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Economic Insight Canada’s trade situation was a problem before Donald Trump

Canada is already in big trouble when it comes to trade, and we’re highly vulnerable to attempts by the Trump administration to rebalance manufacturing trade within North America via new border taxes and other “protectionist” measures.

The election of Donald Trump as U.S. president and the potential imposition of border taxes and other protectionist measures is clearly of great concern to Canadian exporters, the workers they employ and the communities they support. This underlines just how much NAFTA and the wider liberalization of trade with rising economic powers such as China have shaped our economy and made us vulnerable to forces outside our control.

The Canada-U.S. Free Trade Agreement – which preceded the North American free-trade agreement – led to even closer economic integration with the United States on both the export and import side and facilitated cross-border investment. This was expected to enhance productivity and boost living standards.

The reality was different. Since the late 1980s, Canadian productivity growth has been dismal, especially compared with the United States; our dependency upon exports of resources and raw materials, especially energy, has greatly increased; and the growth of the "knowledge-based" economy based on advanced manufacturing and high-value business services has been relatively weak compared to the United States and other advanced industrial countries despite enhanced market access.

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The end of the resource boom and our limited "new economy" capabilities lie behind a now-chronic problem in our international balance of payments: Over the past few years, we have run current account deficits well in excess of 3 per cent of GDP ($67-billion or 3.4 per cent of GDP in 2015). These deficits have to be be financed through foreign borrowing.

The current account deficit is made up of continuing outflows of investment income, plus a big deficit in the trade of goods and services. This amounted to $47-billion in 2015, made up of a $23-billion deficit in merchandise trade and a $24-billion deficit in services trade.

Canada has long relied on a surplus in merchandise trade to offset chronic deficits in investment income flows and services trade, but that surplus has disappeared with falling resource prices and continued loss of manufacturing capacity. We run significant merchandise trade deficits with China ($17-billion in 2015); the European Union ($14-billion); Mexico ($11-billion); and South Korea ($2-billion). We do, however, continue to run a merchandise trade surplus with the United States, amounting to $34-billion in 2015. The United States accounts for 76 per cent of our exports, but just 66 per cent of our imports.

The surplus with the United States is the major positive in our overall balance of payments, and accounts for at least 150,000 direct jobs in manufacturing and the resource industries.

While the merchandise trade surplus with the United States mainly comes from big surpluses in the trade of resources, there is also a Canadian surplus in the trade of manufactured goods. Industry Canada data based on customs statistics show that, in 2015, the Canada-U.S. manufacturing trade surplus was $34-billion, seemingly quite concentrated in the auto and aerospace sectors.

(These data include both exports and re-exports and are not comparable to the balance of payments data. Pet peeve: The data on trade flows and trade as a share of domestic production and markets are woefully inadequate to map how Canada fits into the complex value chains of the global economy.)

The key point is that Canada is already in big trouble when it comes to trade, and that we are indeed highly vulnerable to any attempt by the new Trump administration to rebalance manufacturing trade within North America via new border taxes and other "protectionist" measures.

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If we are to seriously address the Trump challenge, we need to increase our high-value-added exports to global markets through support for innovation, which appears to be on the federal government's agenda.

We should also think about restrictions on the export of unprocessed resources to raise the job content of our exports. And we need to look at our capacity to increase Canada's share of our own large domestic market by displacing manufactured imports in those sectors where we retain productive capacity.

Our trade situation was a serious problem long before the election of Donald Trump and new realities will demand a serious rethinking of the liberal trade and industrial policies of the "free trade" era and not just more of the same.

Andrew Jackson is an adjunct research professor in the Institute of Political Economy at Carleton University in Ottawa and senior policy adviser to the Broadbent Institute.

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