Trump’s Trade Focus Risks Missing the Mark as Nafta Talks Begin

By Randy WoodsRandy Woods

The White House is in the driver’s seat in renegotiating the North American Free Trade Agreement and has laid out its basic priority: cutting trade deficits.

While America’s $87 billion trade gap in goods with Mexico and Canada has attracted President Donald Trump’s ire for putting America on the losing side of commerce, many economists point out that focusing on those numbers is misguided.

For starters, the deficit doesn’t account for services, where the U.S. has a surplus with both countries. That narrows its gap with Mexico and turns America’s overall trade deficit with Canada into a surplus—something Canada’s Foreign Affairs Minister Chrystia Freeland highlighted when outlining her country’s core objectives on Monday.

Accounting for Services

When services are included, the U.S. has an overall trade surplus with Canada.

Balance of trade on

Services

Goods

Mexico

$20B

0

-20

Overall trade balance

-40

-$63B

-60

-80

-100

2000

2016

Canada

$20B

+$7B

0

-20

-40

-60

-80

-100

2000

2016

Balance of trade on

Services

Goods

Mexico

Canada

$20B

+$7B

0

-20

Overall trade balance

-40

-$63B

-60

-80

-100

2000

2000

2016

2016

Balance of trade on

Services

Goods

Mexico

Canada

$20B

+$7B

0

-20

Overall trade balance

-40

-$63B

-60

-80

-100

2000

2000

2016

2016

The biggest contributors to the deficit with Mexico and Canada are imports of vehicles and their parts, followed by machinery, electronics and oil. Not coincidentally, America’s four biggest exports to its two neighbors are from those four categories, just in a slightly different order. That reflects the free flow of goods that Nafta was designed to facilitate, said Robert Scott, senior economist at the Economic Policy Institute in Washington.

“We have deeply integrated supply chains with Mexico and Canada,” he wrote in an email. For instance, “in oil, we import crude and export refined products.”

Top trade items with Canada, 2016

Imports

Category of Goods
Amount ($B)
Vehicles & parts
57.9
Oil & fuel
53.9
Nuclear reactors, boilers, machinery & parts
19.2
Polymers & other plastics
10.4
Wood & wood products
9.8

Exports

Category of Goods
Amount ($B)
Vehicles & parts
48.4
Nuclear reactors, boilers, machinery & parts
40.2
Electronic machinery & parts
24.0
Oil & fuel
16.8
Polymers & other plastics
12.3

Top trade items with Mexico, 2016

Imports

Category of Goods
Amount ($B)
Vehicles & parts
74.8
Electronic machinery & parts
61.8
Nuclear reactors, boilers, machinery & parts
50.8
Optical, medical equipment
13.2
Furniture
11.1

Exports

Category of Goods
Amount ($B)
Nuclear reactors, boilers, machinery & parts
41.7
Electronic machinery & parts
40.7
Vehicles & parts
21.4
Mineral fuels
19.2
Polymers & other plastics
16.2

And on a macro level, the deficit with Nafta is a small part of the U.S.’s $452 billion current-account gap—a broad measure of trade—which in large part reflects the American propensity to invest and spend rather than save. While there are valid arguments for trying to shrink the current-account deficit, that entails a rebalancing of the overall economy that won’t be solved by renegotiating individual trade deals.

“Going after bilateral deficits is essentially a game of whack-a-mole,” according to Fabio Ghironi, an economics professor at the University of Washington. “Trying to shrink the deficit vis-a-vis any individual trade partner is only going to result in that deficit showing up somewhere else, in some other individual partner, unless there is an overall rebalancing of savings vs. investment.”