Donald Trump's NAFTA Trade Imbalance Delusion

The Trump administration is determined to renegotiate the North American Free Trade Agreement (NAFTA) — which created a single market from Mexico's southern border to the Yukon — but the main political appeal of this policy rests on a popular myth: that "fair" trade requires the United States to have a surplus or balanced trade with both Mexico and Canada.

We are supposed to feel especially aggrieved that Mexico regularly has a sizable surplus with us, $63.2 billion in goods in 2016, according to Commerce Department figures. This shows, as the president repeatedly has said, that U.S. trade officials negotiated a bad deal for American firms and workers. Trump has promised to do much better.

That will be hard.

The whole theory of international trade assumes that countries specialize in products and services where they have a relative advantage. On a global basis, trade must balance; one country's imports are another country's exports. But some countries have surpluses and others have deficits, depending on their individual circumstances and histories.

If all countries tried to balance their trade with all other countries, global commerce would break down. It would be too difficult to match every nation's export capacities with every nation's import needs. "Even China, with its large global [trade] surpluses, runs deficits with a large number of countries that produce primary products (Saudi Arabia for oil, Australia for iron ore, etc.)," writes economist C. Fred Bergsten of the Peterson Institute for International Economics in a new paper.

Economists generally discount the significance of bilateral trade balances (that is, balances between two countries) and focus on the overall effect of trade on a country. Interestingly, Mexico and Canada prove the point.

Given all the nationalistic rhetoric about their unfair trade practices, you might expect that Mexico and Canada have recorded huge global trade surpluses. Not so, says Bergsten.

Indeed, as a share of their economies (gross domestic product, or GDP), Mexico and Canada have larger trade deficits than the United States, he notes. In 2016, the U.S. current account deficit was 2.6% of GDP compared with current account deficits of 3.3% of GDP for Canada and 2.7% of GDP for Mexico. (The current account is a broad measure of trade.)

In addition, the trade imbalances within NAFTA aren't as large as they seem. It's true — as noted — that the United States had a $63.2 billion deficit in goods trade (cars, computers, plastics) with Mexico. But the U.S. surplus on services (travel, transportation, consulting) was $7.6 billion, reducing the overall deficit with Mexico to $55.6 billion. On the same basis, covering goods and services, the United States had a trade surplus of $12.5 billion with Canada in 2016.

So: The total trade deficit with Canada and Mexico was $43.1 billion ($55.6 billion minus $12.5 billion). All trade — exports and imports — between the United States and Canada and Mexico totaled $1.207 trillion in 2016. Our net deficit equaled 3.5% of total trade and about two-tenths of 1% of U.S. GDP. This hardly seems crushing.

Against that backdrop, the notion that either Canada or Mexico is going to offer the United States vast new markets in their countries — without corresponding American concessions — seems wishful thinking. "The administration appears to perceive Mexico and perhaps Canada as surplus countries," writes Bergsten, "whereas they (more accurately) see themselves as deficit countries," seeking to increase exports or dampen imports. This is Trump's delusion.