Do We have a Trade Surplus with Canada?

By William A. Reinsch

According to the transcript of a speech President Trump gave in St. Louis on March 14, regarding a phone conversation he had with Prime Minister Justin Trudeau of Canada, when the prime minister told the president that the United States had a trade surplus with Canada, not a deficit, Trump told Trudeau he was “wrong.” Yet the president admitted in his speech, “I didn’t even know…I had no idea….” The main focus of the news cycle has been on the president openly acknowledging he made up facts. It does beg the question, however, does the United States have a trade deficit with Canada? As with many things in the world of trade, the answer is, “It’s complicated.”

Q1: Does the United States have a trade deficit with Canada?

A1: Yes and no.

According to the U.S. Census Bureau, the United States had a USD17.58 billion trade deficit with Canada in 2017, an increase of USD7 billion from 2016. However, this figure only measures trade in goods, tangible products from cars to Hostess cookies. When measuring trade in both goods and services, the United States had a trade surplus of USD2.8 billion in 2017 according to U.S. Department of Commerce data. In other words, the U.S. surplus in services—things like education services, foreign students at U.S. universities, or financial services provided by U.S.-based firms—more than compensated for the U.S. deficit in goods trade. Statistics Canada, however, states that the United States does in fact have a trade deficit with Canada, with their numbers reporting that Canada has a surplus of over CD18 billion (USD13.746 billion).

Q2: How is it that the United States and Canada have different numbers for the same thing?

A2: It all comes down to how you measure goods and services. At the center is the issue of reexports. According to the Office of the U.S. Trade Representative, reexports, also known as foreign exports, are defined as “previously imported goods that were grown, produced, or manufactured in a foreign country and which, at the time of export, have not undergone substantial transformation in form or condition…in the United States.” For example, if a car were shipped from Japan to a West Coast U.S. port, offloaded, and then shipped across the U.S. border to Vancouver (without any additional transformation or work done on it in the United States) this would be considered as a U.S. exported good by both the United States and Canada. (The United States also counts it as a Japanese import, which means in U.S. records the import and export amount nets out to zero.)

The calculations hiccup presents itself with reexportation to the United States via Canada. This is because the United States measures imports and exports on a country-of-origin basis. Using the above example, if a Japanese car is shipped to Vancouver, offloaded, and trucked across the border to Seattle, the United States will measure this as an import from Japan, not from Canada. Statistics Canada, however, will count this as an export to the United States, even though we will not count this as an import from Canada. (Note that Canada also counts the car as a Japanese import, just as we do.) These different calculations methods result in the two nations publishing disparate numbers when it comes to trade balances and in Canada stating they have a trade surplus with the United States. U.S. trade representative Robert Lighthizer has suggested adjusting our trade data to remove accountings of reexports due to this problem. Many suggest this would inflate trade deficits by lowering exports but keeping imports the same.

Q3: Which one is correct?

A3: Both are “correct” in the sense that both are legitimate ways to count. However, the system works best if all countries do it the same way so there are fewer disparities. What would not be correct would be to count only one part of the transaction. In the example, the auto is both an import (from Japan) and an export (to Canada), and it makes the most sense to either count it as both or to count it as neither, since it is simply transiting the United States. If we were to count it as in import, since it unquestionably entered the United States, but not as an export, even though it left, we would be inflating our trade deficit with Japan and reducing the amount we export to Canada, thereby inflating that deficit as well.

Q4: What is value-added accounting, and how does that factor into this situation?

A4: Historically, most products were made in a single country and consisted almost entirely of components from that country. Now, however, we live in a world of global supply chains where parts of a product are made in many different locations and assembled in yet another location. That has led to the development of complex rules of origin that governments use to decide what country an item is a product of. They then use that information to assess the correct tariff, so they can count it correctly as a product of its country of origin. Since for those purposes an item has to be considered a product of a single country, inevitably items end up being identified as products of country X, even though a substantial part of their value consists of components from other countries that were assembled into the final product. The most famous example of this is Apple’s iPhone, which is treated as a product of China because it was assembled there, even though the actual Chinese value in the phone is only a tiny fraction of its total cost.

This has led economists to suggest that accounting for products based on their value added rather than a single country of origin would more accurately reflect the true composition of a nation’s trade balance. In the case of the U.S.-China trade relationship, most estimates suggest that if value-added accounting were used, the U.S. deficit with China would be reduced by about one-third. Of course, our overall global deficit would not change, because as the Chinese deficit goes down, our deficits with the other countries who supplied the components would go up.

This has not been a big issue in the current debate about our deficit with Canada, but it could easily become one. Some products, notably automobiles, go back and forth across the border multiple times with value being added each time. Sorting that out would be a very complicated task, which is one reason why there has been no global stampede toward value-added accounting, even though it would provide a more accurate picture of a nation’s trade profile.

Q5: How much does any of this really matter?

A5: Economists are mostly in agreement that looking at a bilateral balance, or how one country is trading with another, is a misleading and ultimately useless measure of how an economy is performing. Many economists believe that looking at the overall trade balance—that is, how the United States trades with the rest of the world—is a much better measure. That being said, other economists do not believe the trade balance is a sufficient measure because often it can be influenced by other factors that are simply not captured in measuring goods and services. So, while the debate about deficit or surplus is interesting—and complicated—it probably doesn’t say very much about the health of our economy.

William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C. Jonathan Robison is a program coordinator and research assistant with the CSIS Scholl Chair. Andrew Lepczyk is an intern with the CSIS Scholl Chair.

Critical Questions is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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Andrew Lepczyk

Intern, Scholl Chair in International Business.

Jonathan Robison