Continuing my series of examining the results of trade between the U.S. and our major trading partners, we now turn to Canada. Here’s a graphical presentation of the balance of trade with Canada from 2001 through 2008, broken down into major categories of resources and manufactured goods.
As you can see, we have a large trade deficit with Canada – approximately $75 billion in 2008, a figure that’s held relatively steady since 2005. Since then, there’s been a dramatic growth in exports of American manufactured goods, rising to approximately $42 billion in 2008. That trade surplus in manufactured goods accounts for nearly 600,000 high-paying manufacturing jobs in America, a nice little bonus for Americans but an enormous loss for Canada’s manufacturing sector, where their labor force is one tenth the size of America’s.
But those exports of American manufactured products is more than offset by our enormous imports of oil from Canada, which have grown rapidly since 2002 to $94 billion in 2008. Canada is by far our largest supplier of oil. People are often surprised to learn that it isn’t Saudi Arabia or OPEC.
NAFTA (the North American Free Trade Agreement), which governs our trade with Canada and Mexico, is often lambasted by critics of American trade policy for destroying American jobs. When it comes to Canada, nothing could be further from the truth. It’s no wonder that President Obama, soon after taking office, made it a point to visit Canada, whose exports to the U.S. ($335 billion in 2008) account for over 20% of their GDP, to assuage their fears about the “buy American” provision in the stimulus package. Trade with Canada has been enormously beneficial for the American economy – providing us with oil and jobs.
Canada is a nation one tenth as densely populated as the U.S., although their “effective” population density is actually higher, since their location in the upper latitudes concentrates their population along their southern border. The economic theory I presented in Five Short Blasts would predict a trade suplus in manufactured goods for the U.S. in such a situation and, once again, that’s exactly what we find. So, if both nations understood and accepted this theory, Canada would impose tariffs on American manufactured goods in order to restore balance, and the U.S. would not retaliate. Yes, this would tend to make America’s trade deficit even worse, making it that much more important to restore a balance of trade with nations that are much more densely populated than our own (like Japan, Korea, China, Germany and others). The proper response by America would be the implementation of a population policy designed to very slowly reduce our population, which would relieve our unsustainable pressure on the world’s resources, like oil from Canada, while slowly reducing the theoretical Canadian tariffs on American products.
The only real benefit that Canadians derive from trade with America is our petro-dollars, a huge boost to their overall balance of trade with the rest of the world. But one could hardly fault the Canadians if they began to have second thoughts about selling off so much of their precious, dwindling oil reserves to American consumers. If our situations were reversed, I wonder if Americans would be so generous with their oil.
As we say our prayers each night before bed, every American should thank God for Canada, the best friend we have on the planet.
In the next article we’ll complete the analysis of NAFTA by taking a look at Mexico.