The U.S. goods and services trade deficit rose to $438 billion USD in September. It had been as low as $317 billion in May of this year. At its worst, it reached around $800 billion, often in 2005-2006 and last seen in the middle of last year when the world price of oil was at its peak.

In September versus August, the U.S. experienced export sales gains in civilian aircraft, industrial machinery and jewelry. However, those gains did not make up for the import jumps in crude oil and autos and parts. Month-to-month exports rose 2.9% but imports climbed 5.8%.

U.S. currency devaluation

The nature of economic recovery will see the U.S. goods and services trade deficit worsen in the months ahead. However, there are several factors that may limit the size of the deterioration in the deficit versus previous performance levels. First among these will be currency devaluation.

The decline in value of the U.S. dollar, due largely to the retreat from security in U.S. treasury bills and a hunt for higher returns in other assets and other countries, will lower U.S. export prices and raise import costs. The hunt for higher investment returns includes seeking better foreign interest rates, since the Fed is committed to leaving its key policy-setting rate near zero.

Adding to the currency adjustment impact on the trade deficit will be the coming increase in value of the Chinese yuan versus the greenback. The trade impact will be dependent on the degree to which purchasers shift to domestic sources as opposed to moving to other low-cost Southeast Asian nations such as Vietnam, or elsewhere in a cost-competitive world.

Changes on the energy front

There are also changes underway on the energy front. Global oil prices are double their lows from February. But natural gas prices remain much more restrained on an energy equivalency basis. The supply of natural gas in North America has taken a sharp turn for the better due to new technologies that are permitting extraction from previously inaccessible sources.

Horizontal drilling for shale natural gas and techniques to break up the rock are making natural gas more readily available and at an economic cost. Second, the shift to more fuel efficient cars that received a boost from the “cash for clunkers” program and carmakers’ own initiatives to get smaller gas-sipping vehicles on the roads – often to comply with new government regulations – are working to reduce oil consumption. Further technological change to reduce fossil fuel usage is also looming due to pending legislation that will see carbon taxes imposed on heavy polluters.

Canada still in deficit

Canada is still in the unusual position of recording a merchandise trade deficit (-$11.1 billion CDN) rather than its usual surplus with the world. The shortfall improved by a little more than half in September as exports, on a month-to-month basis, increased 3.5% at the same time as imports stayed flat. Even when Canada’s trade position shifts over to a positive balance, it may have trouble returning to its former lofty heights. Such an outcome may be the fallout from natural gas prices staying depressed and the loonie continuing to climb versus the greenback.

Canada’s foreign trade: The merchandise trade balance

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

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

Canada's trade by major goods and commodities - September 2009

		Latest Period				Year to Date
		AUG 09	SEP 09	%		Jan-SEP 08	Jan-SEP 09	%
		(Cdn $ billions)		Change		(Cdn $ billions)		Change
Agricultural and	Exports	2.815	2.772	-1.5%		30.197	28.979	-4.0%
fishing products	Imports	2.466	2.350	-4.7%		20.881	22.293	6.8%
	Balance	0.349	0.422	20.9%		9.316	6.686	-28.2%
Energy	Exports	6.538	6.375	-2.5%		100.101	57.567	-42.5%
products	Imports	2.946	2.814	-4.5%		40.746	24.794	-39.1%
	Balance	3.592	3.561	-0.9%		59.355	32.773	-44.8%
Forestry	Exports	1.533	1.560	1.8%		19.227	14.741	-23.3%
products	Imports	0.193	0.202	4.7%		2.166	1.804	-16.7%
	Balance	1.340	1.358	1.3%		17.061	12.937	-24.2%
Industrial goods*	Exports	6.216	6.608	6.3%		85.538	58.592	-31.5%
and materials	Imports	5.861	6.361	8.5%		68.169	56.364	-17.3%
	Balance	0.355	0.247	-30.4%		17.369	2.228	-87.2%
Machinery and	Exports	6.155	6.433	4.5%		68.181	62.212	-8.8%
equipment	Imports	8.948	8.797	-1.7%		89.962	82.661	-8.1%
	Balance	-2.793	-2.364	-15.4%		-21.781	-20.449	-6.1%
Automotive	Exports	3.636	4.211	15.8%		46.724	30.868	-33.9%
Products	Imports	5.043	4.806	-4.7%		54.986	38.802	-29.4%
	Balance	-1.407	-0.595	-57.7%		-8.262	-7.934	-4.0%

*Industrial goods include metals and minerals.
N/A or "not applicable" is when the signs don't match.

Data source: Statistics Canada (based on seasonally adjusted current dollar monthly figures).
Table: Reed Construction Data - CanaData.