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Here's how 'tweaking' US-Canada trade deals could do more harm than good

Now it's Canada's turn.

President Donald Trump and Canadian Prime Minister Justin Trudeau met Monday to discuss economic ties between the two nations following months of Trump trash-talking NAFTA, the three-way trade deal governing the two largest markets for U.S. exports.

Throughout his campaign, Trump vowed to renegotiate the deal with Canada and Mexico to "get a better deal for our workers."

"And I don't mean just a little bit better, I mean a lot better," Trump told a Pennsylvania rally last summer.

But on Monday, Trudeau faced less of Trump's wrath about "unfair" trade deals than did trade partners China and Mexico, thanks in part to a relatively small U.S. merchandise trade deficit with Canada.

"We will be tweaking it," Trump told a news conference. "It's a much less severe situation than what has taken place on the southern border."

Simple tweaks, rather than a broad overhaul, would come as a relief to the 35 million Canadians whose economy is tightly connected to its southern neighbor.

Though Canada has the world's 10th-largest economy, it represents the largest market for U.S. goods and services, thanks to a shared border and a longstanding alliance.

Last year, total trade in goods and services between the U.S. and Canada came to more than $660 billion, breaking down to $575 billion worth of goods and some $88 billion in services.

That amounted to a merchandise trade deficit of some $11 billion, one of America's smallest deficits with any trading partner. By contrast, U.S. merchandise trade with China last year — roughly the same total value as with Canada — left the U.S. with a trade deficit of $366 billion, according to the Office of the United States Trade Representative.

But while trade with Canada overall has been evenly balanced, the picture varies widely by state and from one industry to another. Canada represents the largest export market for 35 U.S. states, thanks in large part to its proximity. That complicates any future trade negotiations, especially involving industries in states that helped send Trump to the White House.

Oil and gas, for example, make up more than a quarter of Canadian exports to the U.S. — nearly $100 billion a year. Those shipments could get hit by a new cross-border tax on imported raw materials that has been proposed by some congressional Republicans.

Trade negotiations could be further complicated by the increasingly complex, cross-border supply chains, especially in the auto industry, where the manufacturing of components and intermediate parts has blurred the definition of imports and exports.

An American-made pickup truck exported to Canada, for example, might be assembled in Michigan but include an engine made in Mexico and built with components produced in China. In some cases, those parts and subassemblies might cross the same border more than once.

That's why any restrictions imposed on the flow of goods and services with U.S. trade partners could end up harming the American exporters they're intended to help, according to a recent report from the Congressional Research Service.

"Countries that impose trade measures that restrict imports invariably negatively affect their own exports," the report said. "This loss of distinction between exports and imports as strictly domestic or foreign activities further complicates efforts to distinguish between exports and imports on a bilateral basis."

At Monday's news conference, Trudeau sought to emphasize his country's historical economic ties with the United States.

"No other neighbors in the world are as fundamentally linked as we are," he said.

Canada has more to lose if a renegotiation of NAFTA slows the pace of cross-border trade. American imports of Canadian products — from oil to wood products — represent about a fifth of Canada's economy. U.S. exports to Canada amount to less than 3 percent of the U.S. gross domestic product.

But Trudeau gently reminded Trump that those U.S. exports support the kind of jobs that the new administration has committed to expanding.

"Our economy is very dependent on our relationship with the United States," Trudeau told the news conference. "But there are also good jobs, millions of jobs, in the United States that depend on the relationships between our two countries."