The US-Canada Energy Trading Relationship
A recent report from the Center for Strategic and International Studies illustrates the futility in evaluating the trading relationship between two countries based on the levels of trade surplus or deficit. The report, which maps the energy relationship between Canada and the United States, notes that the overall balance of trade between the two countries is relatively level—the US enjoyed a goods and services trade surplus of $8.4 billion in 2017—but that Canada last year exported four times the value of energy products to the US than the US exported to Canada, $75.62 billion versus $19.64 billion.
The US and Canada are each other’s largest energy trading partners by value, with a total of $95 billion in 2017. Fifteen-billion dollars of that energy trade consisted of natural gas, electricity, uranium, coal, and fuel ethanol.
The anchor of the Trump administration’s trade policy, such as it is, is to redress trade deficits with US trading partners. Many economists argue that trade surpluses or deficits are not effective in measuring the effectiveness of trade policy.
The CSIS report illustrates that point when it analyzes the US energy trade deficit with Canada. It turns out that the US exports more petroleum products to Canada than Canada does to the United States by volume, “but since Canadian exports tend to be finished transportation fuels while US exports typically consist of pentanes and liquefied petroleum gases, the total value of Canadian exports registers at a greater level.
“It is for this reason,” the report notes, “that the balance of trade figure…provides limited insight with regard to the complexity of the energy trade relationship between Canada and the United States.” The report also notes that 60 percent of the energy trade deficit with Canada involves imports of crude oil, which make their way to the US to take advantage of its huge refining capacity. Those refined products are then consumed domestically or exported, sometimes back to Canada.
What emerges from CSIS’s portrait of the US-Canada energy trading relationship is a complex picture that can’t be measured by a single numeric figure, the trade deficit or surplus. Energy commodities and products cross borders to satisfy market demands and to take advantage refining capacity. The location of refining capacity and the product mixes they turn out are presumably based on market conditions into which the US government has no business interfering, especially not to redress an irrelevant trade deficit.
“North America is now one of the most energy-advantaged continents on the planet, with attributes that extend beyond just the domestic resource base but include aspects that relate to cooperative political, legal, and economic frameworks that incentivize transborder private-sector development of energy resources and expansive crossborder trade,” the report said.
“To continue this long and successful track record on energy market integration,” the report concluded, “both countries should seek to modernize the North American Free Trade Agreement (NAFTA)…”
And that’s another implication of the report. While it’s true that the three NAFTA partners have been engaged in multiple negotiating rounds, the outcomes thus far don’t appear to please President Donald Trump. Trump has called NAFTA “the worst trade deal ever made” and has repeatedly threatened to withdraw from the agreement. And lest we think he’s bluffing, let’s not forget that Trump has pulled the US out of TPP, the Paris climate accord, and, most recently, the Iran nuclear deal.