“We do have a Trade Deficit with Canada, as we do with almost all countries (some of them massive). P.M. Justin Trudeau of Canada, a very good guy, doesn’t like saying that Canada has a Surplus vs. the U.S.(negotiating), but they do … they almost all do … and that’s how I know!”
— President Trump, in a tweet Thursday
When The Washington Post published closed-door remarks about Trump recounting a conversation with Canadian Prime Minister Justin Trudeau, in which he asserted the United States had a trade deficit with Canada even when he did not know the answer, the article included this line: “The Office of the United States Trade Representative says the United States has a trade surplus with Canada.”
In apparent response to that, Trump tweeted:
So what gives?
In some ways, this exchange reflects the conversation between Trudeau and Trump. Trudeau said the two countries had a surplus, while Trump said, no, it’s a deficit. Trump claimed one of his aides went to check and reported: “Well sir, you’re actually right. We have no deficit, but that doesn’t include energy and timber. But when you do we lose 17 billion dollars a year.”
So, there was a $17 billion trade deficit in merchandise goods in 2017 between the United States and Canada, primarily because the United States imported about $77 billion worth of mineral products (primarily oil) from Canada — more than one-quarter of all Canadian exports — while exporting about $21 billion of mineral products back. There’s also a big gap in timber, since Canada possibly has more trees than people.
But the overall trade figure is a surplus because the deficit in goods is wiped out by a big surplus in trade in services.
Apparently, in Trumpland, trade in services simply does not count, even though it’s a big part of U.S. trade. In fact, the World Trade Organization says that trade in services is the “most dynamic segment in world trade, growing more quickly than trade in goods.” The United States is the dominant player, a fact highlighted by the 2018 annual report of the Council of Economic Advisers, released in February and signed by the president: “Focusing only on the trade in goods alone ignores the United States’ comparative advantage in services.”
Trade in services includes, among other things, telecommunications, accounting and legal services, and tourism. It’s not perhaps as solid and shiny as steel, but it’s a real export. In 2016, the U.S. services surplus was almost $25 billion, resulting in an overall trade surplus with Canada of $12.5 billion, according to the U.S. Trade Representative. (The Commerce Department’s Bureau of Economic Analysis says the surplus was $7.7 billion in 2016 and nearly $2.8 billion in 2017.)
The 2018 CEA report even includes a chart showing Canada has a trade surplus.
More to the point, these deficit and surplus numbers are almost meaningless, compared with the big picture: Canada is the No. 1 goods export market for the United States. U.S. goods and services trade with Canada totaled an estimated $627.8 billion in 2016, according to USTR.
The president frequently suggests the United States is losing money with these deficits, but countries do not “lose” money on trade deficits. A trade deficit simply means that people in one country are buying more goods from another country than people in the second country are buying from the first.
Americans want to buy these products from overseas, either because of quality or price. If Trump sparked a trade war and tariffs were increased on Canadian goods, then it would raise the cost of those products to Americans. Perhaps that would reduce American purchases of those goods, and thus reduce the trade deficit, but that would not mean the United States would “gain” money that had been lost. Meanwhile, trade deficits are also affected by macroeconomic factors, such as the relative strength of currencies, economic growth rates, and savings and investment rates.
The White House did not respond to a request to comment on why Trump consistently says the United States runs a trade deficit with Canada when official government figures show a surplus. According to our database of Trump’s false and misleading claims, he has made this false claim about Canada at least 10 times.
The Pinocchio Test
Someone needs to brief the president on trade in services. He admitted he simply assumed the United States ran a trade deficit with Canada, even if he did not know the answer. Bad assumption. If he had bothered to listen to Trudeau’s explanation, he might have learned something.
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