Chronic deficits expose a political crisis, not a trade problem
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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.
The People’s Republic of China (PRC), for example, has had large trade surpluses with the rest of the world for decades. This appears to have generated strong economic growth during that period and ‘paid for’ major investments in infrastructure and public services such as hospitals, schools, roads, railways, ports and airports.
However, a 2021 study by the European Institute for International Relations attributed China’s economic success only minimally to trade policy. Instead, it credited market reforms that incentivized individuals and firms to increase productivity, as well as policies that opened the economy to foreign investors and expanded both imports and exports.
 Chronic deficits are caused by governments unwilling to rein in borrowing and spending. |
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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.
Japan offers another perspective on export-driven growth—one that mirrors Germany’s path but leads to different challenges. In the post-Second World War era, Japan’s political leaders created policies to encourage export-led growth, a form of mercantilism. Mercantilism is defined as 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 as the country experienced a range of economic and demographic challenges. These included 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 chronic trade deficits with the rest of the world but relatively robust economic growth, as demonstrated by the aforementioned OECD data. Furthermore, the U.S. remains competitive in several industrial sectors: information technology (IT), aerospace and defence, artificial intelligence, biotechnology, liquefied natural gas exports and precision instruments.
Export competitiveness is not the issue. 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, creating a need for foreign buyers of U.S. bonds.
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. is holding its own competitively.
No trade policy change—such as tariffs—can reverse that. Only a credible strategy to shrink the U.S. budget deficit, and the foreign borrowing it entails, will address the trade deficit.
Trade surpluses often 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.
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