Thursday, December 19, 2024

What is a trade deficit — and does it matter to the economy?

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In a post on Truth Social early Wednesday, Donald Trump claimed his country is financially supporting its northern neighbour.

The U.S. president-elect wrote that “we subsidize Canada to the tune of $100,000,000 a year” — an apparent reference to a previous claim about a $100-billion trade gap — and said the imbalance “makes no sense.”

“Many Canadians want Canada to become the 51st State,” he said in the post, made at 3:23 a.m. EST.

In fact, the U.S. trade deficit sat at US$41 billion in 2023, according to figures from the U.S. Bureau of Economic Analysis.

What is a trade deficit?

On the global stage, countries export some goods and services while importing others. A trade deficit occurs when the dollar value of a country’s imports is more than its exports.

Each country has an overall global trade balance, as well as various balances with other states they buy and sell with — for example, the one between the United States and Canada.

More than $3.5 billion in goods and services cross the border daily, with the U.S. comprising Canada’s closest largest trading partner. More than two-thirds of Canadian trade is with its southern neighbour, and Canada is among America’s top trading partners as well.

What are key factors behind the U.S. trade deficit with Canada?

It mainly boils down to oil. Virtually all of Canada’s crude oil exports and much of its other energy products flow south. Energy exports accounted for more than $177 billion or roughly 28 per cent of Canada’s goods exports to the U.S., according to the federal government.

“If we exclude oil … the U.S. is actually benefiting from this trade relationship,” said Salim Zanzana, an economist at the Royal Bank of Canada.

The idea that an imbalance necessarily hurts a country is misplaced, said Stuart Trew, director of the trade and investment research project at the Canadian Centre for Policy Alternatives.

“This is actually not a problem for the United States,” he said.

“It’s actually creating jobs in the United States … Most of the oil we send to the United States, at least from Alberta, is refined in U.S. refineries employing thousands of people. And that is then turned into products like plastics, like chemicals, like fuels — also in the United States.

“The other thing is that they need that oil,” he added.

That sentiment enjoys support from Alberta Premier Danielle Smith, who posted a similar argument on X in response to Trump.

“Canada (especially Alberta) sends billions of raw materials (oil, gas, minerals, grain, livestock, timber, etc) to your U.S. refineries and factories which your great American companies and workers upgrade and sell around the world, including back to Canada (we are your biggest customer by a mile),” she wrote.

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