Fraser Forum

Memo for President Trump—Canada runs a trade deficit with the U.S.

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President Donald Trump issued a bizarre pronouncement this week—that Canada engages in smooth diplomatic trickery when it comes to trade relations with the United States. At a meeting with U.S. governors at the White House, the president claimed that the U.S. loses money on trade with Canada.

Apparently, Trump’s own economic advisors have been unable to educate him about facts that anyone with Internet access can quickly identify. Namely, Canada runs an overall trade deficit with the U.S.

Specifically, in 2016, the U.S. ran a trade deficit in goods with Canada of around US$11 billion; however, that same year, the U.S. ran a trade surplus in services with Canada of approximately US$25 billion. Hence, even by Trump’s crude accounting for the gains and losses from trade, the U.S. “gained” around $14 billion from trade with Canada in 2016.

While Trump’s views on the economics of international trade are puzzling, one would think that a successful real estate developer could at least do some simple arithmetical calculations. The explanation, perhaps, is that Trump is a Physiocrat.

The Physiocrats were a school of political economists founded in 18th century France, characterized by their belief that land is the source of all wealth. President Trump has expanded this notion to include physical goods as a component of wealth, as indicated by his preoccupation with generating more domestic manufacturing output and employment.

However, apparently services do not yet constitute a source of wealth in the president’s calculations.

Trump’s preoccupation with physical objects as manifestations of wealth is dangerous for a 21st century politician, especially a U.S. president, since the value added of private services in the U.S. is almost 70 per cent of U.S. gross domestic product. Perhaps of more importance from Canada’s perspective, issues related to services such as cross-border data and video-streaming and online cross-border shopping, among other services, are becoming increasingly important topics for trade negotiators including those negotiating NAFTA.

If the U.S. administration does not recognize that the services sector creates the majority of income in the U.S., it would seem difficult for Canadian politicians to convince the president that the U.S. runs an overall trade surplus with Canada, let alone that the benefits from trade agreements are increasingly tied to liberalizing trade in services.

If there’s a positive aspect for Canadians in President Trump’s claim that Canada is a smooth and tricky country with which to do trade, it might be that Americans will gain a renewed interest in their northern neighbour. The long-standing image Americans hold of Canadians as nice (but boring) people makes it challenging to market Canada to U.S. tourists. However, promoting Canada as a place where smooth and subtle trickery is the norm might add a certain frisson to Canada’s image and make it a more exciting place for Canadian-based tourism promoters to market.