For the United States, the recession is doing what the good times could not. It is straightening out that nationâ€™s foreign trade position. What was once an enormous liability is gradually becoming less of a problem. This is enormous good fortune for the U.S. Treasury. As for Canada, its merchandise trade position has become negative for the first time since March 1976, which was 33 years ago. This is a pretty stunning reversal of fortunes.
For the United States, the recession is doing what the good times could not. It is straightening out that nation/'s foreign trade position. What was once an enormous liability is gradually becoming less of a problem. The U.S. goods and services trade deficit has dropped from levels consistently between $700 and $800 USD billion, for three years between mid 2005 and mid 2008, to a level below $500 billion today (i.e., in December 2008, according to the U.S. Census Bureau).
The â€œTwin Deficitâ€ Problem is Diminishing
This is enormous good fortune for the U.S. Treasury. It means that the issuance of Treasury Bills can be directed towards the ballooning fiscal deficit without paying as much attention to capital account needs in the Balance of Payments. The twin deficit dilemma of â€œyoreâ€ is gradually shifting to only a single deficit issue, having to do with bailing out the financial sector and providing stimulus to fight the recession. The approach to the latter is through tax cuts and infrastructure spending.
Canada/'s Merchandise Trade slips into Deficit for First Time in 33 Years
Canada/'s merchandise trade position has become negative for the first time since March 1976, which was 33 years ago. This is a pretty stunning reversal of fortunes. Canada/'s trade difficulty lies in a shortfall of exports, mainly in commodities and autos. In the second half of last year, demand for Canadian crude from the U.S. dried up both in terms of barrels (i.e., physical volume) and prices. July 2008 was when global oil prices peaked. Also, auto trade with the U.S. and the rest of the world slipped a gear in late 2008 and the trade deficit in vehicle products has driven into the ditch.
In December, Canada/'s exports in current dollars were -2.7% year over year while imports were +4.6%. The most telling numbers on the export-import disparity, however, were in terms of year-to-date constant dollars. In full-year 2008 versus full-year 2007, Canada/'s constant dollar exports were -7.7% while imports were flat (+0.2%).
The U.S. Trade Improvement is thanks to Three Factors working on Imports
The improvement in the U.S. trade position has mainly come through declining imports. This has worked in three ways. (1) U.S. weak domestic demand has lowered the â€œvolumeâ€ (e.g., units as opposed to dollars) of imports. (2) The higher-valued greenback has lowered the price paid for imports. And (3), the list prices of many major imports, especially for such commodities as oil, have been lowered on world exchanges.
How has the U.S. recently fared in its trade with two key trading partners? This is where the numbers really come alive. The dollar volume of the U.S. deficit with OPEC nations has dropped by almost two-thirds over the past year. At the same time, OPEC/'s share of the total U.S. goods and services trade deficit has fallen back from 20% to just under 10%.
Meanwhile, the trade balance with China over the past year has really not altered that much. The deficit in dollars is about the same and the percentage share has actually increased, from 30.8% to 41.1%.
The Construction Connections
The trade statistics have construction tie-ins in several ways. For starters, export sales indicate where world product demand is healthy. Clearly, for Canada at this time, there isÂ a need to get out the â€œfeather dustersâ€ because so many of Canada/'s former export leaders in wood products, metals and minerals, fossil fuels and automobiles are being left on the shelf. Capacity expansions in those industries are out of fashion. Basic survival is what/'s â€œinâ€, at least for the moment.
Also, what will be interesting to watch over the next year or so will be the cross-border flow of raw materials and goods that are used in the construction process. This should be helped by the stimulus packages being adopted in both countries, with funds directed towards public works projects. Iron ore and steel shipments to the U.S. from Canada appeared to be in jeopardy until President Obama softened the â€œBuy Americaâ€ provisions in the U.S. spending bill.