The Services Gap

Previous episodes in this series have focused on goods — the cars, avocados, oil, and manufactured products that cross North America’s borders on trucks, trains, and pipelines. But there is another trade relationship, one conducted through fiber optic cables, airport terminals, and bank wire transfers. Services trade — finance, travel, technology, consulting, insurance, intellectual property — tells a very different story about NAFTA’s legacy. And the two stories could hardly be more different.

In 1999, the U.S. ran a roughly similar services surplus with both neighbors: $5.4 billion with Canada, $5.0 billion with Mexico. The starting positions were nearly identical. Twenty-five years later, the Canada surplus has grown sixfold to $33.2 billion. The Mexico surplus sits at $5.3 billion — essentially unchanged. Canada’s services trade with the U.S. expanded from $41 billion to $147 billion, a knowledge-economy relationship that deepened every year. Mexico’s services trade grew from $25 billion to $96 billion — but the surplus never widened because Mexican services imports grew just as fast as American exports.

The divergence isn’t an accident. It’s the consequence of each country’s development strategy. Canada built banks, software firms, and film studios. Mexico built assembly plants. NAFTA facilitated both paths — but the services gap reveals which model generates the higher-value relationship.

The $33 billion services surplus with Canada breaks down into a handful of categories that read like a map of American economic power. Other business services — management consulting, legal advice, accounting, R&D contracts — are the largest at $23.5 billion in U.S. exports, generating a $10.5 billion surplus. Every major consulting firm (McKinsey, BCG, Bain) serves Canadian clients from U.S. offices. Every Big Four accounting firm routes Canadian audit work through American partners. When Toronto-Dominion Bank restructures its operations or Shopify redesigns its platform, much of the strategic work flows through New York and San Francisco.

Financial services follow at a $7.3 billion surplus. Wall Street manages an outsized share of Canadian wealth. Canadian pension funds — the Canada Pension Plan Investment Board, Ontario Teachers’, Caisse de dépôt — are among the world’s most sophisticated institutional investors, but they route billions through American asset managers, prime brokers, and derivatives desks. JPMorgan, Goldman Sachs, and BlackRock all maintain significant Canadian operations, while Canadian banks — despite their strength at home — are smaller players on Wall Street.

Intellectual property charges add another $6.0 billion surplus. Hollywood films and streaming content, pharmaceutical patents, software licenses, and franchise fees flow north. When a Canadian hospital prescribes a Pfizer drug, an IP royalty flows south. When a Canadian watches Stranger Things on Netflix, a license fee flows south. When a Tim Hortons franchise (now owned by Restaurant Brands International, a Canadian-Brazilian company) uses American supply chain technology, a service fee flows south.

There is one striking exception. Telecom, computer, and information services show a $1.3 billion deficit for the U.S. — meaning Canada exports more tech services to America than America exports to Canada. This is the Shopify effect. Canada’s tech sector, concentrated in Toronto’s “Silicon Valley North,” Vancouver’s gaming cluster, and Montreal’s AI corridor, has become competitive enough to sell services into the American market. OpenText, a Canadian enterprise software firm founded in Waterloo in 1991, generates most of its $4 billion revenue from U.S. clients. CGI, a Montreal-based IT services company with 90,000 employees, runs federal government systems for both Washington and Ottawa.

Mexico’s services profile looks nothing like Canada’s. Two categories dominate the relationship: travel and transport. Together they account for $63 billion of the $96 billion in total U.S.-Mexico services trade — two-thirds of the entire relationship. And both categories work against America’s surplus.

Travel is the big surprise. In 1999, the U.S. ran a $3.3 billion travel surplus with Mexico — more Mexicans visited America than Americans visited Mexico, and they spent more. By 2016, the balance flipped. By 2024, Mexico ran a $4.1 billion travel surplus over the United States. American spending in Mexico reached $26.3 billion — more than Americans spent traveling to any single country except the broader European Union.

What happened? Cancún happened. Cabo San Lucas happened. Puerto Vallarta, Tulum, Mérida, San Miguel de Allende, Oaxaca. Mexico invested heavily in resort infrastructure starting in the 2000s, and the American tourist discovered that a week at an all-inclusive in the Riviera Maya cost less than three nights in a Maui hotel. By 2019, Mexico had become the world’s sixth-most-visited country, receiving 45 million international tourists. After COVID, the recovery was faster than almost anywhere: Mexico never imposed entry restrictions, making it one of the only warm-weather destinations open to Americans during the winter of 2020–21. That accelerated a trend already in motion.

There’s another factor rarely discussed in trade statistics: medical tourism. An estimated 1.2 million Americans cross the border annually for dental work, cosmetic surgery, prescription drugs, and elective procedures. A dental crown that costs $1,500 in Texas costs $300 in Los Algodones, a border town in Baja California that has more dentists per capita than anywhere on Earth — roughly 600 dental offices in a town of 6,000 residents. The BEA counts this spending as travel services imports.

Transport is the other heavyweight — and it’s the hidden cost of nearshoring. The U.S. imported $9.2 billion in Mexican transport services in 2024, against just $4.7 billion in exports, a $4.5 billion deficit that has grown sevenfold since 1999. This is the bill for moving all those goods discussed in Episodes 2 through 4. Every auto part manufactured in Saltillo, every avocado picked in Michoacán, every TV assembled in Tijuana needs a truck to reach the U.S. market. Mexican trucking companies — firms like Kimberly Clark de México’s logistics division and TUM (Grupo Transportación Marítima Mexicana) — carry the freight. More factories means more trucks, which means a bigger transport deficit.

The transport story has a political subplot. Under NAFTA’s original terms, Mexican trucks were supposed to gain access to U.S. highways by 2000. The Teamsters union and American trucking lobby blocked it for fifteen years, arguing that Mexican trucks didn’t meet U.S. safety standards. Mexico retaliated with $2.4 billion in tariffs on U.S. goods. A pilot program launched in 2011, and full cross-border trucking access was finally granted in 2015 — two decades late. The delay created a permanent inefficiency: goods still must be transferred between Mexican and American trucks at border drayage yards in Laredo, El Paso, and Nogales, adding time and cost.

The table below lays out every major services category for both neighbors side by side. The contrast is stark. Canada shows American dominance in finance, consulting, insurance, and IP — all high-value, skill-intensive sectors. Mexico shows a relationship built around tourism and logistics, with the knowledge-economy categories either tiny or absent.

Two categories stand out for the comparison they invite. Financial services: the U.S. surplus with Canada (+$7.3B) is nearly double the surplus with Mexico (+$4.0B), even though Mexico’s economy is about the same size as Canada’s. This reflects Canada’s deeper financial markets — the Toronto Stock Exchange, its massive pension funds, its active M&A scene. Mexico’s financial system is more insular, with Banorte and BBVA México handling most domestic business.

Intellectual property: the U.S. surplus with Mexico (+$5.1B) is actually close to Canada’s (+$6.0B). This is one area where the factory-floor model generates American revenue. Every auto plant running Ford or GM designs pays royalties. Every Mexican TV broadcasting American content pays license fees. Every franchise — McDonald’s, 7-Eleven, Subway — pays ongoing IP charges. Mexico has over 750 7-Eleven stores, all paying franchise fees to the Dallas-based parent.

Services trade does something remarkable to the NAFTA balance sheet — but only for one partner. With Canada, the $33 billion services surplus absorbs nearly half of the $69 billion goods deficit. In some years, it does better than that. In 2013, the combined goods-and-services balance with Canada was just −$282 million — essentially zero. In 2015 and 2016, the U.S. ran an outright surplus with Canada: +$7.1 billion and +$10.8 billion respectively, because the services surplus exceeded the shrunken goods gap (oil prices had crashed).

This is a profoundly different picture from the goods-only view. When commentators cite America’s “$69 billion deficit with Canada,” they’re telling half the story. Add services, and the 2024 deficit shrinks to $36 billion — a 48% reduction. From 2009 to 2018, the combined balance was never worse than −$8 billion, and the U.S. ran actual surpluses in four of those ten years. Canada isn’t a one-way drain on American prosperity. It’s more like a trading partner where the U.S. ships oil money north and gets consulting fees, tourist dollars, and financial commissions back.

Mexico is another story entirely. The $5.3 billion services surplus offsets just 3 percent of the $181 billion goods deficit. The combined goods-and-services deficit in 2024 was −$176 billion — barely different from goods alone. In 2022, the services surplus nearly vanished altogether, falling to a mere $202 million — essentially zero — as Americans surged back to Mexican resorts and trucking costs soared with fuel prices. That year, the combined deficit hit $133 billion, and services provided no cushion at all.

NAFTA was supposed to build a services bridge to Mexico, not just a goods highway. Chapter 12 of the original agreement covered cross-border trade in services. Chapter 14 covered financial services. The provisions called for liberalizing accounting, engineering, legal, and telecom services across borders. In theory, a U.S. law firm could serve Mexican clients. An American bank could operate freely in Mexico City. A Mexican engineering firm could bid on U.S. government contracts.

In practice, barriers persisted. Mexico’s professional licensing remained nationally controlled — a U.S.-licensed engineer couldn’t stamp Mexican building plans. Banking regulations kept foreign lenders at arm’s length for years (Citigroup’s Banamex acquisition in 2001, for $12.5 billion, was one of the few breakthroughs — and Citi sold it back to Mexican investors in 2024, acknowledging the experiment hadn’t worked). Telecom was dominated by Carlos Slim’s América Móvil until reforms in 2013 began opening the market. Legal services remain largely siloed: Mexican notarios hold a monopoly on property transactions that foreign firms cannot penetrate.

The result is a services relationship that, twenty-five years in, still looks more like two neighbors with a fence than two partners with an open door. The goods fence came down. The services fence barely moved. And the consequences show up in every column of the balance sheet.