally between Canada and Brazil, with notably strong recent increases in Brazilian investment into Canada. Seventy percent of Canadian investments in Brazil are supported by EDC. Since 2006, EDC has also been involved in facilitating Brazilian purchases of Canadian assets, based on the rationale that the resulting growth of companies contributes to greater exports of Canadian goods and services and related investments.

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Caribbean
The Caribbean is a very large recipient of Canadian investment. Most Canadian investment in the region is directed towards the financial service sector. The tax-friendly jurisdictions of Barbados, Bermuda, and the Cayman Islands are major destinations for CDIA. There has been significant investment in Trinidad and Tobago's energy sector.

Other LAC Countries/Regions
Canada's key investments in the Andean region¹³ include natural resources (especially oil) and telecommunications development. Canada's foreign direct investment in Peru is primarily in mining, hydro-electrical transmission, and banking. Canada is heavily invested in Colombia's oil and telecommunications sectors. In Chile, Canada directs most of its investment to mining, energy, and information technology. In Argentina, Canada's investment focuses on natural resources specifically petroleum and is also involved in the telecommunications, agri-business, mining, and energy sectors. ¹⁴