Chronic deficits expose a political crisis, not a trade problem
Lost amid the clamour and drama over trade, tariffs and industrial policy—particularly the controversy over potentially punitive duties on (now paused) Canadian exports to the United States—is the unsatisfying truth about trade deficits and surpluses: neither one is necessarily ‘good’ nor ‘bad.’ Sometimes, their effects or significance can even be the reverse of conventional wisdom.
China, for example, has had large trade surpluses with the rest of the world for decades. Superficially, this appears to have generated strong economic growth and ‘paid for’ major investments in infrastructure such as hospitals, schools, roads, railways, ports and airports.
However, a 2021 European Institute for International Relations study attributed China’s economic success only minimally to trade policy. Instead, it credited market reforms incentivizing individuals and firms to increase productivity, opening the economy to foreign investors and expanding imports and exports.
Another major trading nation, Germany, has had substantial trade surpluses with the rest of the world for decades, yet, according to the Organization for Economic Co-operation and Development (OECD), it remains mired in economic stagnation, hovering around zero growth.
Turing to Japan as another, different example, in the post-Second World War era, its policies encouraged export-led growth, a form of mercantilism. Mercantilism is a system designed to enrich one nation by boosting higher-value exports and inducing other nations to supply lower-value inputs, thereby accumulating financial assets—gold in earlier eras.
As a result, Japan ran trade surpluses for decades. However, after 2010, its trade balances oscillated between surpluses and deficits. The country experienced a shrinking workforce, escalating public debt, an ageing population and weak productivity growth, all of which continue today, according to the International Institute for Strategic Studies (IISS).
In contrast, the United States has well-known, politically contentious global chronic trade deficits but relatively robust economic growth – noted by the aforementioned OECD data. Furthermore, the U.S. remains competitive in several sectors: information technology (IT), aerospace and defence, artificial intelligence, biotechnology, liquefied natural gas exports and precision instruments.
According to the U.S. Commerce Department, U.S. goods exports grew at a compound annual growth rate (CAGR) of 3.6 per cent from 2015 to 2024, reaching $2.98 trillion (in Canadian dollars). That represented 7.1 per cent of the U.S. GDP, which totalled C$41.7 trillion that year. U.S. services exports performed even better, with a CAGR of 5.6 per cent, reaching $1.16 trillion (Canadian) in 2024. Hence, the U.S. remains competitive.
No trade policy change—such as tariffs—can fully reverse trade deficits. The persistent U.S. trade deficit stems not from a lack of competitiveness but from capital inflows driven by large federal budget deficits. These deficits overwhelm domestic savings, drawing foreign buyers of U.S. bonds. Only a credible strategy to shrink the U.S. budget deficit, and the foreign borrowing it entails, will address the trade deficit.
Trade surpluses carry a more positive connotation than deficits, but history proves otherwise: prosperity depends on sound fiscal policy, not trade balances. Chronic deficits, like those of the U.S., are less a symptom of trade failure than of political failure—an unwillingness to rein in borrowing and spending.
Ian Madsen is the Senior Policy Analyst at the Frontier Centre for Public Policy.
