Written by Anne Redding
Europe’s financial crisis was the focal point of the 2012 G20 Summit, which was held in Cabo San Lucas last month. Following the Summit and the related news that Greece remained committed to upholding its third-party bail out conditions, Canada’s Prime Minister, Stephen Harper, issued the following statement:
"I am convinced that European leaders fully understand what needs to be done. The issue is now acting quickly and dramatically to actually take those steps."
This represented a cautionary, yet positive, response by the Canadian PM, who left the Summit against the backdrop of European trade negotiations and armed with an invitation to join Pacific Trade Talks. It was a response that was mirrored, to a large extent, by US Treasury Secretary Tim Geithner and UK Prime Minister David Cameron (the UK is one of the ten European countries to have remained out with the Eurozone).
Synopsis of Canada’s Trade Patterns
The Canadian economy is structured around its service industries. Canada’s levels of international trade in natural resources are, however, unusually high given its developed economy. In brief, Canada’s 2009 trading figures showed that energy, agricultural, mining and forestry exports accounted for approximately 58 percent of its total exports. Further; machinery, automotive products, equipment and other manufactures accounted for 38 percent. In 2009, Canada’s exports represented approximately 30 percent of its GDP.
Canada’s Trade Agreement with the US
Traditionally, Canadian governments have been keen to drive forward Canadian trade agreements. Most notably, since 1987, Canada has been party to a Canada-United States Free Trade Agreement. The economic impact of this well documented agreement, which was welcomed by free market economists, is hard to quantify. Success is determined, in part, by relative current values of each respective currency. Since the agreement, however, it is undisputed that Canada-US trade has increased. By the 1990s, Canada-US exports represented approximately 40 percent of GDP. This figure rose to closer to 50 percent in the 2000s.
Update on the Status of Current Trade Negotiations – Morocco and Costa Rica
On June 22nd, the conclusion of the third round of talks surrounding a trade agreement between Canada and Morocco was announced. The importance of the Moroccan market to Canadian trade is significant because of its projected economic growth, estimated at 4.3 percent by 2013. In 2011, bilateral merchandise trade between the two countries constituted nearly $420 million, with Canadian exports valued at $300 million. Should an agreement be reached, it would constitute Canada’s first with an African Nation. As per the Honourable Ed Fast, it would "serve as a gateway to deeper Canadian commercial presence in North Africa and the Mediterranean region."
On June 15th, Ed Fast announced the successful conclusion of the fourth round of talks between Canada and Costa Rica. Talks were aimed at modernizing the Canada-Costa Rica Free Trade Agreement. It is the aim of these talks to encompass, within the agreement, provisions relating to trade in services, government procurement, investments and financial services.
"Deepening Canada’s trade and investment in the Americas is a priority for our government," said Fast. "We have concluded agreements with the United States, Mexico, Peru, Columbia and Panama, and most recently with Honduras. To help us create jobs, growth and prosperity for hard working Canadians, and our trading partners, we will continue to build on this success with Costa Rica and with high growth markets throughout the hemisphere."
Trading with the European Union
The EU is a key trading partner for Canada, second only to the US. Canadian trade with the EU accounts for 10.4 percent of total external trade. In 2011, the total value of bilateral trade in goods constituted 52.5 billion Euros. Trade in services, particularly transportation and travel, is key.
Canada and the EU have been party to the Framework Agreement for Commercial and Economic Co-operation since 1976. Subsequently, this agreement has been strengthened by further bilateral agreements such as the Veterinary Agreement (1999) and the Civil Aviation Safety Agreement (2009).
In 2007, Canada and Europe agreed to take steps to further strengthen their agreement. In light of European Economic difficulties, this agreement remains pending.
Euro Crisis: Caution over Further Trade Deals
Prior to G20, the Bank of Canada warned Canadians over the potential impact of the deepening European financial crisis upon the sustainability of the Canadian economy. The bank stated:
"If sovereign debt in Europe continues to intensify, it would further weaken global economic growth and prompt a general retrenchment from risk. In turn, the weaker global outlook would fuel sovereign fiscal strains and impair the credit quality of loan portfolios. Together these factors would increase the probability of an adverse shock to the income of wealth of Canadian households."
Understanding the Risk to Canadians
Pivotal to the bank’s concerns are two key factors; inflated house prices and high levels household debt. These factors, they believe, could increase economic and trade vulnerability should there be a catastrophic financial shock in Europe.
The bank observed that, since 2008, Canada has continued to see artificial inflation in house prices, thus is vulnerable to high levels of price correction. This is particularly the case within certain urban areas and with certain types of housing stock (e.g. condominiums) due to oversupply. Where mortgage loans have been secured over property, the bank has noted that approximately 40 percent of Canadian household worth is currently directly linked to real estate values. Ten years ago this figure was only 34 percent.
Rising levels of household unsecured debts also stand to threaten Canadian banks. This is because, whilst banks insure against the majority of their mortgage products, this is not the case for unsecured loans
. For each of the six largest Canadian banks, unsecured debt represents between 6 percent and 15 percent of total managed assets. When this figure is considered within the context of additional uninsured mortgages, total uninsured debt for these banks' managed assets constitutes between 14 percent and 24 percent.
As the asset mix of each bank is distinct, so too is the potential impact of such high levels of uninsured debt. At 24 percent, the Bank of Canada has the highest level of unsecured debt compared with assets, with non-mortgage consumer debt making up 11 percent of that figure.
About the Author: Anne Redding is a freelance finance writer from London, England who specializes in international trade and stock market writing for a number of business journals. One of her favorite memories from traveling in her early 20s was the train through the Rockies in Canada.