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A textile mill in Huaibei, China. Canada has generally lost market share in the U.S. in manufacturing industries, such as textiles.

REUTERS

North American trading patterns are changing and the key is China.

Canada is losing market share in the United States to China, and Chinese imports are accounting for a growing share of Canadian consumption and imports.

But the Chinese market also provides massive opportunities for Canadian firms, and they have begun to take advantage of those. What we are seeing is the development of a new trade equilibrium between China, Canada and the United States.

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The 2000s were a lost decade for Canadian exports to the United States; the value of exports today is actually less than it was in 2001. The high Canadian dollar often gets the blame, but it is not the major cause. A strong Canadian dollar makes imports from the United States cheaper, so if the exchange rate was so crucial, imports of U.S. goods and services should have grown as the loonie rose. In fact, Canada's imports from the United States have also changed little since 2001, and the United States has lost market share in Canada across a wide variety of industries.

In short, Canada and the United States are becoming less dependent on one another, and, in most cases, China is the X factor. The Conference Board of Canada discusses these trends, their causes and implications in its recently published report, Walking the Silk Road: Understanding Canada's Changing Trade Patterns.

The most resilient industries in terms of Canada's share of U.S. imports are generally service industries. A highly educated work force, similar cultures, and a shared language have helped Canadian firms maintain their competitive position in the U.S. market. In contrast, Canada has generally lost the largest market share in manufacturing industries where labour is a major share of total costs, such as furniture manufacturing, printing and textiles. Industry specific issues can be an additional factor, such as the shift in consumer demand for flooring and cabinets away from traditional hardwood products toward those made from bamboo or more exotic hardwoods.

The same pattern shows up when examining the U.S. share of Canadian imports. At the top of the list in terms of declining U.S. market share are industries such as electronic products, textiles, furniture and printed materials – one guess where these products are now coming from. At the same time, many of these industries have also experienced an increase in the share of domestic demand being met by imports. Thus, China has established itself as a key supplier of particular types of goods to both Canada and the United States.

Because of China's emergence in the world economy, many of the changes in Canadian trade patterns over the past decade would have occurred regardless of the value of the dollar, although the rise in the loonie has likely accelerated the pace of change. As well, Canadian policy makers have very limited influence on the value of the currency. Given this, managing the value of the dollar as a policy tool to revitalize affected industries would be difficult and unlikely to be successful.

Instead, the China effect on Canada's trade should be seen through a different lens. China is more than just a threat; it represents a massive opportunity for Canadian firms, in more sectors than just natural resources. Key exports to China include products such as canola, minerals, lumber and pulp. But they also include chemicals, plastic resins, aerospace products and certain types of machinery.

The benefits of trade are still in force, whether the partner is across the border or across the ocean. Canadian policy makers need to open doors to China, and help firms to navigate a challenging market where government-to-government relationships are crucial. And Canadian companies need to enter the doors that open. While many firms have begun to take advantage of these opportunities, there is still considerable room for growth along the new silk road.

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Join the conversation on Canada's competitiveness by following Canada Competes on Twitter:@CanadaCompetes

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