“Blips on the Radar” (Part 2)

Even President Trump does not seriously make the national security argument under Section 232 of the Trade Expansion Act the basis for levying steel and aluminum levies against his closest allies. Instead, he and his fellow mercantilists in the Commerce Department claim they are necessary to negotiate ‘fair trade’ agreements that will eliminate any trade surpluses (other than those in favour of the U.S.) and, in Canada’s case, dismantle any restrictions on the import of U.S. agricultural products.

Let’s examine the trade deficit with Canada that has the U.S. Administration so exercised. According to the U.S. Trade Representative’s Office, in 2017 Canada had a surplus in goods trade of $17.5BN with the U.S. So the President and Commerce Department are right, then? Not so fast. The U.S. traditionally runs a surplus in services (things like travel, IP, professional services, etc.) with Canada. In 2017 this surplus was $25.9BN, resulting in a net trade surplus of $8.4BN in favour of the U.S. But what about those rigged agricultural markets? Again, in 2017 the U.S. exported more agriculture/food products into Canada than it bought back ($24BN vs. $22BN).

These are not anomalies. For almost two decades, except when oil prices spike, Canada runs a significant and consistent trade deficit with the U.S. The mineral fuels exception is important, as mineral fuels make up about 24% ($73BN in 2017) of total Canadian exports to the U.S.. As Canada’s transportation infrastructure provides limited access to other markets, the U.S. can buy Canadian bitumen and oil at a significant discount to global prices. If the Administration wanted a bigger trade surplus with Canada, it could simply pay world prices to buy oil from Venezuela, Russia or Iran.

Commerce Secretary Wilbur Ross calls the tariffs ‘blips on the radar’. He needs to acquire a radar with range that extends beyond the White House.

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