Trudeau Socks It To Trump

By Shlomo Maital

    I just watched Canadian Prime Minister Justin Trudeau sock it to Trump, a week before he leaves office.  “Very smart”, Trudeau described Trump – but “ very dumb” to slap 25% tariffs on Canadian goods.   Dumb, because the US and Canadian economies are highly integrated, through a trade agreement negotiated by Trump himself, in his first term.  This is especially true of the automobile industry; a US car exec said this 25% US tariff on Canadian imports will “blow a big hole” in the US industry. 

    Trudeau is retaliating with 25% tariffs on a wide range of US imports.

     Let’s face it.  The US has a problem.  It has imported about $50 b. more in goods per month than it exported, up to 2020.  Since then, that monthly deficit has doubled, to about $100 b. a month.  The US now has a $1.2 annual  trillion trade deficit.  Only the US can live so far beyond its means – because it pays in dollars, the international money, and it can create dollars (through credit) and borrow dollars by selling bonds to foreigners, who accumulate dollars through trade surpluses (e.g. China).

        The US exports $349 b. yearly to the US, and iimports $412.7 b.  That is a deficit of about $63 b., or just over 5% of America’s overall deficit.  Mexico exports $505.3 b. to the US, and imports $334 b.  That is a US trade deficit of $171 b., or just under 15% of America’s overall trade deficit.

         China and the European Union are the big ones. China’s trade surplus with the US is $295.4 b., or 25% of the total US deficit, and the EU has a $235 b. trade surplus with the US, or roughly 20%. 

         What do these numbers mean?  The US has leveraged the fact that the dollar is the world’s currency, to live beyond its means, buy much more than it sells abroad, and borrows to pay for it.  America spends more in interest on its national debt than it spends on defense — $1 trillion!  

         Trump has a quick fix.  Tariffs.  Why won’t this work?  Why is it dumb?  He tariffs Canada at 25%. Canada responds in the same way.  So nothing changes – US exports and Canadian exports each get 25% more costly, meaning their relative prices remain the same.  So all that happens, is that US exports to Canada and Canadian exports to the US both decline, because they are more expensive – but no advantage accrues to either country.  Trade declines.  Both countries lose.  Prices go up in each country. 

          There is a way to deal with the fact that the US has lived far beyond its means for years.  Invest in education.  In infrastructure. In productivity. In modernizing factories.  In becoming more efficient and competitive.  That takes government investment and smart policies, and a long run policy.  Biden began, with an infrastructure bill that brought semiconductor factories to the US (Trump took credit on TV for bringing Taiwan’s powerhouse TSMC to the US, but that was done under Biden). 

           Tonight, in his speech to Congress, Trump will blame everybody else but the US for its trade deficit.  But it is the US itself that is responsible.  It has fallen far behind, by building a consumption society (70% of GDP), while China built an investment economy (nearly a third of GDP). 

          China is an ant.  America is the grasshopper.  It’s pretty simple.  And pretty obvious.  But – expect half of Americans to buy Trump’s snake oil pitch tonight and applaud him. 

          It’s a shame.