The Trump administration insists that the U.S. runs a trade deficit with Canada. Canada denies that’s true.
But the most important outcome of the quarrel over the trade numbers may be that it undermines the case for preserving the North America Free Trade Agreement.
The Trump administration accurately points out that the U.S. has a trade deficit with Canada in goods. The basic data from the U.S. Census Bureau puts this at $17.6 billion in 2017, up from $11 billion the prior year.
“We do have a Trade Deficit with Canada, as we do with almost all countries,” President Trump said in a tweet.
But the U.S. and Canada also trade in services–and the U.S. has an advantage in these. Once services and goods are included, the U.S. ran a small surplus of $2.8 billion in 2017, according to the latest data from the Department of Commerce.
Canada prefers to use the combined goods and trade numbers while insisting that it does not think deficits or surpluses are a good way of measuring the health of trade relationships at all. Trump’s critics have jumped on the administration’s focus on the goods deficit, arguing it is not an accurate way of depicting trade between the U.S. and Canada.
Interestingly, there’s a discrepancy between the way the U.S. and the way Canada tracks the data. According to official Canadian government data, the U.S. had a $20.5 billion combined goods and services deficit with Canada. So Trump’s claim is undoubtedly right under Canada’s way of counting the deficit.
But even using the U.S. statistics (which are themselves contradictory, with slightly different numbers coming from Commerce and the U.S. Trade Representative), Trump has good reasons to prefer the goods numbers to the combined figures. Manufacturing of goods generally provides more employment at higher wages than many services jobs, for one. According to the U.S. Trade Representative, exporting goods to Canada supports 1.2 million jobs in the U.S., while exporting services supports just 36,000. No wonder Canada does not want the U.S. to focus on the advantage it has in exporting goods.
For another, reviving American manufacturing was a key promise of Trump’s on the campaign trail. Trump probably would not have been elected on a promise to provide more travel agent jobs–a major service export to Canada.
But the dispute does highlight one thing: the trade gap between the U.S. and Canada is probably surmountable. It’s the gap with Mexico that is the real challenge.
The U.S. had a combined goods and services trade gap with Mexico of $55.6 billion in 2016, according to the latest data available from the U.S. Trade Representative. The deficit in goods alone was $63.2 billion, with a services surplus of $7.6 billion. That much large goods deficit will be much harder to close.
This could add strength to arguments of those in the administration who are urging the U.S. to abandon the three-way trade agreement in favor of independent agreements with Canada and Mexico. Afterall, if the combined deficits are so distinct in scale, perhaps trying to solve them in a single agreement is not a realistic possibility.
The fight no doubt also complicates the Nafta negotiations in another way: if you can’t agree how to count trade deficits or which way they run, you’ll probably have a tough time working out how to reduce them.
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