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According to President Donald Trump, our trade deficit with Canada is a problem:  "They send us hundreds of thousands of cars, they make a lot of money with that,” he said. “They send us a lot of other things we don’t need.”  He neglected to mention the biggest contributor to our trade deficit with Canada:  crude oil and natural gas, without which the U.S. would actually have a trade surplus. They make a lot of money from that too! But so do we; of course; when Americans spend less at the pump and on their monthly utility bills they can afford to spend more on other things.  And what is true of inexpensive energy is true of everything else we import from Canada. 

The President’s suggestion that we don’t “need” these things apparently means that we can produce them ourselves.  But at what cost? The economic logic in favor of trade is not based on what we can make, but on what we can afford to make. As Adam Smith explained in his famous book An Inquiry into the Nature and Causes of The Wealth of Nations, a man will “never to attempt to make at home what it will cost him more to make than to buy.”  Research by economists at the International Monetary Fund estimate that a 1% increase in trade openness leads to/or is associated with a 2-5% increase in GDP.  

What is true of trade in general is even truer of our trade with Canada, a reliable political ally and our second largest trading partner.   According to the most recent report from the Office of the United States Trade Representative, U.S. goods and services traded with Canada totaled an estimated $908.9 billion in 2022. Exports were $427.7 billion; imports from Canada were $481.2 billion. The U.S. goods and services trade deficit with Canada was $53.5 billion in 2022.

The breakdown of goods and services trade is as follows:

Goods

U.S. goods exports to Canada in 2022 were $356.5 billion, up 15.1% ($46.8 billion) from 2021. U.S. goods imports from Canada totaled $436.6 billion in 2022, up 22.2% ($79.3 billion) from 2021. U.S. exports to Canada account for 17.3% of overall U.S. exports in 2022. The U.S. goods trade deficit with Canada was $80.1 billion in 2022, a 68.0% increase ($32.4 billion) over 2021.

Services

U.S. exports of services to Canada were an estimated $71.3 billion in 2022, 24.8% ($14 billion) more than in 2021. U.S. imports of services from Canada were an estimated $44.6 billion in 2022, 20.5% ($7.6 billion) more than 2021.  Leading service exports from the U.S. to Canada were in the professional and management services, travel, and financial services sectors. The United States had a service trade surplus of an estimated $26.6 billion with Canada in 2022, up 32.9% from 2021, according to the U.S. Trade Representative’s Office.

Shedding additional light on the subject

The deficit in the balance of trade on goods and services between the U.S. and Canada may be a cause for concern to the typical American worker, who may find Trump’s current efforts appealing. We believe they are less appealing when a deeper dive into the data is considered.

The population of the U.S. in 2022 was 333.3 million while the population of Canada was 39.6 million. Despite the goods trade deficit, Canadians spend significantly more per capita on U.S. products. In 2022, the average American purchased roughly $1,443 worth of Canadian goods and services, while the average Canadian spent just over $10,800 on U.S. goods and services—648% more. This disparity is striking given Canada’s lower average disposable or after-tax income of $34,305 compared to $58,228 in the U.S. In a nutshell, if one was just to consider the trade of goods and services between the U.S. and Canada, it seems highly laudable that Canada purchases as much as it does from the U.S. given the population and disposable income differences between the two nations.

FDI or Assets

Furthermore, we as Americans do not spend all of our hard-earned income on just goods and services when purchasing domestically or internationally. Too much emphasis on trade and the trade deficit leads us to think so. A very logical purchase using U.S. dollars for an American may well be to purchase assets.

If we consider that Canadians can purchase U.S. goods, U.S. services and/or U.S. ASSETS with their dollars, the following interesting data comes to light.

U.S. foreign direct investment (FDI) in Canada totaled $438.8 billion in 2022; a 10.1% increase from 2021. U.S. direct investment in Canada is led by manufacturing, non-bank holding companies, and finance and insurance.

Canada’s FDI in the United States totaled $589.3 billion in 2022, up 7.3% from 2021. Canada’s direct investment in the U.S. is led by finance and insurance, manufacturing, and depository institutions.

A mutually beneficial relationship

U.S. trade with Canada for 2022 shows a U.S. trade deficit (goods and services) of $53.5 billion. While the overall level of trade of assets (FDI) was a positive $150.5 billion with Canada at the end of 2022.

The President is missing something here when considering the overall balance of trade including goods, services and/or total assets invested favored the United States with a positive $97 billion balance in 2022. Using the President’s logic, should it not be Canada complaining about unfair trade practices between the United States and Canada? It seems to us the President is correct in his efforts to attract foreign investment in the United States. Given the data presented above, it is equally important if not more so to celebrate that Canada has been for more than one hundred years, a wonderful trading partner. Rather than focusing narrowly on trade deficits, President Trump should celebrate Canada as a model trading partner. The strong trade and investment relationship has bolstered economic growth on both sides of the border. Ensuring a secure, cooperative trade relationship with Canada aligns with President Trump’s goal of attracting foreign investment and advancing American prosperity.



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