Phipps: State of Trade Between U.S., Canada, Mexico

September 25, 2017 08:45 AM
 
 

Last week we looked at some the of issues I think important during the ongoing NAFTA renegotiations. This week I want to establish what we already know about this agreement and negotiations in general.

Let's look at the state of trade between the US and Canada and Mexico. Some things to keep in mind.

First, always look at goods AND services. US services—like travel, licenses fees, financial services, and consultants make up about 1/3 of our exports, but don't get enough recognition compared to cars or corn. Because we run significant and growing surplus in services trade, it needs more attention. 

One big problem is a when imports are larger than exports it is often referred to as a trade "deficit," which is often confused with debt.

In fact, any such deficit is fully paid for with U.S. dollars. It is more accurate to say dollars are one of our biggest exports.

Furthermore, there is no linkage with the balance of trade and the federal debt, a fact that seems to be misunderstood by our administration.

There are effects on national savings and investment, but there is no correlation between our balance of trade and fiscal deficit, even when we ran a budget surplus.

NAFTA was at best a modest boost to our national economy, adding about $125 billion dollars per year to our GDP. This is less than ½ of a percent.

Second, notice that trade both ways with our NAFTA partners is growing. Lost in the rhetoric about a trade deficit is the fact that trade overall is expanding in North America.

Third, the biggest imbalance is Mexico, but this is hard to avoid when a rich country trades with a poorer country. Right now, we have a small trade surplus with Canada. Overall though, NAFTA is very good for ag exports like corn.  And pork.

NAFTA disrupted some parts of our economy significantly, but in the 20-plus years since it began, all three economies have adapted to it and any changes will require more painful adjustments.

Next week I'll wrap up how I think the issues will be resolved. Or not.

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