O Canada

I’m among the subset of economists who worries about the U.S. trade deficit. I have even argued that America’s allies—not China—now account for the bulk of the world’s trade surplus, and changes to their fiscal and currency policies have to be a part of any sustained reduction in the overall U.S. trade deficit.*

And I’m baffled by Trump’s focus on Canada.

Yes, Canada has some high tariffs on a few specific commodities. And by and large Canada’s instances of protection are directed against the U.S. The U.S. has some sectors that it protects too. That’s all part of the “embedded liberalism” compromise.

I also tracked the negotiations over a new NAFTA somewhat closely, so I was aware of the building tension between Canada and the United States.

But on every metric that the U.S. should care about Canada is one of the good guys.

Trump claims to care about the bilateral balance. Yet trade with Canada is basically balanced. Look at the U.S. data on trade in goods, or on trade in goods and services.  There are other, much more obvious targets** ...

Trump claims to care about U.S. manufacturing. Yet, Canada is one the rare countries where the U.S. runs a substantial surplus in manufactures. 

In fact, the U.S. increasingly imports energy and other resources from Canada in exchange for manufactures. And since a lot of Canada’s oil is “trapped” by the Rocky mountains and has no signficant outlet to global markets without traversing the U.S. pipeline network, the U.S. gets that oil on really good terms too. (Check out exhibit 17b of the annual trade release. The average price of oil imports from Canada in 2017 was in the low 40s, well below global benchmarks — helping to keep the overall U.S. oil import price down).***

So when it comes to trade with Canada, there is a good case that the U.S. is the one now winning.

Trump hasn’t ever really focused on global current account imbalances—that’s too diplomatic a term for his taste. But on that metric too, Canada is on the side of the angels. It runs an overall current account deficit of about 3% of its GDP. 

Canada's overall external deficit takes some of the pressure off the U.S. to generate the demand needed to offset the still large surpluses of Japan, Korea, Taiwan, most of Europe, and yes, China.

So tell me again, what’s the strategy here? Why Canada?

This simply isn’t the fight the U.S. should be fighting.

*/ The bilateral U.S. balance with China overstates China’s contribution to the overall global current account imbalance and the U.S. trade deficit, as China’s surplus has embedded in it a decent amount of Korea, Japanese, and Taiwanese content. Conversely, the bilateral data with Korea, Taiwan, and to a lesser degree Japan understates their contribution to aggregate imbalances. That said, the bilateral data isn’t entirely divorced from the aggregate data—with both Asia and Europe running overall surpluses, the world needs a sizeable U.S. deficit for global trade to balance.

**/ Bilateral data for goods and services trade with emerging economies only starts in 1999.

***/ The average price of the more than 3 mbd that the U.S. imported from Canada was just over $41 a barrel in 2017. That is about $8 a barrel less than the average import price from OPEC countries. The Canadian discount is a big reason why the overall U.S. import price in 2017 was $46 a barrel, though it also reflects the “heaviness” of Canada’s export mix. Yet even relative to Mexican heavy crude, Canadian heavy (West Canadian Select) trades at a discount.