The rapid evolution of certain macroeconomic variables (the rising Canadian loony, the collapse of the U.S. real estate market, and increasing oil prices) influencing Québec’s agriculture remind us of our interdependency with the world economy.

Throughout history, Canada has turned to the United States for a very large share of its overall trade dealings. Our neighbour to the south has the advantage of being relatively close and another advantage is that it is also one of the largest creditworthy consumer markets on the planet. However, the currently ascending economic influence of countries such as China and India leads us to predict a greater diversification of the world economy. This context could, in theory, allow Canada to reduce its economic dependency on the USA. In fact, internationalization, supported by significant technological gains in terms of communications and transportation, encourages the creation of new economic links among the different countries.

Through the game of interdependency, trade internationalization may well have the opposite effect, and that means further solidifying our economic relationship with the United States, which is not necessarily a good thing within the current U.S. context.

Let’s take a closer look at this situation. The diagram below illustrates the economic relationships that bind Canada, China and the United States. The width of the arrows reflect the relative significance of the relationship (interdependence) for the start country, while the figure, in billions of dollars, shows the level of exports in 2006. China exports 287 billion dollars towards the United States, while Americans export 42 billion dollars toward China. As to the width of the arrows, the relationship established from the USA to Chain is thin, because in the event China decided to stop importing from America they would barely notice the change. Inversely, if Americans ended all imports from China, the latter would certainly feel it, as indicated by the width of the arrow. Please note that China exports more to Canada ($22 billion) than we export to China ($8 billion), our interdependency is more significant than theirs. This can be explained by the fact that China buys a lots of raw material from international markets, which directly influences the price and demand for raw material from Canada.

The diagram also shows us that China is on the verge of beating us as the most important exporter to the U.S. In fact, the economic interdependency between China and the USA is growing in magnitude. In addition to a trade surplus of 245 billion dollars with the United States, China is the second main bearer of America’s external debt with a reserve of one billion billion US dollars. And this brings us to the “double whammy” hypothesis.

Thus, as our diagram clearly shows, an American recession hits the Canadian economy like a pie in the face (whammy # 1), remember the adage “when the U.S. sneezes, Canada catches a cold”. However, what is new is that an American recession could also seriously affect China’s economy. A weaker Chinese economy means lower demand for raw material, which then influences the Canadian economy (whammy #2). The American economy is currently in trouble and the probabilities of a U.S. recession are high. So, Québec’s agri-food business should start making sure it has lots of room to manoeuvre to face a potential “double whammy”.

Professor Doyon

Maurice Doyon is an Associate Professor and Graduate Program Chair, Department of Agricultural Economics and Consumer Science, Université Laval. He is also a member of the Centre de Recherche en Économie agroalimentaire (CRÉA) with that same department, auxiliary professor with the University of Maine, associate researcher with the Centre interuniversitaire de recherche en analyse des organisations in Montréal and associate researcher with the Neutraceuticals and Functional Foods Institute (NIAF). Furthermore, he holds a doctorate degree in Applied Economics from Cornell University, as well as a Master’s degree from this same institution. Mr. Doyon has received over fifteen grants and merits throughout his distinguished academic career.