Report prepared by Statistics Canada  for the Regional Workshop on Country Practices in Compilation of International Merchandise Trade Statistics,  7-11 May 2007, Lima, Peru

The international import and export prices program was established over thirty years ago. At the time, exchange rates were relatively stable, total imports and exports represented around 20% of total economic activity, the bulk of Canada’s exports consisted of resource-based commodities and most of our imports came from the United States and the United Kingdom. Given those economic realities, the import and export price indices were constructed using unit values, US domestic prices (as a proxy for import prices) and domestic prices (as a proxy for export prices).

Since 1970 Canada’s economic landscape has changed significantly. The share of imports and exports as a
percentage of GDP topped 45% in 2001. The commodity composition of Canada’s trade has also undergone a marked transformation as Canadian exports can no longer simply be categorized as exports of lumber, wheat, fish and iron ore. Goods such as aircraft, circuit boards, computers, industrial equipment, chemicals, plastics and pharmaceutical products must be mentioned in the same breath. As the nature of Canada’s trade has evolved over the last 30 years, so has the behaviour of the exchange rate. The average absolute yearly change in the Canada-US exchange rate in the 1970’s was 2.6% compared with 6.2% so far this decade. Finally, Canada’s trading partners are becoming increasingly diverse. Today a growing share of Canada’s imports come from countries such as China and Japan and Thailand.

This evolution in Canadian international trade has led to a questioning of the assumptions which underlie the import and export prices program. While unit value based indexes may have been appropriate in the past they are becoming less meaningful as a measure of import and export price change in today’s environment. Given increasing market specialization it is no longer correct to assume that import and export prices will behave in the same manner as domestic prices. With the changing origin of Canada’s imports, we need to account for other exchange rate fluctuations than those with the US dollar.

With the growing volatility of the exchange rate it is becoming more and more important that we understand
and quantify exchange rate pass through and how prices react to changes in the international marketplace. Since 2003 large BOP adjustments have been made to the real export series because the domestic prices that underlie our export price indexes have not properly captured Canadian business’ reaction to the appreciation in the Canada-US exchange rate. Over the last two years Canadian businesses have had to reduce the price they charge foreigners for their goods in order to remain competitive in the international market place. The domestic price based export indexes have not been able to capture this phenomenon and in order to ensure a proper accounting of real exports has led to a large BOP adjustment within the quarterly income and expenditure accounts. Continued adjustments such as this could lead users to lose confidence in our estimate of real exports and imports.

While Statistics Canada has continued to increase the number of import and export prices it collects, much of this work has been accomplished by modifying existing programs or partnering in new initiatives. While this effort has improved the quality of the import and export price index, there are serious data gaps and data quality issues that need to be addressed.

The proposed project aims to re-tool our import and export price index and establish an international prices program within the context of Statistics Canada’s overall price program.

Full meeting document available here and also in the attachments.