Jul 30, 2018

New Concerns for Progress on Trade after President Trump's Canada Remarks

The United States and Canada Enjoy a Mostly Free, Fair, Reciprocal, and Balanced Trade Relationship
Daniel Griswold Director of Trade and Immigration

At a meeting last week in Peosta, Iowa to tout his trade agenda, President Trump took special aim at Canada. “The Canadians—you have a totally closed market ... they have a 375 percent tax on dairy products, other than that it’s wonderful to deal. And we have a very big deficit with Canada—trade deficit.”

The president’s remarks may have been mere bluster designed to get Canada to cut a deal on the North American Free Trade Agreement (NAFTA), but they were detached from reality and they bode ill for a favorable outcome from the administration’s current showdown with our major trading partners.

Far from being “totally closed,” Canada’s market is almost totally open to US exports. Thanks to NAFTA, 100 percent of US non-agricultural exports enter Canada duty free, including manufacturing goods. When it comes to agricultural products, 97 percent of US exports enter Canada duty free. Canada is a huge market for American-produced animal feeds, meat, poultry, fruits, frozen juices, vegetables and nuts. This is why American farmers love NAFTA and all major farm groups oppose a US withdrawal.

Dairy is one of the few exceptions to duty free access. Canada’s dairy farmers, like America’s, are a politically powerful lobby that still receives government support and protection. The high duty rate the president mentions is not applied to a wide range of goods but is most likely imposed on a narrow category of imports that exceed a quota.

Despite the residual duties, America runs a significant surplus in dairy trade with Canada. In 2017, the US exported nearly three times as much dairy products and eggs to Canada than it imported—$368 million and $125 million respectively. So much for Canada having a “totally closed market.”

On the US trade balance with Canada, the president is also wrong, although not absurdly so. On goods and services, the United States consistently runs a small trade surplus with Canada. In 2017, Americans exported $341.3 billion in cross-border goods and services to Canada and imported $338.5 billion worth. That’s a surplus, not a deficit, of $2.8 billion. And those numbers come from the president’s own US Department of Commerce.

President Trump, however, was probably talking about trade in goods only, as he typically does, and there the United States did run a bilateral trade deficit with Canada in 2017 of $17 billion. But there is no reason to focus only on goods when looking at US-Canada trade. Services now account for one-third of total US exports, supporting millions of middle-class American jobs. The bilateral goods deficit with Canada is more than offset by the big surplus that Americans run in services, including air transport, travel, financial services, advertising, and charges for use of intellectual property.

Even if we consider only goods, there is nothing nefarious or unfair about US trade with Canada. The bilateral goods deficit can be explained entirely by one product category—crude oil. In 2017, the United States exported $6.5 billion in crude oil to Canada and imported $50.1 billion. In all other goods categories, including manufactured products, the United States ran a big trade surplus with Canada. Why would anyone consider it a problem that Canada remains a major and reliable supplier to the United States of such a valuable commodity as crude oil?

Defenders of President Trump’s approach to trade policy claim that his ultimate goal is free trade. But his belligerence towards Canada suggests otherwise. America’s trade relationship with Canada is about as close to free, fair, reciprocal—and balanced—as two nations can obtain in this economically complex and politically compromised world. And yet President Trump complains frequently about the allegedly unfair Canadian trade practices and has mocked their prime minster on Twitter as “Very dishonest & weak.”

In the same trip to Iowa, President Trump hailed his White House meeting that week with European Commission President Jean-Claude Juncker that resulted in a joint statement to work toward eliminating most industrial tariffs between the United States and the European Union. Yet their agreement pointedly omitted motor vehicles and agriculture, except for an EU pledge to buy more US soybeans. In contrast to Canada, the EU allows less than half of US farm exports to enter duty free, and that will not change as long as the French have any say.

For President Trump, however, the news splash of an agreement with the EU to begin talking about a future deal for freer trade counts for more than the benign reality of an existing deal with Canada that has delivered free trade by any reasonable measure. Given the way the administration treats Canada, no wonder the line for negotiating new free trade agreements with the United States remains painfully short.

Photo credit: Evan Vucci/AP/Shutterstock

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