In 2017, Canada had a 48-billion-dollar trade deficit with China (23 billion in exports minus 71 billion dollars in imports).
Most economists do not see trade deficits as bad because the excess money that flows out of a country to buy imports will eventually flow back into the country as foreign investment.
There are, however, negative consequences from running trade deficits.
Three of these include currency devaluation, greater government debt and a loss of economic sovereignty.
When Canada’s trade deficit increases, Canadian citizens become more dependent on other countries to maintain their standard of living. In the long-term, trade deficits can weaken a nation’s economy.
As a nation’s trade deficit increases, the value of its currency tends to fall. As a result, citizens will have to pay higher prices for imports. In Venezuela, the collapse of their currency has resulted in shortages of many products including toilet paper.
Countries that have a strong currency can run trade deficits and not suffer economic decline, at least in the short-term. The United States has run trade deficits since 1976 in part due to the U.S. dollar being the world’s reserve currency. Because of the strength of the U.S. dollar, American citizens can buy cheap imports and maintain a higher standard of living.
Most economists argue that trade deficits are not a problem because the excess money that flows out of a country to buy imports will eventually flow back into the country. For instance, in 2017, Canada had an 8.4-billion-dollar trade deficit with the United States. With a surplus of Canadian dollars flowing into the U.S. (from the sale of American exports), American individuals and firms might “invest” in Canadian government bonds.
Hence, a trade deficit allows (or forces) the Canadian government to run larger budget deficits. If Americans had bought Canadian exports instead of bonds, the private sector would have grown larger, resulting in higher tax revenues for the government, and the budget deficit would decrease.
Another consequence of Canada’s trade deficit is that individuals from other countries will “invest” in our real estate. In recent years, foreign ownership of Canadian real estate has driven up prices to record highs. (In 2015, Chinese investors bought 13 billion dollars in real estate in Metro Vancouver, one-third of all sales.) While foreign purchases of Canadian real estate benefits Canadians who already own a home, it has made it more difficult for millennials to enter the market.
Perhaps the most serious consequence of Canada’s trade deficit with China is that Chinese firms have “invested” in Canadian corporations. (However, if Canada had balanced trade with China, more money would be in the hands of Canadians to “invest” in Canadian corporations.)
In effect, our trade deficit with China has resulted in Canada selling its assets (corporations and real estate), so that Canadians can buy Chinese imports. Worse still, when Canadian companies are owned by foreign entities, our natural resources may no longer be managed in the best interest of Canadian citizens. Hence, trade deficits result in a loss of economic sovereignty.
If a country has a net trade deficit, it means its citizens are consuming more than they are producing. In the long term, no country (except possibly the United States) can consume more than they produce without negative consequences. Sooner or later, trade deficits will lead to economic decline because the strength of a nation’s economy depends on producing goods and services that the world wants.