Trade Balances and Jobs: Canada, the US and China

The following note, including tables, is available on the Canadian Labour Congress website:

Free trade was promoted to Canadians on the famous promise of “jobs, jobs, and more jobs” and is widely defended on the basis that Canada’s large trade surplus with the US contributes to Canadian employment. Meanwhile, American commentators are concerned that the US trade deficit displaces American jobs. While these commentators are mainly focused on China, some of them have identified Canada as a drain on US employment. This note examines the effect of trade balances on North American jobs.

Conservative economists argue that, assuming full employment, free trade simply ensures an efficient allocation of production among countries. For each country, job losses in some industries will be offset by gains in others, leading to higher overall productivity. In the real world, where unemployment is possible, free trade can yield net losses of production and employment in particular countries. Even Canadian supporters of free trade acknowledge that it failed to significantly increase Canada’s productivity. Their claims that Canada’s trade surplus with the US creates Canadian jobs implicitly accept the claims of American critics that this surplus eliminates American jobs.

The conventional wisdom that free trade and Canada’s trade surplus have transferred jobs from Americans to Canadians is misleading. In fact, this surplus consists almost entirely of natural resources that the US cannot produce enough of to meet its needs. However, the concern about the US trade deficit relates to imports of goods and services that might otherwise have been produced by American workers. Whereas Canada’s trade surplus simply reflects differing resource endowments, China’s trade surplus is based on low-cost manufacturing that undermines North American employment. Rather than viewing Canada as part of the problem, Americans should work with Canadians to address the challenge of Chinese competition.

Fossil fuels and electricity account for nearly two-thirds of the Canada-US trade surplus. Raw and semi-processed products from forestry, mining and agriculture comprise the remaining third. In general, these Canadian exports do not displace American jobs. To the extent that Canadian and American producers compete in forestry and agriculture, the recent Softwood Lumber Agreement and generous farm subsidies protect American jobs in these sectors. If the US did not import natural resources from Canada, it would have to import them from other foreign countries. Such imports do not harm American workers, but provide inputs vital to the US economy.

Of course, much resource processing is conventionally classified as “manufacturing.” However, to argue that oil refineries, sawmills, and steel plants in Canada eliminate American jobs is to suggest that all Canadian natural resources should be processed in the US. Currently, Canada exports four times the value of crude oil and natural gas as of refined petroleum products and electricity to the US. To the extent that some resources are processed in Canada, the associated “manufacturing” jobs clearly arise from Canada’s resource endowment.

Canada-US trade in non-resource industries is remarkably balanced. While Canada runs a significant surplus in automotive products and a small one in chemicals, the US enjoys appreciable surpluses in machinery and equipment and in services. Canada’s overall trade surplus reflects its resource endowment. Outside of the resource sector, American exports to Canada nearly equal Canadian exports to the US. There is no evidence of internationally mobile production being disproportionately located in Canada rather than in the US. In other words, Canadians have not gained jobs at the expense of American workers.

In fact, significant evidence indicates that internationally mobile activity is still concentrated in the US. Free trade was supposed to end Canada’s status as a “branch plant” economy by allowing Canadian-based companies to access the same continental market and economies of scale as American-based companies. However, the persistence of a US current-account surplus with Canada in investment income reflects the disproportionate location of corporate headquarters, and the associated jobs, in the US as opposed to Canada. The US investment-income surplus of $18.4 billion dwarfs Canada’s small surplus of $2.7 billion in non-resource output.

While the North American Free Trade Agreement has had many negative consequences for Canadian and American workers, it has not transferred jobs from the US to Canada. However, the recent flood of imports from China clearly implies a loss of North American employment. Even in resource industries, Canada has only a modest trade surplus with China. Canada’s natural endowment is mostly offset by China’s competitive advantage in resource processing, such as primary-steel production and petroleum refining. Canada exports raw commodities to China and imports processed materials from China. In non-resource industries, Canada runs a substantial trade deficit. Like the US, Canada has lost many manufacturing jobs in recent years.

Canada’s trade deficit with China is 1.9% of Gross Domestic Product (GDP), while the US trade deficit with China is 1.8% of American GDP. Despite anticipated Canadian gains from selling natural resources to China, Canada’s trade deficit with China is proportionally larger than the US trade deficit with China.

Rather than benignly increasing productivity, international trade can cause net losses of production and employment. However, there is no evidence that North American free trade transferred internationally mobile activity from the US to Canada. The Canadian trade surplus reflects natural resources that help sustain, and do not threaten, American employment. By contrast, the shift of manufacturing to China is eliminating North American jobs. Progressive forces in Canada and the US should cooperate to address this shift.