Trump’s use of trade deficits to justify policy is ‘dangerous business,’ economist warns

Trump’s use of trade deficits to justify policy is ‘dangerous business,’ economist warns

Bilateral trade deficits are a poor measure of fairness in the Canada-U.S. trade relationship and U.S. President Donald Trump’s use of them to justify policy is “dangerous business,” according to a CIBC economist.

“It doesn’t shed any light on the discussion at all,” said Royce Mendes, senior economist at CIBC Capital Markets. “It’s very misleading yet it’s constantly being debated.”

Trump has long pointed to trade deficits as sure-fire evidence of the dysfunction in U.S. trade relationships, including with Mexico and Canada. This has led to a seesaw of arguments between American and Canadian officials, including one memorable instance — as recounted by Trump himself during a fundraising speech — in which Prime Minister Justin Trudeau insisted Canada did not have a trade deficit with the U.S.

Trump’s response: “‘Wrong, Justin, you do.’ I didn’t even know … I had no idea. I just said, ‘You’re wrong.’”

Trump has since doubled down on the argument, stating at a press conference earlier this month that the U.S. has “close to $100 billion a year loss with Canada.”

So who’s right?

Statistics Canada has indeed released customs data pointing to a US$97.7 billion goods trade surplus with the U.S. — close to the $100 billion figure cited by Trump. But that number excludes trade in services such as travel and tourism, telecommunications and banking. When those numbers are worked in, the surplus flips to the U.S. side, to the tune of US$2.7 billion, according to the U.S. Census Bureau — which amounts to “roughly balanced trade,” Mendes says.

“There’s absolutely no reason to ignore trade in services in a comparison like this. So he’s cherry picking one number and glossing over a lot of other stuff.”

Of course, estimates vary among agencies and countries according to the methods used for data collection. Yet Trump’s own Office of the U.S. Trade Representative says the U.S. had a goods and services trade surplus of US$8.4 billion with Canada in 2017 on exports of $341.2 billion and imports of $332.8 billion.

But in the end none of it really matters, Mendes says.

“Canada shouldn’t be talking about this data point at all, we shouldn’t be falling into that trap,” he said. “What we should be arguing is that it’s irrelevant.”

Bilateral trade statistics fail to capture a variety of factors that are crucial to the evaluation of any trade relationship, including employment, he says. Though U.S. goods exports to Canada account for just 1.5 per cent of U.S. GDP, roughly 7 per cent of American jobs are tied to trade across the 49th parallel.

What’s more, Canada is the only major trading partner that buys more manufactured goods from the U.S. than it sells — a figure that should matter to White House’s “America First” agenda to protect factory jobs, Mendes adds.

As for Trump’s view of surpluses and deficits as “wins and losses,” economists have long argued that trade can’t be so easily translated into those terms.

“One of the many benefits of free trade is that you can get more for less,” said Alan Deardorff, professor of international economics at the University of Michigan. “Countries specialize in things and they are able to produce more of them, more efficiently so that other countries buy them at a cheaper price. That’s not losing.

Canada, for instance, sells a large amount of oil to the U.S. at a discounted rate, largely because the Canadian industry has struggled to build the infrastructure necessary to sell it elsewhere. That’s arguably a win for the U.S., yet oil makes up a big part of the goods surplus Trump has been complaining about, said Mendes.

“To determine if trade is fair you really need to look at the kind of barriers we have between us to protect markets and historically the barriers between us are miniscule,” he said.

The vast majority of trade between Canada and the U.S. is free of tariffs with the exception of a small portion of items like dairy, to which trade is limited under Canada’s supply management system, he said.

“But lots of countries subsidize industries, it shouldn’t have such a massive disrupting effect on a trade relationship of this size.”