Lexicon Financial Group Weekly Update — March 26, 2025
“The trade deficit is the capital surplus, and don’t ever think of having a capital surplus as being a bad thing for our country.”
From the desk of Craig Swistun, CIM, MFA-P, Portfolio Manager, Raymond James Investment Counsel, and Wayne Hendry, Client Relationship Manager, Raymond James Investment Counsel
Looking Around
Trade deficits are mentioned almost as much as tariffs these days. But trade deficits are nothing new. Take the United States (U.S.), for example. They have run a persistent trade deficit since the 1970s. They also ran one through most of the 19th century.
In the early 1800s, Europe could produce manufactured goods more cheaply, and the agrarian United States was still playing catch-up. Europe had the factories that turned raw materials into finished, more desirable goods. This created trade deficits for the U.S. in several classes of manufactured goods. Basically, the country paid more to import finished goods than it generated selling raw materials. It was not until the U.S. advanced and began to surpass other manufacturing-based economies that the trade balance went from persistent deficits to persistent surpluses in the first part of the 20th century. In the 1970s, by contrast, the U.S. went from trade surpluses to trade deficits as the U.S. economy began exporting more services such as finance, technology, and tourism. (1)
Canada recorded a positive trade balance between 1980 and 2008 every year except for 1991 and 1992. However, from 2009 onwards, its trade balance shifted to a deficit. In 2021, it switched back to a trade surplus, in large part due to the contribution of the export of energy products. Just this past January, the Canadian trade surplus widened to CAD 4.0 billion - the largest since May 2022 and well above market expectations of CAD 1.3 billion. Interestingly, Canada’s exports to the U.S. surged 7.5 per cent, reaching a record CAD 58.2 billion despite amid tariff threats, while imports from the U.S. increased 4.7 per cent. Trade surpluses and deficits are influenced by all aspects of global markets. When energy prices are lower, the value of exports declines, and Canada often finds itself in a deficit. (2)
But that doesn’t mean the sky is falling. We are not “Chicken Little.”
President Trump has indeed been unambiguous when it comes to trade. His trade policy agenda prioritizes tariffs as a tool to protect and grow U.S. industries and jobs. He wants domestic manufacturing to return, reducing the need to purchase goods abroad. U.S. trade deficits (where the value of imports exceeds exports) with partner countries have now potentially become a gauge for tariff risk. The chart below shows which countries have the largest, in dollar terms, trade imbalance with the U.S.
Another way to look at things is by looking at how important trade is between those countries and the U.S. The chart below overlays the percentage of the country’s economy that is tied to U.S. imports.
Take China, for example. It’s the dot on the far left. It has the largest trade deficit with the US in dollar terms, but the Chinese economy does not rely considerably on the U.S. as an export market. Mexico and Canada, on the other hand, rely far more heavily on the U.S. purchasing their goods and services and are much more vulnerable to the threat of tariffs. Yet, so far this year, the announced tariffs have been milder than financial markets had anticipated. As a result, stock markets around the world have advanced. However, the potential for more market volatility is as real as the risks of more tariffs, tariff rate escalation, and retaliatory tariff or non-tariff measures. (3)
Trade deficits do matter. A sustained trade deficit may adversely impact a country and its stock markets. Any country that imports more goods than it exports for a prolonged period may find themselves spiraling into debt. They are buying more than they are selling. A decline in spending on domestically produced goods hurts domestic companies, domestic workers, and local economies. If stock prices decline, investors may seek opportunities in foreign markets. And so, the cycle goes. (4)
The thinking is that if Trump’s tariff policies make importing goods more expensive for American consumers, manufacturers will create the facilities and factories to make those goods in the U.S., deploying capital and employing workers. This grows the domestic economy, which trickles down to investors through increased stock prices. More people are working. This can drive up consumer spending, which often results in higher stock prices. And the cycle goes and goes.
The question for businesses is, where are they in the cycle? The question for economies, whether developed or developing, is the same but more complex: Where are we? Where do we want to be? How are we going to get there?.
Canada has a trade surplus with the United States because the United States buys a lot of energy from us. A trade deficit could coexist during economic expansion and a rising stock market, as it has in the U.S. for quite some time. (5)
The point here is that central governments need to understand how and why a trade deficit or surplus exists and what the impact will be on its economy. A deficit is not necessarily a bad thing, and a surplus is not always a good thing. They are, however, frequently politicized and serve as ammunition for politicians to advance their agendas. Trade imbalances can shape public perception, influence policy decisions, and often underscore broader concerns about globalization and job loss. They may also signal an over-reliance on a source of revenue and be a call to diversify the domestic economy.
Read and Watch
Want deeper insight into topics in your Weekly Update? Then, read and/or right click:
Is this the start of a period of European exceptionalism in markets?
Berkshire raises stakes in Japan’s largest trading houses
China’s Real Estate Crisis: Why the Younger Generation Is Not Buying Houses Anymore
Looking Back
So far, this week, stock markets have reclaimed some of the losses of last week. The big news this week was the decision of the United States Federal Reserve (Fed) to leave interest rates unchanged, as Fed officials stuck to their previous forecast for two more cuts this year, despite bracing for higher inflation and slower growth. The Fed may change its stance, but, for now, the cost of borrowing is not going to decrease for U.S. consumers and businesses.
Major stock indexes in the United States (U.S.) closed slightly higher and well off earlier lows on Friday last week. Comments from U.S. President Donald Trump provided hope to investors that previously announced tariffs that will begin on April 2 may not be as harsh as feared.
Markets, as we all know, have been under significant pressure since President Trump began implementing tariffs, as ever-changing announcements about the timing and size of tariffs have clouded the outlook for corporate profits, the U.S. Federal Reserve (Fed) monetary policy path, and economic forecasts. Stocks showed some signs of bottoming out last week in the wake of the Fed’s latest policy announcement. The Fed kept rates unchanged and signalled two cuts were likely this year. Last Friday, Chicago Federal Reserve President Austan Goolsbee said that the Fed needs more time to work out how Trump’s policies play out in the U.S. economy. Meanwhile, New York Fed President John Williams echoed Goolsbee’s comments and said there was no rush to change monetary policy right now. The Toronto Stock Exchange’s S&P/TSX composite index (TSX) ended up 1.7 per cent last week - its biggest weekly gain since November. (6)
Major U.S. stock markets ended slightly higher last week, with the technology-heavy Nasdaq Composite being the worst-performing index last week. Expectations have increased for inflation in the U.S. this year while expectations for gross domestic product (GDP) growth have been lowered. The Fed’s post-meeting statement stated that uncertainty around the economic outlook has increased. Despite this, the takeaways from the Fed meeting appeared to be largely positive thanks to the Fed Chair, Jerome Powell, stating that the Fed’s “base case” is that the impact of tariffs will be transitory and that most longer-term expectations will remain consistent with the 2 per cent inflation target. This helped improve investor sentiment and boost stock markets.
The pan-European STOXX Europe 600 Index snapped two weeks of losses by ending 0.56 per cent higher last week. This gain was fueled by hopes of a boost in government spending but curbed by tensions about U.S. tariffs planned for April 2. Other major European stock indexes ended the week mixed.
Stock markets in Japan rose last week as foreign investor interest helped lift the shares of Japanese trading companies. The Bank of Japan (BoJ) adopted a cautious stance, holding rates steady as it assesses the potential impact of higher U.S. tariffs on Japan’s economy.
Mainland Chinese stock markets fell last week as investors turned cautious even though a batch of better-than-expected indicators showing that the economy started the year on solid footing was released in China. Retail sales in China rose 4 per cent in the January-February period from a year earlier – this is the quickest growth rate since November last year. Industrial output grew 5.9 per cent year on year in the first two months of this year. This was slower than December’s 6.2 per cent expansion but still beat expectations. Fixed asset investment—which includes property and infrastructure investment—increased 4.1 per cent in the January-February period year on year, which was also above expectations. Now you may be wondering why China’s statistics bureau combines data for January and February. Well, it does so to smooth out distortions caused by the irregular timing of the Lunar New Year holiday.
Other data signalled areas of weakness in the Chinese economy. Property development investment sank 9.8 per cent in the first two months of 2025 year on year after falling 10.6 per cent in December. It looks like China’s yearslong property slump has yet to find a bottom. The urban unemployment rate climbed to 5.4 per cent which is the highest level in two years, according to Reuters. That said, it is expected that the Chinese government can meet its annual growth goals of 5 per cent despite the risk of an escalating U.S. trade war. (7)
The opinions expressed are those of Craig Swistun and not necessarily those of Raymond James Investment Counsel which is a subsidiary of Raymond James Ltd. Statistics and factual data and other information presented are from sources believed to be reliable, but their accuracy cannot be guaranteed. It is furnished on the basis and understanding that Raymond James is to be under no liability whatsoever in respect thereof. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. Raymond James advisors are not tax advisors, and we recommend that clients seek independent advice from a professional advisor on tax-related matters.
5 Things to Know about the U.S. Trade Deficit, Laura Taylor, Federal Reserve Bank of St. Louis, September 25, 2019
Canada Balance of Trade, Trading Economics, Feb 5, 2025
Who is at risk from tariffs and what do they mean for equity markets? Andrew Rymer, CFS, Schroders Global, February 25, 2025
Trade Deficit: What It Is and Its Effect on the Market, Troy Segal, Investopedia, January 8, 2025
Trade Deficit: Definition, When It Occurs, and Examples, Andrew Bloomenthal, Investopedia, March 23, 2024
U.S. stocks erase earlier losses to end higher on tariff hopes, Reuters, Globe staff, March 21, 2025
Global markets weekly update – Fed holds rates steady amid heightened uncertainty, T. Rowe Price, March 21, 2025
SUBSCRIBE
If you’d like to automatically receive the weekly Market Update by email, enter your email address in the box below.
We respect your privacy, and you can always remove yourself from the mailing at any time.
Looking to Learn?
If you want to know more about some of the topics we wrote about this week, just click on the links below:
What is a trade deficit — and does it matter to the economy?
Trump's on-off tariffs: the potential effects in the US and elsewhere