January 20, 2014

The U.S. and Canada are sauntering down opposite foreign trade paths

If there’s any doubt about the enormous potential for the U.S. recovery and expansion, it should be dispelled by the latest foreign trade data.

The annualized goods and services trade deficit in November fell 26% versus October to its lowest level (-$411 billion in U.S. dollars) since October 2009 (-$394 billion).

Each monthly lessening of the trade deficit makes a further positive contribution to gross domestic product (GDP).

The low trade deficit in 2009 was normal for its time. It occurred in the heart of the most serious recession/depression in nearly a century when all economic activity — including world trade — slowed to a crawl.

For the U.S. trade deficit to be just as low now, when the economy is back on a solid footing, demonstrates that something quite significant is underway.

When the U.S. economy was expanding rapidly before the 2008-2009 recession, the trade deficit was consistently in excess of $600 billion. Sometimes, it reached as much as -$800 billion.

At that time, there was a greater reliance on foreign sources of energy.

Lately, thanks to “fracking” and horizontal drilling, increases in U.S. domestic oil production have lowered reliance on imports from nearly two-thirds to only half.

Industry analysts are expecting the U.S. to overtake Saudi Arabia and Russia as the world’s largest oil producer within the next couple of years.

In November, the U.S. crossed over into a surplus in its trade with Nigeria, traditionally a top-five supplier of oil to America.

A similar situation prevails in natural gas markets, where the U.S. is approaching self-reliance.

Furthermore, low-cost natural gas in the U.S. is permitting a repatriation of jobs and output in several large-scale industries, including petrochemicals.

Another factor helping the U.S. trade picture hasn’t received as much attention — the remarkable performance in services trade (e.g., engineering consultancy, tourism, etc.).

While the U.S. deficit in goods exports has eased considerably, a growing surplus in services trade is further helping to improve the overall trade balance.

In the latest month, a $53.9 billion goods trade deficit (not annualized) was alleviated by a $19.7 billion services trade surplus, the highest on record going back to the turn of the millennium.

Let’s move on to Canada’s foreign trade position. A different picture emerges. In the latest month, goods exports stayed flat while good imports rose 0.1%.

The nation’s trade balance — which before the recession was always impressively upbeat, between +$40 billion Canadian and +$80 billion — stayed below zero for the 20th month in a row.

The U.S. accounts for three-quarters of Canada’s exports and two-thirds of its imports.

Canada is still running a surplus in its trade with the U.S., but that excess is being eroded. This November, it was +$33.0 billion versus +$46.0 billion last November.

Canada’s balance with the rest of the world in November was -$44.3 billion.

From the oil sector through automobiles, there is every indication the U.S. cannot be counted on to deliver as strong a trade surplus to Canada as in the past. (2013’s January-to-November trade deficit with America in motor vehicles and parts was 17% higher than in 2012’s same period.)

Canada’s trading horizon must be expanded to include more interaction with Europe, Latin America and, most crucially, Asia.

The recent signing of the Comprehensive Economic and Trade Agreement with the European Union is a bold and self-confident step in the right direction.

But there is a single most critical economic issue facing our politicians at this time — finding acceptable means to overcome the obstacles standing in the way of building pipelines to supply oil and liquefied natural gas to potential clients on the other side of the Pacific Ocean.

For more articles by Alex Carrick on the Canadian and U.S. economies, please see his market insights. Mr. Carrick also has an economics blog.

Canada’s foreign trade:
the merchandise trade balance

Based on seasonally adjusted monthly figures, projected at an annual rate.
Data source: Statistics Canada / Chart: Reed Construction Data – CanaData.

United States’ foreign trade:
goods and services balance

Based on seasonally adjusted monthly figures, projected at an annual rate.
Data source: U.S. Bureau of the Census / Chart: Reed Construction Data – CanaData.

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