A Shift to Balance in U.S. and Canada Foreign Trade

As of February 2009, there have been remarkable changes in the foreign trade positions of Canada and the United States. Canada usually runs a large merchandise trade surplus. During the past three months, however, that surplus has flipped over into deficit or a zero balance. Meanwhile, the trend in the U.S. has been in the opposite direction. The U.S. for the past four years has experienced a huge goods and services trade deficit. In the latest month, that deficit is down by more than two-thirds. This helps Washington with policy options. It need only worry about financing its fiscal deficit for the time being.

The National Output Impact
Net exports is a major component of Gross Domestic Product (GDP). Therefore, the change in foreign trade will have a negative impact on Canada's national output figure in the next set of quarterly measurements. Furthermore, this will also be a drag for a couple of quarters going forward. In the U.S., there will be a positive impact that will count against negative readings in other GDP components such as consumer spending.

There are three things to look for before Canada's trade picture will perk up again: (1) an improvement in U.S. housing starts that will draw more Canadian lumber across the border; (2) a pickup in U.S. auto demand to be satisfied by more imports from Canada; and (3) an increase in world commodity prices, especially for oil. This will help all of Canada's raw material sales and especially fossil fuel exports to south of the border. (story continued below)

Canada's Foreign Trade: The Merchandise Trade Balance

Analysis of Canada's foreign trade position usually focuses on the Merchandise Trade Balance, which is goods exports minus goods imports.
Based on seasonally adjusted monthly figures, projected at an annual rate.

Data source: Statistics Canada/Chart: Reed Construction Data — CanaData.

United States' Foreign Trade: Goods and Services Balance

Analysis of U.S. foreign trade usually focuses on goods and services exports minus goods and services imports.
Based on seasonally adjusted monthly figures, projected at an annual rate.

Data source: U.S. Census Bureau (Department of Commerce)/Chart: Reed Construction Data — CanaData.

Buried Deep in the Latest U.S. Trade Report
Buried deep in the latest trade report from the U.S. Census Bureau is a set of numbers that is one major explanation for the improvement in the U.S. trade picture. Due to the recession, the volume of oil imports into the U.S., as expressed in number of barrels, has fallen significantly since last July (i.e., by about 25%). This reading is consistent with many other indicators on the U.S. economy, such as auto sales and home prices.

But the volume decline is only a small part of the story. The big drop in the world price of oil has meant that the dollar volume of U.S. oil imports has nose-dived by nearly 80%. That's a swing effect of prodigious proportions. Add to this the fact that the U.S. still runs substantial surpluses in the following: airplanes, engines and parts; some agricultural products (corn and soybeans); and specialized industrial machinery.

One other statistic is particularly noteworthy. China has traditionally accounted for about one-third of the total U.S. trade deficit. Rather than decreasing, that proportion has now increased to 50%, although the dollar volume is down. China remains a big part of the world trade package.

Bilateral and Multi-lateral Trade Impacts on Construction
In bilateral trade, the Canadian forestry-U.S. housing connection takes first place for the construction sector. Any pickup in U.S. starts, expected by this fall, will be welcomed by suppliers in almost all provinces. Then there is the matter of multi-lateral trade. The volume of world trade has a major impact on commodity prices, which then spills over into building material costs. This effect will continue to be muted for the next six months. But there are indications that the Chinese economy is starting to bulk up again.

Finally, government infrastructure programs are being rolled out in Canada, the U.S. and elsewhere, including China. This will have an impact both in terms of primary product availability (e.g., steel from China) and raw material demand (e.g., coal and iron ore supplied to China from deposits in the West and Newfoundland and Labrador).

Canada's Trade by Major Goods and Commodities - February 2009

U.S. Goods Trade Deficit with Major Countries and Areas-
February 2009