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It’s clear that U.S. President Donald Trump thinks the North American Free Trade Agreement (NAFTA) is unfair to the United States. He believes trade should balance. It’s a misguided view.
The president is obviously persuaded by images. He was convinced to launch strikes against Syria and to maintain troops in Afghanistan based on pictures. So you wonder if he derives his view of trade from popular film. The view that trade must balance seems eerily similar to the economic structure of post-apocalyptic nation Panem in the movie The Hunger Games. In that fictional world, the Capitol sends goods to the 12 districts for the exact amount of resources they send back.
We often try to compare nations on a per capita basis. Economists use gross domestic product (GDP) per capita to rank the wealth of nations. Environmental organizations use emissions per capita to compare the environmental impact of countries. Criminologists use violent crime per 100,000 people to determine the safety of nations. Even hotels, a business Trump understands, use a metric called Revenue per Available Room (RevPAR) to compare the profitability across hotels.
We do this to normalize the comparisons. It allows smaller and larger nations (or larger and smaller hotels) to be compared on an even basis.
So why not evaluate trade deals using per capita data?
Let’s focus on the relationship between Canada and the United States (all figures in American dollars). In 2015, the U.S. exported $280.3 billion in goods to Canada and imported $295.2 billion in goods from its northern neighbour. The total value of this trade partnership is $575.5 billion.
It’s not quite balanced. America has a $14.9 billion trade deficit with Canada. That deficit represents 2.6 per cent of the total trade.
However, the U.S. economy is much larger than the Canadian economy. In 2016, it had a nominal value of $18.56 trillion while the Canadian economy was valued at $1.53 trillion. The U.S. economy is 12.5 times the size of the Canadian economy, yet trade is almost balanced.
The U.S. also has a larger population at 323.1 million versus 36.29 million for Canada (2016 numbers). The U.S. population is 8.9 times the size of the Canadian population, yet trade is almost balanced.
Total U.S. trade with all nations in 2016 equated to $2.2 trillion in exports and $2.7 trillion in imports. When removing the value of Canadian trade from the total, the U.S. imported $2.405 trillion in goods and exported $1.92 trillion. The global population, not including Canada and the U.S., is 7.1 billion people. Yet Canada receives 13.4 per cent of all U.S. exports.
When these numbers are adjusted by per capita, the average Canadian buys $7,723.89 in American goods ($280.3 billion divided by 36.29 million) a year and the average American buys $913.65 of Canadian goods ($295.2 billion divided by 323.1 million).
If we extract Canada from American trade numbers and look at U.S. trade per capita with the rest of world, the average American imports $7,443.51 worth goods while each international customer buys $270.42 worth of U.S. products.
Canadians buy 8.45 times more goods per person from the U.S. than the U.S. imports from Canada. And Canadians buy more on a per capita basis than the U.S. buys from the rest of the world.
Using these metrics, Canadians appear to be the best customer in the world.
Imagine both nations were stores. When the Canadian customer goes to the U.S. store, he purchases $8.45 worth goods for every $1 the U.S. customer spends at the Canadian store. The Canadian is the best customer the U.S. store has. And the Canadian is a better customer than the U.S. customer is at the store we’ll call Rest of the World.
Trump sold the notion to voters that he would run government like a business. What type of business would shun their best customer over a 2.6 per cent deficit in business? Would a successful business alienate a customer who spends almost 8.5 times more for goods per person?
Maybe Trump’s protectionist policies restore some American manufacturing jobs. But if you chase away your customers, you just produce goods for no reason. This is what the failed Soviet economy did. It produced a steel quota regardless of demand.
Trump’s America First view won’t work without customers. Certainly some dollars the U.S. spent on trade with Canada will be directed internally, but this only equates to $913.65 per person. That’s probably just enough to rent the nicest room in some of Trump’s hotels.
For Canada, eliminating NAFTA would be painful at first, but Canadians could redirect that $7,723.89 worth of goods internally (former exports become domestic products) to the businesses that are created to replace American imports or from new foreign sources as Canada continues to sign trade agreements. Canada will survive.
But this isn’t the best outcome for either nation. The self-sufficient notion of autarky has proven to be inefficient and costly. Canadian prices would likely rise and the benefit to American producers would likely be smaller than Trump claims.
In his business ventures, does Trump chastise and alienate his best customer? A customer who spends 8.45 times what Trump spends on his or her business? Would Trump be worth as much if he ran his golf courses or hotels this way?
It’s no way to run a country’s trade.
Bradley Parkes is a geologist in Calgary who publishes a quarterly investment newsletter at www.economisms.com.
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