I’m among the subset of economists who worries about the United States 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 US 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 US. The US 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 US 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 US data on trade in goods, or on trade in goods and services. There are other, much more obvious targets.
Trump claims to care about US manufacturing. Yet, Canada is one the rare countries where the US runs a substantial surplus in manufactures.
In fact, the US 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 significant outlet to global markets without traversing the US pipeline network, the US gets that oil on really good terms too. So when it comes to trade with Canada, there is a good case that the US 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 three percent of its GDP.
Canada’s overall external deficit takes some of the pressure off the US 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 US should be fighting.