Trade deficit Canada’s new economic hobgoblin

Posted on September 23, 2012 in Debates

Source: — Authors: – FPcomment
Sep 19, 2012.   Andrew Coyne

A trade deficit can be as much a sign of strength as weakness

“The whole aim of practical politics,” said H. L. Mencken, “is to keep the populace in a continual state of alarm (and hence clamorous to be led to safety) by menacing them with an endless series of hobgoblins, all of them imaginary.”

As usual, Mencken was understating things. Had he lived in present-day Canada, he would have seen the hobgoblins marching, not single file, but in mobs. Hollowing out. Dutch disease. “Dead money.” All supposed menaces to the populace — among a long list — all provably imaginary (see Coyne, A., passim).

Indeed, it’s hard out there for a hobgoblin. While no one would mistake these for boom times, the reality is that the Canadian economy remains in relatively good shape. Unemployment is at 7.3%: a percentage point higher than it was at its pre-recession low, but lower than at almost any other time in the last 40 years. (And headed lower: the TD Bank predicts by this time next year it will be below 7%, on its way to 6.)

Poverty, even when measured against a moving target like Statistics Canada’s Low Income Cut Off, is at its lowest level in at least 40 years, perhaps ever: 9% as of 2010, versus 15% just a few years ago. Inflation is low, growth is steady, if unspectacular. Median incomes have resumed rising, after a brief interruption, having increased by 20% after inflation over the previous two decades.

So if you are an opposition leader, and you wish to convince the populace we are in the midst of, as Tom Mulcair told his caucus yesterday, “an unprecedented economic downturn” (unhelpfully, the Liberals were at the same time claiming credit for “the underlying economic strength of the country”), what do you do? You send out for another hobgoblin. Ladies and gentlemen, allow me to introduce: the Record Trade Deficit!

A non-issue until about a week ago, the NDP has suddenly seized upon the trade deficit as its primary index of the general unprecedentedness of things. “Canada’s growing trade deficit is ringing alarm bells,” claims a party press release, quoting no less an authority than NDP trade critic Don Davies. “In July, Canada ran the worst merchandise trade deficit in history,” quoth Davies, “and it’s not an isolated event.”

Indeed. “Mr. Speaker, when the Conservatives took office, Canada had a $26-billion trade surplus,” Mulcair thundered Tuesday, in one of several interventions on the subject. “Today, Canada has a $50-billion trade deficit, which is an all-time high. How can the Prime Minister explain this failure to Canadians?”

The notion that trade deficits are some sort of economic blight, or that policy should aim at earning a trade surplus (invariably described in the press as “healthy”) is perhaps the oldest of all economic fallacies. It was indeed the point of Adam Smith’s work to suggest “the wealth of nations” lay in the welfare of their people, and that the purpose of trade was to raise their living standards, rather than to earn gold for the king. Yet two centuries later, the same mercantilist superstitions — exports good, imports bad — appear to inform the thinking of our leading opposition party.

Exactly why there should be any necessary relation between the amount of goods and services a country sells to others and the amount it buys is never explained, so self-evident is it taken to be. Often the same principle is invoked, not only with regard to trade generally, but to specific countries or commodities: thus, “we continue to suffer a deficit with Japan in autos.”

POP QUIZ: does Ontario have a trade deficit with Alberta? How much? Don’t know? If it doesn’t matter to you when it comes to trade between provinces, what makes it a subject of such all-consuming importance between nations? Right: because those other countries are populated by foreigners. And what do those foreigners get in return for their trade surplus with Canada? They get lots of lovely, multi-coloured Canadian dollars, good for spending … in Canada. They can buy more Canadian goods and services, or they can invest in Canadian businesses.

The trade deficit, in other words, is only one part of our overall balance of payments. And the balance of payments must balance: whatever deficit we have on trade (technically, the current account, a broader measure that includes, for example, payments on investments) is necessarily offset by an equal and opposite surplus on the capital account. That’s not an accident, or a wish. It’s an accounting identity.

Or turn it around. Suppose Canada were the hottest investment destination on earth. Foreigners are lining up to put their money down. But they can only lend us the Canadian dollars they earn by trading with us. So one way or another a current account deficit must result. The balance of payments must balance.

If the causes of a trade deficit are so uncertain, so is its meaning. It can suggest an underlying problem: if, for example, those foreign funds were being borrowed, not to fuel productive investment but to feed current consumption, as is typically the case with government deficits. But there’s no particular significance to a trade deficit in itself.

Indeed, it can be as much a sign of strength as weakness. A country whose economy is growing relatively slowly, compared to its trading partners, will buy rather less from them, and sell rather more. Its trade deficit will accordingly shrink. Conversely, a country that is growing quicker than its partners will experience an increase in its trade deficit. POP QUIZ: Which country would you rather live in?

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