Does the US have a trade deficit with Canada?
Donald Trump loves to hate trade deficits. And he loves to hate what he claims is the US trade deficit with Canada. The problem is that’s something Canadian prime minister Justin Trudeau denies having.*
The latest flare-up came in a presidential tweet on Wednesday, after it was reported that Mr Trump simply made up the claim about the deficit in a meeting with Mr Trudeau. “I had no idea, I just said ‘you’re wrong’,” Mr Trump recounted to attendees at a fundraising dinner this week, according to a transcript reported by the Washington Post.
The tweet prompted a quick retort from pundits in Washington that US trade data showed the US had a surplus, not a deficit, with Canada.*
But it turns out things are not that simple. It depends on whose data you rely on and what you call a trade deficit.*
Here are three points:
Yes,
US trade data show that the US had a trade surplus with Canada last year
According to figures released by the US Commerce Department last week the US in 2017 had a trade surplus in goods and services of $2.8bn.*
But that was largely thanks to a $25.9bn US surplus in services, which
range from financial services to tourism. That offset a $23.1bn deficit in goods, which is what Mr Trump has tended to focus on.*
The overall surplus was also down from $7.7bn in 2016, though the US trade representative’s office complicates things by putting the 2016 surplus at $12.5bn, underscoring the existence of varying methodologies even within the US government.
Canada’s own trade data appear to prove Mr Trump’s claim
This is where things get interesting. There is actually a very real discrepancy between US and Canadian trade data, which show Canada running a much larger surplus in goods with the US than US data does.*
And if you take Canadian data at face value, Mr Trump appears to be right.*
According to its official balance of payments statistics, Canada last year had a goods and services surplus with the US of C$26.8bn (in US dollars, $20.5bn).
Canada’s official trade data show a much larger deficit in goods of*C$89.2bn (US$68.3bn at today’s exchange rate).
But that picture is complicated by the question of re-exports, or goods from third countries that are passing through Canada on their way to the US (which is something US officials argue distorts their data as well).
Canada does have a trade deficit in services with the US, however. Last year it was worth C$13.7bn.
Economists really wish Trump didn’t care about this
There are few things that annoy economists more than President Trump’s obsession with trade deficits or his conviction that he can reduce them via his embrace of protectionism.
A country’s trade balance is the result of many different things, ranging from the value of its currency to its standing as an investment destination in the world. Macroeconomic policy, economists point out, often has a bigger impact on trade balances than trade policy.
Traditional trade data are also bad at reflecting the realities of the global economy today. In a world of global supply chains where imports of parts often leave countries as value-added exports of final products, and services are an increasingly important and misunderstood component, old fashioned trade data just doesn’t cut the mustard. That is why economists at the Organisation for Economic Co-operation and Development have been working for years on data that better reflect the value-added trade in goods around the world.*
The US also has a unique relationship with its trade balance because of its position in the world. The fact that the dollar is a reserve currency and that US capital markets attract foreign investors is one driver of the deficit. Ironically, the tax cuts that Mr Trump championed — which will increase the US’s fiscal deficit and the US government’s need to borrow to fund it — are likely to have more of an impact on the trade deficit in 2018 than any trade policy moves.*
Another deficit driver is the fact that US consumers save less than those in China and other countries and have an insatiable appetite for things like cheap consumer electronics.*
A narrowing of the trade deficit also tends to be a sign of bad economic times in the US. The last time the US deficit narrowed sharply was in 2009 in the wake of the global financial crisis.*The last time the US ran a*trade surplus with the world was 1975.
And finally: Mr Trump’s own metrics aren’t going his way.
The US trade deficit actually increased by 12.1 per cent in his first year in office — something he has regularly declined to mention.*
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