The Trade Deficit and Buy Canadian Policy
A standard objection to the Buy Canadian policy proposed yesterday by Canadaâ€™s largest industrial unions was that Canada enjoys a trade surplus. Such a policy would allegedly prompt foreign retaliation, erasing our current trade surplus and its contribution to aggregate demand in Canada.
This morning, Statistics Canada reported that we actually ran a merchandise trade deficit in December, the first since March 1976. (Apparently, we really were trading on thin ice.) In other words, Canadaâ€™s much-vaunted trade surplus is already gone. International trade is now a net subtraction from Canadian aggregate demand rather than a net addition to it.
Of course, the microeconomic arguments for generally allowing the free movement of goods across borders have not changed, but the macroeconomic argument for â€œfree tradeâ€ just left the building. This news underscores the urgency of preventing too much stimulus spending from leaking out of Canadaâ€™s economy through a deteriorating trade balance. Such spending should indeed be accompanied by a Buy Canadian policy.
The fact that Canada is already in deficit reduces the potential cost of foreign retaliation. In any case, foreign retaliation is extremely unlikely because our major trading partners already employ preferential procurement along the lines proposed by Canadian unions (and some Canadian business).