Potential Impact of Canola Sanctions on the Saskatchewan Economy - September 2024

Potential Impacts of Trade Sanctions on Canadian Canola Exports to China

Introduction

China has initiated an anti-dumping investigation into Canadian canola imports, marking a significant escalation in trade tensions between the two countries.  This move comes in response to Canada's recent announcement of tariffs on Chinese-made electric vehicles (EVs) and other products, which Beijing has described as discriminatory.  The investigation could potentially lead to tariffs on Canadian canola, a key agricultural export valued at approximately CAD $5 billion (USD $3.7 billion) in 2023, making China the second-largest market for Canadian canola after the United States. 

The current trade dispute is rooted in a series of retaliatory measures.  Canada plans to impose a 100% tariff on Chinese EVs starting October 1, 2024, and a 25% tariff on steel and aluminum from October 15, 2024.  In response, China's Ministry of Commerce has indicated it will defend the interests of its companies, through the WTO.  Historically, Canadian canola has faced challenges in the Chinese market.  In 2019, China restricted imports from two major Canadian grain companies due to alleged pest concerns, which coincided with heightened diplomatic tensions following the arrest of Huawei executive Meng Wanzhou in Canada.  This previous ban resulted in significant economic losses for the Canadian canola industry, estimated between CAD $1.54 billion and CAD $2.35 billion.

Economic Impact on Canadian Farmers

The Canola Council of Canada has highlighted that three-quarters of Canada's canola exports go to China. Farmers are now bracing for the potential economic fallout from this investigation, with concerns that it could lead to a significant drop in canola prices and revenue.  Reports suggest that the canola sector could face a hit of up to CAD $1 billion if tariffs are imposed, echoing the financial strain experienced during previous trade disputes. 

Economic Impact on the Saskatchewan Economy

While the above summary of the impact on Canadian farmers remains vague, the following is an attempt to more completely quantify the impact on the provincial economy in terms of output, gross domestic product, jobs, and labour income. 

Results are expressed in current 2023 dollars.  Results, although positive numbers, represent losses to the provincial economy.  For example, potential job losses are 3,817 positions.

The results of this simulation are below:

Direct impacts are confined to the agricultural sector.  Indirect impacts are prominent in the support activities for agriculture and forestry; repair construction; manufacturing; wholesale trade; transportation and warehousing; finance, insurance, real estate, rental and leasing; and professional, scientific, and technical services industries.  Induced impacts represent the additional impacts of consumer spending of wages lost; these impacts are concentrated heavily within the retail trade and service industries. 

Assumptions

-2023 Saskatchewan exports to China of canola seed (HS 1205

- rape or colza seeds, whole and crushed) were $2,011.8 million.-Exports of crop products were reduced by $2,011.8 million in the economic model.

-The Chinese export market is not replaced by another market.

-Saskatchewan producers do not switch to another crop.-$2,011.8 million in lost exports is considered lost production and represents a “worst case” scenario.

Methodology

This analysis presents results based on standard methodologies for estimating economic contributions for sub-national geographies. 

To estimate the impact of lost canola production, Praxis’ provincial economic model was employed which uses the latest provincial and national input-output tables.  An input-output analysis is a form of macroeconomic evaluation based on the interdependencies between different economic sectors or industries.  This method is commonly used for estimating the impacts of positive or negative economic shocks and analyzing the ripple effects throughout an economy.  The Saskatchewan model contains 35 industries and 66 commodities.  These models are based on a standardized method published by Statistics Canada and yield industry-standard results.

In addition to the core model, Praxis has developed several satellite models.   Below are the results of the fiscal satellite model.  Typical economic impact models will only provide results in terms of indirect taxes.  Praxis’ economic impact model extends this to include personal income taxes, corporate and unincorporated business taxes, as well as resource revenues, and excise taxes.  The fiscal module is updated annually upon the release of the federal and provincial government budgets.  

Results are the sum of direct, indirect, and induced impacts of lost canola production.  Direct impact is the total initial output shock. Indirect impact is the secondary impact that includes inter-industry transactions: purchases of inputs from supporting industries.  Induced impact is the additional impact from changes in household spending as industries reduce labour in response to lower levels of demand for output. Gross Output measures total expenditures on local goods and services as well as payments to labour and business profits. Gross domestic product (GDP) measures net economic activity within a prescribed geographic area. It represents the payments made to final factors of production: labour, unincorporated business profits, and other operating surplus (corporate profits, interest income, inventory valuation adjustments, and capital consumption allowances). GDP excludes the value of intermediate goods and services used in production. Direct, indirect, and induced employment impacts are measured in positions.  Labour income includes wages, salaries, and employer contributions to pensions and benefit packages.