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When President-elect Donald Trump recently floated the idea of annexing Canada, a key reason he gave was a claim that the United States was “losing $200 billion a year” to its northern neighbor.
Speaking at Mar-a-Lago last week, Trump didn’t specify what constituted the $200 billion, but he used the figure in the context of how the US “subsidized” Canada and also had a “massive” trade deficit for items such as cars and lumber that he said the US does not need.
The lion’s share of the $200 billion was attributed to US defense spending of which Canada directly benefits, and the remainder is from the trade deficit, a Trump-Vance transition official told .
In 2023, the US had a trade deficit of $67.9 billion dollars with Canada, Commerce Department data shows.
Trade policy has once again landed in the spotlight as Trump is expected to wield tariffs and other measures as key policy levers during his second administration.
However, some economists caution that exaggerating or classifying trade deficits as losses or subsidies isn’t a fair representation of what has become a crucial mechanism for the US economy.
“The President-elect sees the world as a zero-sum game: Anything that’s not made here or bought elsewhere is considered a loss, which simply isn’t the case,” Joe Brusuelas, chief economist at RSM US, told .
Gary Clyde Hufbauer, a senior fellow at the Peterson Institute for International Economics, put it another way.
“That’s like saying that I lose $25,000 a year to Albertsons, where I do my shopping,” he said.
What is a deficit, and what is the US trade balance
In simple terms, a trade deficit results from when the value of a country’s imports exceeds the overall value of exports.
And for much of the past 50 years, the US has had a trade deficit, driven by goods (America runs a growing surplus on services).
That trade gap widened significantly in the 1990s as globalization accelerated, the American economy boomed and consumers and businesses purchased more from abroad. The deficit hit north of $700 billion in the mid-aughts before global trade and the US economy constricted considerably during the Great Recession.
The deficit hovered between $400 billion and $550 billion from 2009 to 2016, during the Obama administration, and moved closer to $600 billion during Trump’s first term.
And then Covid-19 came along.
In the economic recovery that followed, consumption soared for goods and services both those from overseas as well as domestically while some exports took a hit as the demand from other countries lagged that seen in the US. (Other factors contributing to the pandemic-era deficit widening included a shift in oil and petroleum trade from surplus to deficit while the trade surplus decreased because of restrictions on foreign nationals and rising shipping costs, White House economists wrote in 2022).
The US trade deficit widened to a record $945 billion in 2022, narrowed to $785 billion in 2023, but was expected to widen again in 2024 in part due to economic expansion and consumer demand, an increase in shipments in preparation for potential port strikes or a rise in tariffs, as well as the strong dollar weighing on exports, economists noted.
In 2023, in addition to the $67.9 billion deficit with Canada (which narrowed from the year before), the US narrowed its deficit with Canada to $274.9 billion from $382.3 billion, and the deficit with Mexico now America’s biggest trading partner increased $21.9 billion to $152.4 billion, Commerce Department data shows.
The $945 billion overall trade deficit represents about 2.8% of gross domestic product, which falls in line with the range seen since 2010, according to World Bank data.
Trade balances factor heavily into current account balances a broad measure of countries’ international transactions that also include personal and government transfer payments. The current account balance (of which the US has a deficit) is offset by the capital and financial accounts (US has a surplus), which include foreign asset transactions and international debt forgiveness.
“From my analytical framework, global trade balances plus global capital flows equal zero,” Brusuelas said. “So, if we want to buy maple syrup from our friends across the border, that just adds variety, quality and choice of my consumption; it doesn’t take away or cause a loss for our economy because presumably the Canadians then get those dollars and buy US services typically financial services, government debt, bonds, equities.”
Chip shortages and other trade risks
Trade deficits aren’t necessarily inherently terrible, economists say, noting they can be a reflection of a strong economy and the power of the US in stimulating the economies of trading partners elsewhere.
“You obviously want to run closer to balance if possible,” Shannon Grein, an economist at Wells Fargo, told . “But there can be efficiencies made by importing certain goods that are produced more cheaply abroad or produced more as a specialty of a certain economy.”
Coffee purchased from Central America is one example of a specialized product with no readily available substitute; however, heavily reliance on a certain country or product can backfire, as seen during the pandemic recovery.
“You don’t want to be running such large deficits that it makes you dependent on a certain economy for certain things,” said Grein. “We saw this come to a head during the pandemic with things like semiconductors.”
When relying heavily on a certain economy for specific items, that can easily crimp a supply chain and lead to other challenges, she said.
Other risks come with the US persistently spending more than it earns and financing the difference with foreign investment, according to PIIE.
The US has to borrow more or attract investment from abroad, which can increase foreign-based financial claims in America. That in turn could cause higher debt or interest rate burdens and national security concerns.
The increase in imported goods also can negatively affect manufacturing jobs, which also suffered because of increased automation and improvements in technology, PIIE noted.
Still, according to PIIE, imports can allow consumers to purchase items (including those exclusive to other countries that can’t be produced domestically) for a lower cost and spur economic growth while the increased foreign investment can result in jobs, higher wages, technology advancement and enhanced productivity.
There are potential avenues to reduce the trade deficit, some more painful than others (such as a recession); but bilateral trade restrictions or tariffs likely will not achieve that outcome, said Hufbauer.
“If you try to squeeze the deficit with one country for example, China it’s just going to migrate over, the goods are going to come from some other source (such as) Malaysia, Vietnam, Mexico, Korea, wherever can produce the most similar type of goods,” Hufbauer told , noting those shifts occurred in recent years when tariffs were placed on Chinese goods.
It’s possible that Trump could instead insist on some bilateral balance provision, such as requiring European Union countries to purchase US natural gas or specific products, he said. However, that could require more capacity than the US has at this time when unemployment is still low, he added.
Some of the most effective tools in reducing trade deficits are those that impact how much people, businesses and governments save, according to PIIE.
The US trade deficit could very well hit $1 trillion when the Commerce Department releases its 2024 data next month. China, on the other hand, just reported a nearly $1 trillion surplus.
While both reflect some “front-loading” in advance of potential tariffs, the chasm goes beyond economics or finance, said Brusuelas, the RSM economist.
The $1 trillion deficit and surplus risk “altering the political economy of the US,” he said.
“Rather, it feeds into the great global competition, which has opened the door for trade protectionism,” he said. “It is what underscores the bi-partisan consensus that China must be confronted on national security grounds and has triggered the move to protect infant industries such as artificial intelligence, quantum computing and synthetic biology to ensure that China does not increase its power both economic and political relative to that of the United States via trade and technology transfers.”
Trade tensions can have negative effects that ripple through economies, industries and companies.
Boeing, for example, is America’s largest exporter and therefore highly exposed to any trade war. China is the largest global market for new aircraft purchases, with Boeing forecasting that China’s fleet of commercial jets will double in the next 20 years.
The aircraft maker has been down this road before. The company’s sales to China ground to a near-halt in 2017 as trade tensions between the two countries escalated during Trump’s first term. Orders from Chinese buyers fell from 64 in 2016 to 51 in 2017 to zero in both 2018 and 2019. A similar drop could occur if a new trade war breaks out.
“We really don’t know what Trump will do with Chinese tariffs,” Richard Aboulafia, managing director at AeroDynamic Advisory, an industry consultant, told in November. “But if he slaps 60% tariffs on all Chinese goods, the quickest way for China to retaliate is to switch to (Boeing rival) Airbus for 100% of its needs.”
This potential Cold War plays directly into questions about the sustainability of both the annual operating deficits and the overall national debt, Brusuelas said.
“It means that the US is entering uncharted terrain with respect to financing a new geopolitical competition at a time when interest on the debt is one of the largest line-item entries inside the national budget,” he said. “This requires trade-offs. One cannot have as much guns and butter as one wants, given the political, economic, financial and social constraints that accompanies such a competition.”
