What is a trade deficit — and does it matter to the economy?

What is a trade deficit?

On the global stage, countries export some goods and services while importing others. A trade deficit occurs when the dollar value of a country’s imports is more than its exports.

Each country has an overall global trade balance, as well as various balances with other states they buy and sell with — for example, the one between the United States and Canada.

More than $3.5 billion in goods and services cross the border daily, with the U.S. comprising Canada’s closest largest trading partner. More than two-thirds of Canadian trade is with its southern neighbour, and Canada is among America’s top trading partners as well.

What are key factors behind the U.S. trade deficit with Canada?

It mainly boils down to oil. Virtually all of Canada’s crude oil exports and much of its other energy products flow south. Energy exports accounted for more than $177 billion or roughly 28 per cent of Canada’s goods exports to the U.S., according to the federal government.

“If we exclude oil … the U.S. is actually benefiting from this trade relationship,” said Salim Zanzana, an economist at the Royal Bank of Canada.

The idea that an imbalance necessarily hurts a country is misplaced, said Stuart Trew, director of the trade and investment research project at the Canadian Centre for Policy Alternatives.

“This is actually not a problem for the United States,” he said.

“It’s actually creating jobs in the United States … Most of the oil we send to the United States, at least from Alberta, is refined in U.S. refineries employing thousands of people. And that is then turned into products like plastics, like chemicals, like fuels — also in the United States.

“The other thing is that they need that oil,” he added.

That sentiment enjoys support from Alberta Premier Danielle Smith, who posted a similar argument on X in response to Trump.

“Canada (especially Alberta) sends billions of raw materials (oil, gas, minerals, grain, livestock, timber, etc) to your U.S. refineries and factories which your great American companies and workers upgrade and sell around the world, including back to Canada (we are your biggest customer by a mile),” she wrote.

“Literally millions of good paying American jobs and companies rely on these affordable raw materials from Canada to make trillions of dollars of wealth in your country.”

Does a trade deficit mean the country’s economy is weak?

Trump has both suggested that Canada’s trade surplus with the U.S. is a point of pride for Canadians — “they were bragging and got caught!” he said in a Twitter post in 2018 — and a point of shame: “we subsidize Canada…”

But experts say a trade deficit or surplus is not in itself good or bad.

The focus should be on overall trade and investment between countries, Trew said. If cross-border trade goes up, as it has for decades, both nations can benefit. Each can leverage their comparative advantage in different areas — crude oil in Canada and machinery production in the U.S., for example — while closely integrating their supply chains in other fields such as automotive manufacturing.

“They export way more services to us,” Trew noted. “You turn on Netflix, you turn on Amazon Prime. It’s not problematic.”

He qualified that the massive imbalance in goods trade with China is an issue “if your goal is to enhance your manufacturing capacity,” since cheaper Chinese-made consumer products can undercut American suppliers.

Why is this not as simple as winners and losers?

Observers suggest Trump is using the trade gap as a pretext to raise tariffs or gain leverage in negotiations around the Canada-U.S.-Mexico free-trade agreement.

“Mr. Trump’s method is pretty well known. You hit the other side over the head, force them to react and maybe make concessions, and then you negotiate,” said former Quebec premier Jean Charest, now a partner at the Therrien Couture Joli-Coeur law firm, in an interview on Wednesday.

Trump has threatened to impose 25 per cent tariffs on all goods from Canada unless it stops the flow of migrants and illegal drugs into the U.S.

Charest stressed the tightly braided supply chains in auto and other manufacturing sectors.

“If you put a tariff on it, you’re really putting a tariff on yourself,” Charest said. “Components that go into building cars may cross the border up to seven times until the final building of a car.”

What are the ramifications of Trump’s fixation on trade gaps and tariffs?

If the incoming president sees trade gaps as an imbalance to be corrected — or compensated for — the ripple effects would be far-reaching.

“It could spread to non-trading industries,” Zanzana said of potential tariffs. “There’s also a risk of retaliatory tariffs, which Canada has done in response to previous tariffs on steel and aluminum.”

He also cited lower growth, higher inflation, weaker business investment and greater uncertainty as likely outcomes.

Zanzana framed a trade deficit as a form of borrowing. Since the value of imports amounts to less than can be bought out of export sales, “that shortfall needs to be made up for by selling assets or borrowing abroad,” he said.

“Balancing the trade gap, therefore, would essentially require re-balancing economy-wide net borrowing, and the biggest net borrower in the economy is — surprise, surprise — the federal government.”

Achieving that goal would be “very hard” given U.S. federal deficit levels already stand near record highs, he said.

Charest said Trump’s social media post underscores the need to diversify trade rather than remain “captive to a single American client.”

“I don’t think it’s useful for us to engage with Mr. Trump on the abrasiveness side,” he said.

“But he does shed light in a brutal way on the fact that we as a country have to rise above the circumstances in which we are now and redefine our place relative to the United States, relative to the rest of the world.”

This report by The Canadian Press was first published Dec. 18, 2024.

Christopher Reynolds, The Canadian Press

by Canadian Press

What is a trade deficit — and does it matter to the economy?

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