U.S. President Donald Trump justifies tariffs on Canada and other countries by pointing to the chronic U.S. trade deficit.
Since the U.S. imports more from the rest of the world than it exports, it has a trade deficit.
In 2024 that deficit equalled $917 billion (U.S.). That sounds like a lot, but equalled only three per cent of U.S. GDP (smaller than previous years). Canada gets much of the blame in Trump’s rants. Yet we account for just four per cent ($35 billion) of that total — tenth among U.S. trading partners.
Trump claims the deficit results from unfair treatment by the rest of the world. America can’t sell more abroad, he cries, because of obvious or hidden trade barriers. By imposing tariffs on all other countries (and even some uninhabited islands), and then using those tariffs to leverage other concessions, Trump predicts America will export more and import less. Voilà, the deficit will disappear.
Economists of all stripes, however, ridicule this narrative. Trade deficits are affected by many factors, including differences in macroeconomic performance, changes in competitiveness and exchange rate fluctuations. But the U.S. deficit is a chronic, structural feature: it has existed for 50 consecutive years.
That is only possible if a country continuously imports capital from the rest of the world, allowing it to pay for its trade deficit. And indeed, every year the U.S. takes in trillions of dollars of capital from other countries.
Those capital inflows come in all forms: loans, equities, derivatives, private equity, property, even cryptocurrency. They originate from many different actors: wealthy investors, investment funds, banks, central banks, and even foreign governments.
In total, those capital inflows are necessarily identical and opposite to America’s trade deficit. Indeed, by definition a country’s capital account (which measures net inflows and outflows of capital) must equal the opposite of its current account (consisting of the trade deficit and other current revenue flows).
America’s ability to attract foreign capital is usually seen as a strength, not a weakness. On average, U.S. investments are highly profitable (largely thanks to the very corporate-friendly structure of taxes, labour markets, and competition policy there). And U.S. assets, including the dollar itself, were long considered safe harbours in an uncertain and volatile financial world. (Under Trump, of course, that reputation is fading fast.)
Massive capital inflows give America (in aggregate) more money to spend in the world economy than it earns. Far from “subsidizing” Canada and other countries through its trade deficit, it’s America that has its hand out.
So if Trump really wants to reduce the trade deficit, America must stop taking in so much capital from the rest of the world. Here’s where Canada comes in.
There’s been a historic but underappreciated change in our economic relationship with the U.S. over the last generation. We’ve gone from being dependent on incoming foreign investment from the U.S. (whether to build industries or finance deficits) to the opposite. We are now a huge net source of capital for the U.S.
Canada has a net positive investment balance with the U.S. of $1.6 trillion, or 50 per cent of our GDP. The growth in our U.S. holdings over the last decade closely conforms to the cumulative U.S. trade deficit with Canada over the same time. America needs “handouts” from the rest of the world to finance its perpetual trade deficit — and Canada has done our bit.
Our U.S. investments take all forms: individual holdings, mutual funds, pension funds. Shockingly, our own Canada Pension Plan has half its total assets in the U.S.
Canada can help Trump in his mission to reduce his trade deficit, by bringing some of that capital home. In the face of his attacks, we face an urgent challenge to build a more sovereign and self-reliant economy. We need to diversify not just where we sell exports, but what we sell — breaking free of our precarious reliance on raw resource exports. We need to build infrastructure, high-tech industries and affordable housing.
All that will require massive amounts of capital — and we have $1.6 trillion sitting in the U.S. So let’s bring it home, including by repatriating some of those tax-subsidized pension investments. That will shrink the U.S. trade deficit.
And Donald Trump should thank us for it.
