If you take Canadian oil out of the equation, Canada actually has a trade deficit, and the U.S. has a surplus — of $58 billion
Donald Trump has been complaining about the United States’ “trade deficit” with Canada.
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The president-elect has claimed the U.S. is subsidizing Canada to the tune of $200 billion per year, through a combination of the trade deficit, military protection and other measures. He has threatened to implement a 25-per-cent tariff on Canadian goods when he is inaugurated on Jan. 20, which has thrown Canada’s governments into chaos, as premiers and federal politicians attempt to find a way to placate the incoming U.S. president and, if tariffs can’t be avoided, somehow fight back.
“We don’t need anything. So why are we losing $200 billion a year and more?” Trump has said.
But the U.S. trade deficit with Canada isn’t actually that big. As of 2023, it was around $32 billion.
And, here’s the thing: While Canada does have a trade surplus with the United States — the other side of the trade deficit coin — it’s due almost entirely to oil and gas purchased by the U.S.
Oil, critical for fuelling refineries in the U.S. Midwest, is purchased at a substantial discount, processed and re-sold.
If you take Canadian oil out of the equation, Canada actually has a trade deficit, and the U.S. has a surplus — of $58 billion.
National Post’s Tyler Dawson spoke with National Bank Chief Economist Stéfane Marion about the trade deficit — and its realities. This conversation has been edited and condensed for clarity and length.
What actually is a trade deficit?
Trump is saying that he’s buying more from Canada than we’re buying from them. To which I say, fine, but not outside energy you don’t, and if it weren’t for Canada, you probably you wouldn’t be a net energy exporter, because the reason you’re able to be a net exporter to the world is because you import discounted energy from Canada and then you transform it. You sell it in LNG format, or you sell it back in terms of gasoline, or you blend the Canadian oil and you sell it to the rest of the world in lighter form.
So if you look at the total balance of trade and services, it’s only $32 billion that the U.S. runs for us. That is insignificant, once you consider that the U.S. is running a $1-trillion deficit globally, so we account for three per cent of that deficit. But all of it is due to energy and without energy, well, the U.S. wouldn’t be performing the way it is.
So, outside energy, the U.S. is running a surplus. So I’m a bit baffled that the president-elect doesn’t see that they’re having a better end of the deal on free trade.
Are trade deficits inherently bad?
The U.S. has a 4.4-per-cent unemployment rate. Why is it a problem?
Given the way that U.S. economy is performing, I have a very hard time admitting that there’s something fundamentally wrong with the U.S.
Now this is not to say that from a national-security perspective it makes sense for them to run such large deficits in industries. Is it normal that China is accounting for 92 per cent of rare-earth refining? Is it normal that China controls much of the supply-chain manufacturing? Maybe that’s not normal. Maybe we’ve gone too far.
But to say that the U.S. has been constant losers on free trade, well, if that were the case, then they wouldn’t have a 4.1-per-cent unemployment rate.
Part of the reason why Canada has, outside of oil and gas, a trade deficit with the United States is our lacklustre manufacturing performance. What’s going on there?
We signed the Paris Accord in 2005 to say we were decarbonizing the country. I have no issues with that, but not if it means outsourcing our manufacturing output to the rest of the world.
Producing manufacturing is energy intense. So you need natural gas, you need electricity. So one of the ways we decided to decarbonize here was to not put any emphasis on manufacturing and just outsource it to the rest of the world. And manufacturing has atrophied quite dramatically.
Given our status as a major energy producer, and you need a lot of energy to produce manufacturing, it is abnormal for Canada to have such a small manufacturing sector, even more so considering the fact that we consistently, constantly brag that we are a trading nation.
You become a trading nation only if you leverage your manufacturing sector in the sense that: I signed a free trade agreement, we will use our comparative advantage, and I will grow my manufacturing sector. You don’t sign free trade agreements to shrink your manufacturing sector, because if you do, then you become almost insignificant in the global supply chain. If you want to be trading stuff you have to be producing stuff that people need. I know people need energy, but on the manufacturing side, we should be better than what we are now.
And this is a problem?
If we have a carbon tax and our trading partners know, all we’re going to do is move production elsewhere, where it’s actually worse for the planet. That’s the issue I have with the carbon tax. A tax, generally speaking, is good to send a market signal, but if your ultimate goal is to help the planet, you’re not going to help the planet if only Canada has a carbon tax.
It’s better for the planet that we rebuild the manufacturing sector in order to produce the stuff we need here in this country, because we are a cheaper source of production, and we need a lot of energy. But with the market signal — the carbon tax — and we, suddenly, are not economical. And so, basically, we’re scoring on our own goals.
Can tariffs end a trade deficit? As in, could this change things for the United States?
Well, if you do that, what are you going to achieve? What if there’s no substitute for the stuff that you’re increasing tariffs on? There is no substitute for Canadian heavy oil. So all you do by slapping tariffs, you’re not going to increase U.S. production in heavy oil — you don’t produce that. Canada produces that. All your refineries would need to be retooled to process lighter oil.
So all you’re going to do is you increase the price of gasoline for your consumers. And if you do that, you’re going to raise inflation. If you raise inflation, long-term interest rates will increase. And that’s not going to be favourable for the stock market. You will create a negative wealth effect for Americans.
So, if you say that you’ll impose tariffs in order to grow your domestic industry, yeah, maybe for emerging markets, it makes sense. But for a matured economy like the U.S., to go all out with the 25-per-cent tariff structure, tax energy, on which there’s no substitute, you’re just going to increase inflation and create a negative wealth effect.
That’s why I’m not so sure that Donald Trump will move forward on that, because he was elected to improve or increase the wealth effect for Americans.
How does the U.S. trade deficit with Canada compare to its trade deficit with other countries?
We account for only three per cent of their trade deficit when you account for services. Like, come on. I mean, are you joking? We’re not Mexico. We’re not China. Come on.
Of all trading partners, were the least subsidized, to use the president’s term.
What does this all mean, in the end?
It’s not just a tariff war with Canada. It’s going to be a global tariff war, so everyone’s going to lose on that. From the U.S. perspective, you want to tax Canadian energy, well, you’re just going to increase the price of gasoline in the U.S. You may no longer be a net energy exporter, because for the past two years, the U.S. has become a net energy exporter on oil and gas for the first time in 70 years, or 100 years.
The reason they’re able to achieve that is because they’re getting cheap Canadian oil. So if you raise the price of Canadian energy on the U.S. market, then obviously, as you refine the oil, your markup will be less. So you may not even be a net oil exporter, as you are right now.
Inflation could be a one-to-three percentage-point impact on U.S. inflation. And, if that’s the case, long-term rates will increase, and there comes the negative wealth effect for Americans. So my view is that the markets will probably end up disciplining the president.
As for Canada, what do we do? We’re pretty small in comparison, which doesn’t seem to put us in a good negotiating position.
Well, we find alternatives to ship our energy. That’s where we have big surplus. And we find solutions to reduce internal trade barriers, which are a tariff equivalent of 21 per cent.
We’re fearing a 25 per cent tariff structure against the U.S. But did you know that the internal trade barriers are a tariff equivalent of 21 per cent?
Well, you know what? Maybe this is an opportunity to revisit our internal trade barriers and say, why don’t we trade more within ourselves? And that will reduce the trade deficit that we have with the U.S. We are running a trade deficit in the U.S. They’re running a surplus. We have a trade deficit outside energy, and much of that could be reduced if we were to look at those internal trade barriers.
It’s time to have a very serious discussion in Canada and stop scoring in our own goal.
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