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posted on 31 August 2017

NAFTA: A Per Capita View

by Brad Parkes

By now everyone knows that President Trump believes NAFTA is unfair to the United States of America. President Trump believes Trade should balance. It is clear the President is persuaded through images as he was convinced to launch strikes against Syria and to maintain troops in Afghanistan based on pictures.

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One might wonder if he derives his view of trade from popular film. The view that trade must balance seems eerily similar to that of the economic structure of Panem in the Hunger Games. A structure where the Capitol District sends goods to the eleven districts for the exact amount of resources they send back. America is the hub and all other nations are the spokes.

Comparing Trade Partners: By Per Capita

When institutions attempt to compare nations we do so on a per capita basis. Economists use GDP per capita to rank the wealth of nations. Environmental organizations use emissions per capita to compare the environmental impact of different countries. Criminologists use violent crime per 100,000 people to compare the safety of state. Even hotels, a business President Trump understands, use a metric called Revenue per Available Room (RevPAR) to compare the profitability across different hotels. We do this to normalize the comparison. It allows smaller and larger nations (or larger and smaller hotels) to be compared on an even basis.

So why not trade per capita to evaluate trade deals?

Trade: The numbers

This article is just looking at the relationship between Canada and the United States. In 2015, trade between Canada and the United States consisted of the US exporting US$280.3 billion dollars’ worth of goods to Canada while importing US$295.2 billion worth of goods from the northern neighbour. The total value of this trade partnership is US$575.5 billion. It is not quite balanced. America has a $US14.9 billion trade deficit with Canada. That deficit represents 2.6% of the total trade.

However, the United States economy is much larger than the Canadian economy. It should have the capacity to import more than its smaller neighbour. Just as the wealthy have the capacity to purchase more than their less wealthy neighbours.

The US economy in 2016, had a nominal value of US$18.56 trillion while the Canadian economy was valued at US$1.53 trillion. The US economy is 12.5 times the size of the Canadian economy, yet trade is almost balanced.

The US also has a larger population at 323.1 million (2016 numbers) versus 36.29 million (2016) for Canada. The US population is 8.9 times the size of the Canadian population, yet trade is almost balanced.


the “average Canadian" buys US$7723.89 of American goods... and the “average American" buys US$913.65 of Canadian goods


Total US trade with all nations in 2016, equated to US$2.2 trillion in exports and US$2.7 trillion in imports. When removing the value of Canadian trade from the total, the US imported US$2.405 trillion in goods and exported US$1.92 trillion. The global population, not including Canada and the USA, is 7.1 billion people. Canada represents 13.4% of all US exports. This was done by an economy that is approximately 2% of global GDP and 0.5% of global population.

NAFTA: Per Capita Trade

When these numbers are adjusted by per capita the “average Canadian" buys US$7723.89 of American goods ($280.3 billion divided by 36.29 million) and the “average American" buys US$913.65 of Canadian goods ($295.2 billion divided by 323.1 million).

Adjusting the “Rest of the World" trade, ex-Canada, on a per capita basis the “average American" imports US$7443.51 worth goods from abroad while the “average Rest of the World" customer buys $270.42 worth of US products.

Canadians buy 8.45 times more goods per person from the USA than the US imports from Canada on a per capita basis. Canadians buy on a per capita basis more than the USA buys on a per capita basis from the Rest of the World.

Using these metrics Canadians appear to be the best customer in the world.

A Metaphor Trump can Understand: The Store

Imagine both nations were a store (or hotel or golf course). When the Canadian customer goes to the US store he purchases $8.45 worth goods for every $1 the US customer spends at the Canadian store. The Canadian is best customer the US store has. The Canadian is a better customer than the US customer is with the Rest of the World at their store. Adding to the impressive nature of the Canadian customer, his store is 12.5 times smaller.


For Canada, eliminating NAFTA would be painful at first, but Canadians could redirect that US$7723.89 worth of goods internally (former exports become domestic products) to the businesses that are created to replace American imports or from new foreign sources as Canada continues to sign trade agreements.


President Trump sold the notion to voters that he would run government like a business. What type of business would shun their best customer over a 2.6% deficit in business? Would a successful business alienate a customer that spends almost 8.5 times the amount on their goods than they spent in return?

Conclusion

Maybe President Trump’s protectionist policies bring back some manufacturing jobs, however, if you chase away your customers you just produce goods for no reason. This is what the Soviet economy did. It produced a steel quota regardless of demand. President Trump’s America First view will not work without customers. Certainly some dollars the US spent on trade with Canada will be directed internally, but this only equates to US$913.65 per person. Probably just enough to rent the nicest room in some of President Trump’s hotels. For Canada, eliminating NAFTA would be painful at first, but Canadians could redirect that US$7723.89 worth of goods internally (former exports become domestic products) to the businesses that are created to replace American imports or from new foreign sources as Canada continues to sign trade agreements. The world knows Canada is a good customer. Canada will survive.

I do not believe this is the best outcome for either nation. Autarky has proven to be inefficient and costly. Canadian prices would likely rise and the benefit to American producers would likely be smaller than President Trump claims. Supply chains would be disrupted making previous investments inefficient as well as other negative effects.

President Trump you are a business man. In your business ventures do you chastise and alienate your best customer? A customer who spends 8.45 times what you spend on his or her business? Would you be worth as much as you say if you ran your golf courses or hotels this way? I think you need to ask yourself this question.

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