Trade Surplus Falls to Nine-Year Low

Today, Statistics Canada revealed that our December 2007 merchandise trade surplus was the lowest one since November 1998. This fact is yet more evidence that the rise in energy exports has been smaller than the decline in exports from manufacturing and other sectors.

The conventional story about high oil prices driving-up the loonie assumes that these prices have increased our trade surplus and hence foreign demand for Canadian currency. However, today’s numbers confirm that our trade surplus has decreased. Other things being equal, this decrease would tend to reduce foreign demand for Canadian currency. Indeed, today’s merchandise-trade figures have slightly lowered the exchange rate.

Notwithstanding the trade surplus, the fact remains that high oil prices have raised the Canadian dollar to parity with the US dollar. Jim and I have put forward some alternate explanations of the oil-loonie relationship.


  • I don’t see how this challenges the conventional narrative:

    – Higher oil prices pushed the trade balance up to the stratosphere.

    – The current account surplus generated upward pressure on the CAD.

    – The CAD appreciation is brining the trade balance back to earth.

    It looks like the stuff of textbooks to me.

  • Isn’t there another part of the equation? Our biggest trading partner is in recession, consumers aren’t buying, which means less demand for our exports. Our economy is still relatively strong, which keeps imports high, and the gap lessens.

  • Yes, Stephen, but events did not unfold in that order.

    As the trade surplus peaked during the second half of 2005, the Canadian dollar retained a value around 85 American cents.

    As the trade surplus declined steadily during 2006, the dollar rose to 90 cents and then fell back to 85 cents.

    As the trade surplus rose partway back to 2005 levels during the first half of 2007, the dollar rose to 90 cents.

    As the trade surplus fell sharply in the second half of 2007, the dollar shot-up as high as 110 cents and then levelled-off at parity.

    With the exception of early 2007, it is not clear when “The current account surplus generated upward pressure on the CAD”. Most of the trade surplus happened in 2005. Most of the currency appreciation happened in late 2007.

  • Notwithstanding the timing, the story stands: an increase in oil prices would have increased the trade surplus if exchange rates had stayed constant. But the CAD appreciated, so the trade surplus is lower than it would have been if that appreciation had not taken place.

    Large trade surpluses are not sustainable, no more than are large trade deficits.

  • Oh Stephen tell that to the Americans. I suppose that the recent decrease of their deficit to only 6% of GDP is further evidence in your favour. No, well, then queue Dark Matter. The only part of your textbook that still stands is that if certain goods become more expensive less of them will be purchased. But then Shakespeare could have told you that. I dare you invoke the «long run» view now.

  • AFAICT, no-one thinks that the US current account deficit is indefinitely sustainable.

  • AFAICT, no-one thinks the American empire is indefinitely sustainable, or the sun for that matter.

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