Canada's Surprise Trade Deficit Highlights Issues With The U.S.

Canada posted a trade deficit of $179 million in April. Economist were instead expecting a surplus near $1 billion (see Financial Post article). Both prices and volume fell, with exports dropping 5.1%. Lower exports of industrial goods, materials, energy products, machinery, and equipment drove the number lower. The Canadian dollar, which has been strengthening against the U.S. dollar, is also not helping the situation for Canada. The U.S. is the largest Canadian trading partner (76% of exports and 65% of imports to and from the U.S., 2007 data, wikipedia; about 1/3rd of U.S trade).

The numbers, while bad for Canada, also highlight issues for the U.S. While the weak greenback may have helped U.S. exporters, imports into Canada were also down 1.5%. As a result, the larger decrease in exports from Canada illustrates the double-edge sword of a weak dollar. While it makes U.S. exports more attractive, it also makes international goods more expensive for U.S. industries that rely on imports of raw materials. The impact of this was seen in 2008 as higher crude oil prices, driven up in part due to a falling dollar, put a strain on the economy that trumped any benefits from increased exports. The figure below shows how U.S. - Canadian trade has fallen off a cliff over the last six months (figure source, U.S. Census Bureau), and why the recent "Buy American" provisions received so much interest and debate in Canada and the U.S.

Source: U.S. Census Bureau