Neither U.S. nor Canadian Foreign Trade is Following the Script

2016-06-08-US-Trade-GraphicLast year, an expectation of a series of interest rate hikes to be rolled out by the Federal Reserve led to a period of extreme strength in the value of the U.S. dollar. There’s no doubt this caused headaches for manufacturers and service providers trying to make export sales.

It also inhibited inbound tourist and business travel from beyond the country’s boundaries and encouraged import purchases which were made cheaper by the currency effect.

Nevertheless, America’s goods and services trade balance with the world, which ranged between -$600 billion and -$800 billion before the Great Recession, stayed close to -$500 billion in 2015, or approximately the same as in 2014 and 2013 (see Graph 1).

Graph 1: United States’ Foreign Trade: Goods and Services Balance


Based on seasonally adjusted monthly figures, projected at an annual rate.

Analysis of U.S. foreign trade usually focuses on goods and services exports minus goods and services imports.

Data source: U.S. Bureau of the Census.
Chart: ConstructConnect


In March and April of this year, the U.S. trade deficit fell further, to -$400 billion. That’s a reduction of as much as 50% from when it was at its most excessive.

The major sources of the improvement have been a greater self-reliance on domestic energy, made possible by the emergence of a hydraulic fracturing sector that has learned how to tap previously inaccessible reserves.

Also, the global price of oil has fallen dramatically. The oil that is still being imported is much less expensive.

More recently, with job creation decelerating and the Fed less likely to aggressively pursue rate increases, the greenback has been in modest retreat versus other major currencies.

A less muscular greenback should enable the economy to maintain its better foreign trade position.  A smaller trade deficit will provide a big bonus for the summation of the line items in the gross domestic product (GDP) calculation.

The U.S. was able to realize +2.4% ‘real’ (i.e., after adjustment for inflation) GDP growth in each of 2014 and 2015, partly due to smaller foreign trade shortfalls.

Prior to the Great Recession, mention was often made of the U.S. having a mountainous problem tied to its giant ‘twin deficits’, in foreign trade and in federal government financing.

As Graph 1 shows, considerable progress has been made in rectifying the trade deficit.

As for Washington’s financing deficit, the revenues versus expenditures shortfall ballooned to between $1.0 trillion and $1.5 trillion in each of the four fiscal years 2009, 2010, 2011 and 2012. (America’s budgetary period runs from October 1st of one year to September 30th of the following year.)

Since then, sequestration and other forms of severe belt-tightening have drastically cut the deficit. It dropped below -$500 billion in Fiscal Year 2015 and is projected to range between -$500 billion and -$600 billion out to 2020.

Given the progress that has been made in dealing with and reducing the ‘twin deficits’, one could easily argue that the economic mood in the U.S. should be a good deal lighter. (Although there is still a $20 trillion accumulated debt that’s wearing a scary mask and lurking behind a tree in the backyard.)

Table 1: U.S. goods trade deficit with major countries and areas – April 2016
Annualized Percent
of Total
Annualized Percent
of Total
Figure U.S. Goods Figure U.S. Goods
(U.S. $ billions) Trade Deficit (U.S. $ billions) Trade Deficit
Canada 1 year ago -3.7 0.5% Euro Area 1 year ago -125.3 17.0%
3 months ago -30.4 4.4% 3 months ago -88.7 12.8%
Latest month 10.5 n/a Latest month -129.0 19.4%
Mexico 1 year ago -56.4 7.6% OPEC 1 year ago -0.5 0.1%
3 months ago -52.0 7.5% nations 3 months ago -4.4 0.6%
Latest month -68.6 10.3% Latest month 3.2 n/a
Germany 1 year ago -78.6 10.7% Indonesia* 1 year ago -15.4 2.1%
3 months ago -54.5 7.9% (OPEC 3 months ago -9.9 1.4%
Latest month -70.4 10.6% (member) Latest month -11.7 1.8%
China 1 year ago -321.7 43.6% Nigeria 1 year ago 0.9 n/a
3 months ago -347.2 50.2% (OPEC 3 months ago -0.6 0.1%
Latest month -291.7 43.8% member) Latest month -2.7 0.4%
Japan 1 year ago -86.3 11.7% Saudi Arabia 1 year ago -4.1 0.6%
3 months ago -58.6 8.5% (OPEC 3 months ago -4.2 0.6%
Latest month -74.6 11.2% member) Latest month 3.2 n/a
India 1 year ago -26.1 3.5% Venezuela 1 year ago -10.9 1.5%
3 months ago -26.3 3.8% (OPEC 3 months ago -3.3 0.5%
Latest month -23.3 3.5% member) Latest month -4.1 0.6%
*Indonesia rejoined OPEC on January 1, 2016.
The five major foreign suppliers of crude oil to the United States are Canada, Saudi Arabia, Venezuela, Mexico and Colombia.
Data source: U.S. Census Bureau (Department of Commerce) (based on not seasonally adjusted current-dollar monthly figures).
Table: ConstructConnect.

Canada’s foreign trade position was supposed to be helped by a weak Canadian dollar. The benefits, especially over the last three months, have not been readily apparent (see Graph 2).

Graph 2: Canada’s Foreign Trade: The Merchandise Trade Balance
Canada’s Foreign Trade: The Merchandise Trade Balance

Based on seasonally adjusted monthly figures, projected at an annual rate.

Analysis of Canada’s foreign trade position usually focuses on the
Merchandise Trade Balance which is goods exports minus goods imports.

Data source: Statistics Canada.
Chart: ConstructConnect.

A monthly (annualized) surplus in merchandise trade of around +$50 billion CAD has deteriorated to a deficit near -$25 billion CAD.

The reversal of the commodities super-cycle–from booming demand and peak prices in the mid-00s to the stagnant demand and less-than-stellar prices of the last several years−has been most injurious.

Table 2 shows year-over-year sales for the nation’s major export products, according to their principal province(s) of origin.

Table 2: Provinces ‒ Key Product Exports
% Change, Jan-APR 2016
Provinces versus Jan-APR 2015
Newfoundland & Labrador:
     Energy products -36.6%
     Metals & minerals -8.4%
     Forestry products 5.9%
     Aerospace products -14.0%
     Consumer goods 18.9%
     Metals & minerals -1.9%
     Petrochemical products 0.1%
     Industrial Machinery 5.8%
     Motor vehicles & parts 26.8%
     Consumer goods 24.7%
     Farm products -2.8%
     Energy products -53.8%
     Metals & minerals -29.4%
     Energy products -32.0%
     Petrochemical products -4.7%
British Columbia:
     Energy products -16.0%
     Forestry products 5.5%


Data source: Statistics Canada.
Chart: ConstructConnect.

‘Energy product’ exports is the category that leaps off the page as most severely in the doldrums.

The year-over-year sales descent has been especially pronounced in Saskatchewan (-53.8% or cut by more than half), with Newfoundland and Labrador (-36.6%) and Alberta (-32.0%) also being battered and bruised. B.C. (-16.0%), while down, has escaped the same degree of calamity.

Alberta’s poor showing year-to-date through April (-32.0%) doesn’t even include the disastrous results that are sure to appear for May, when an awesomely disruptive wildfire swept through the Fort McMurray region, forcing 80,000 people to temporarily flee their homes, and caused the shutdown of nearby Oil Sands operations for several weeks.

Among the major exporters of metals and minerals, Saskatchewan (-29.4%) has suffered the most, while Quebec has seen a more modest decline (-8.4%) and Ontario has held almost steady (-1.9%). Saskatchewan is known for its ‘pink gold’ sales (i.e., potash) and the worldwide fertilizer market has fallen below its earlier potential promise.

2016-06-08-Canada-Trade-GraphicThe low-valued Canadian dollar has played a helpful role in stimulating the consumer goods exports of Ontario (+24.7%) and Quebec (+18.9%) and the motor vehicle and parts exports of the former province (+26.8%). But Ontario also needs to thank U.S. car purchasers, who have been enthusiastically upgrading their ‘means of locomotion.’ In other words, their ‘wheels.’

The gain in the export sales of forestry products by Quebec (+5.9%) and B.C. (+5.5%) warrants future monitoring. Should there be further percentage change advances in the months to come, that’s sure to create a flashpoint in trading relations between the U.S. and Canada, what with the recent termination of the softwood lumber agreement between the two nations.

As for total exports regionally, the resource-dependent provinces of Newfoundland and Labrador (-26.6%), Alberta (-25.0%), Saskatchewan (-22.3%) and New Brunswick (-19.7%) have recorded the largest year-to-date sales declines.

Nova Scotia (+1.4%), Manitoba (+1.2%), B.C. (+1.0%) and Quebec (-0.5%) have managed to stay essentially flat.

Only tiny Prince Edward Island (+7.4%) and much bigger Ontario (+13.8%) have bragging rights to increases.

Slight signs of relief for Canada’s foreign trade imbalance are beginning to emerge. Some commodity prices have tentatively begun rebounds.

Silver is finally being recognized for its industrial uses, not just its intrinsic value as a precious metal. As a highly efficient conductor of electrical current, it is being widely used in the production of solar panels. And the solar panel industry is expected to grow exponentially.

The price of zinc is up nearly one-quarter so far this year. A couple of large mine closures have fostered fears of an imminent supply shortage. Zinc is principally employed to rustproof steel.

Most important, oil has risen back to around $50 USD per barrel. It’s no coincidence that this spring’s best advance in the Toronto Stock Exchange (TSX) index in years has been simultaneous with the improving world price for crude.

As is naturally to be expected, the low prices for many commodities have set in motion self-correcting forces–which is just a fancy way of saying production cutbacks, combined with incipient bargain-hunter demand.

For agricultural commodities, instances of severe weather patterns (e.g., torrential rain or skin-wrinkling drought), which have slashed crop yields in some key farming zones throughout the world, have also contributed to upward price speculation.

Finally, since most commodities are priced in U.S. dollars, the greenback’s softening has also been a spur to demand, especially from consumers outside America’s borders.

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