Trade Deficits with America - Who is to Blame?

An interesting analysis by Brad Setser, a Senior Fellow at the Council on Foreign Relations looks at the recent trade kerfuffle between Canada and the United States and helps us put all of the Trump Administration's trade threats into perspective.  This is particularly critical given the ongoing NAFTA renegotiations that will likely see significant changes to the decades-old three country trade deal. 

First, Dr. Setser looks at overall trade in both goods and services with Canada (blue and red lines respectively) and compares the two Canadian trade factors with overall U.S. trade when both goods and services trade is measured as a share of U.S. GDP:

As you can see, when you consider the trade in both goods and services, U.S. trade with Canada is basically balanced with the positive trade balance in services balancing the negative trade balance in goods.

Dr. Setser goes on to look at a breakdown of bilateral goods and services trade balances for Canada, Japan, Europe, Mexico and China/Hong Kong, again, as a share of U.S. GDP:

Quite clearly, the tiny grey-filled area on the graph shows that a U.S. trade deficit with Canada is the least of America's problems.  The trade deficits with Japan, Europe, Mexico and especially China/Hong Kong are far higher.

As he did during the election (either deliberately or by accident), Donald Trump has repeatedly claimed that his mandate is to ensure that manufacturing jobs increase in the United States.  His recent tweet about car manufacturing...

Based on Justin’s false statements at his news conference, and the fact that Canada is charging massive Tariffs to our U.S. farmers, workers and companies, I have instructed our U.S. Reps not to endorse the Communique as we look at Tariffs on automobiles flooding the U.S. Market!

— Donald J. Trump (@realDonaldTrump) June 9, 2018

 

...being but one example.  According to Dr. Setser's analysis, the overall manufacturing sector deficit with Canada is not a problem as shown here (the dark dashed line), particularly when compared to Mexico, China/Hong Kong, Japan, South Korea/Singapore/Taiwan and the rest of the world:

Certainly, the United States has suffered from the rusting of its manufacturing belt which has resulted in this:

...however, most of the blame can be laid at the feet of China's accession to the World Trade Organization in 2001, a move that was largely pushed by the Clinton Administration as shown here:

You've got to love the fact that 1999 Bill Clinton clearly states that China will have no new access for their exports to American markets beyond what they already have.

Dr. Setser notes one area where the United States really benefits from Canada; oil.  Canada's oil production is primarily sources from Saskatchewan, Alberta and British Columbia and very little of it is exported to world markets outside of the United States (at least until the TransMountain pipeline is built and Canadian oil is exported to Asia).  As shown on this graph, a very significant portion of Canadian oil is sold to the United States for prices that are far below world prices (West Texas Intermediate), directly benefitting the United States consumers and overall economy:

Funny how Donald Trump seems to never mention that, isn't it?

Let's close with this final U.S. goods trade tally for 2017 from the Bureau of Economic Analysis.  Here is a list of nations/regions with which the United States has a positive goods trade balance (surplus) in billions of dollars:

South and Central America - $34.3

Hong Kong - $32.5

Netherlands - $24.5

Belgium - $14.8

Australia - $14.6

The United States had negative goods trade balances (deficits) with the following nations, again, in billions of dollars:

China - $375.2

European Union - $151.4

Mexico - $71.1

Japan - $68.8

Germany - $64.3

Ireland - $38.1

Italy - $31.6

Malaysia - $24.6

India - $22.9

South Korea - $22.9

Thailand - $20.4

Canada - $17.6

Taiwan - $16.7

France - $15.3

Switzerland - $14.3

Indonesia - $13.3

OPEC - $13.0

So, why not pick on Malaysia, Italy or Ireland, all three of which have goods trade surpluses that are far in excess of what Canada has with the United States?  The biggest problem is trade with China; in 2017, the trade deficit with China increase by $28.2 billion on a year-over-year basis with American exports to China increasing by only $14.8 billion to $130.4 billion and imports from China to the United States increasing by a very substantial $43 billion to $505.6 billion.

Picking on Canada over international trade is, however, like shooting fish in a barrel.  It's easy to do but is really not that much fun in the long run.  While Canada may contribute a small amount to the U.S. trade deficit issue, it's contribution pales into insignificance compared to that of other advanced and less advanced economies.