4.2: Measuring Trade Between Nations

To evaluate the nature and consequences of its international trade, a nation looks at two key indicators: the balance of trade and the balance of payments.

Balance of Trade

A country’s balance of trade is calculated by subtracting the value of its imports from the value of its exports. If a country sells more products than it buys, it has a favourable balance, called a trade surplus. If it buys more than it sells, it has an unfavourable balance, or a trade deficit.

In 2023, the value of Canada’s annual merchandise exports decreased 1.4% to $768.2 billion, while the value of annual imports rose 1.4% to $770.2 billion.^[1] Between 1980 and 2008, Canada recorded a positive trade balance every year, with the exception of 1991 and 1992. From 2009 onwards, the trade balance shifted to a deficit. In 2021, it switched again to a trade surplus, with energy products making the largest share of exports (refer to Figure 4.2). The United States remains the country’s biggest trading partner.^[2] Other countries, such as China and Taiwan, which manufacture high volumes for export, have large trade surpluses because they sell far more goods overseas than they buy.

Deficits

A national deficit occurs when a government spends more money than it receives in revenue over a period of time. This can be due to a number of factors, including excessive spending or borrowing. A nation’s deficit can be an indicator of its financial health and economic situation.

Are trade deficits a bad thing? Not necessarily. They can be positive if a country’s economy is strong enough both to keep growing and to generate the jobs and incomes that permit its citizens to buy the best the world has to offer. That was certainly the case in  Canada in the 1990s and early 2000s. Some experts, however, are alarmed by trade deficits. Investment guru Warren Buffett, for example, cautions that no country can continuously sustain large and burgeoning trade deficits. Why not? Because creditor nations will eventually stop taking IOUs from debtor nations, and when that happens, the national spending spree will have to cease. “A nation’s credit card,” he warns, “charges truly breathtaking amounts. But that card’s credit line is not limitless”.^[3]

Surpluses

A country has a trade surplus when it sells more to other countries than it buys from them. It’s the opposite of a trade deficit. A surplus can lead to economic growth and employment, but it can also cause higher prices, interest rates, and a more expensive currency.

Trade surpluses aren’t necessarily good for a nation’s consumers. For example, Japan’s export-fueled economy produced high economic growth in the 1970s and 1980s, but most domestically made consumer goods were priced at artificially high levels inside Japan itself—so high, in fact, that many Japanese travelled overseas to buy the electronics and other high-quality goods on which Japanese trade was dependent.

CD players and televisions were significantly cheaper in Honolulu or Los Angeles than in Tokyo. How did this situation come about? Though Japan manufactures a variety of goods, many of them are made for export. To secure shares in international markets, Japan prices its exported goods competitively. Inside Japan, because competition is limited, producers can put artificially high prices on Japanese-made goods. Due to a number of factors (high demand for a limited supply of imported goods, high shipping and distribution costs, and other costs incurred by importers in a nation that tends to protect its own industries), imported goods are also expensive.^[4]

Today, Japan may not be as expensive as you think. While prices for certain goods and services are generally higher than you’d find in countries like China, Thailand, and Vietnam, on the whole, you might discover that costs are lower than in places such as Singapore, Australia, and Scandinavia.^[5]

Balance of Payments

The second key measure of the effectiveness of international trade is balance of payments—the difference, over a period of time, between the total flow of money coming into a country and the total flow of money going out. As in its balance of trade, the biggest factor in a country’s balance of payments is the money that flows as a result of imports and exports. But the balance of payments includes other cash inflows and outflows, such as cash received from or paid for foreign investment, loans, tourism, military expenditures, and foreign aid. For example, if a Canadian company buys some real estate in a foreign country, that investment counts in the Canadian balance of payments, but not in its balance of trade, which measures only import and export transactions. In the long run, having an unfavourable balance of payments can negatively affect the stability of a country’s currency. Canada has experienced unfavourable balances of payments since the turn of the century, which has forced the government to cover its debt by borrowing from other countries.

The national debt is the combined debt of all three levels of government in Canada: federal, provincial, and territorial. The debt is held by a variety of entities, including the Canadian public, foreigners, banks, trust and loan companies, and insurance companies. The balance of payments is comprised of three accounts: the current account, the capital account, and the financial account. In 2023, the current account of the Government of Canada posted a $17.8 billion deficit, up $7.4 billion compared with 2022. ^[6] The increase in the deficit was largely due to the trade in goods balance going from a surplus of $19.7 billion in 2022 to a deficit of $1.8 billion in 2023.^[7]

Below are a few interesting facts about who owes money to whom:

• As of 2021, China owed Canada $371 million in loans it incurred decades ago, and is not expected to repay them in full until 2045.^[8]
• As of 2024, Pakistan owed China $26.6 billion for money borrowed for infrastructure and energy projects.^[9]
• The United States boasts both the world’s biggest national debt in terms of dollar amount and its largest economy, which translates to a debt-to-GDP ratio of approximately 121.31%. The United States government’s spending has exceeded its income for most years, and the U.S. has not had a budget surplus since 2001.^[10]
• Japan, China, the United Kingdom, Belgium, and Luxembourg own the most U.S. debt, in that order.^[11]

Media Attributions

Figure 4.2: Exports and imports stabilize in 2023. (Source: Statistics Canada, based on Table 12-10-0011-01, 2024, May 9. Reproduced and distributed on an “as is” basis with the permission of Statistics Canada.), © Statistics Canada, licensed under Statistics Canada Open license.

Image Descriptions

Figure 4.2

A bar and line graph with a vertical axis representing millions of current dollars, ranging from -100,000 to 800,000 and a horizontal axis showing the years from 2009 to 2023.

A red line represents the merchandise trade balance, which fluctuates slightly above and below zero.

Dark blue bars represent imports while lighter blue bars indicate exports. The value of imports and exports are similar, but imports are consistently higher in most years, except 2014 and 2022. The graph indicates a general increase in both exports and imports over time, with slight fluctuations in the trade balance line.

Notes below the graph are

• Note(s): Data are on a balance-of-payments basis.
• Source(s): Table 12-10-0011-01.

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