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Europe Is In (Big) Trouble
By Shlomo Maital
US trade deficit (top) EU trade deficit (bottom)
In her NYT Op-Ed today, March 10, Karen Karniol-Tambour clarifies President Trump’s murky tariff quirks.# I find the above diagrams helpful, along with her analysis and my own. The top diagram shows the US trade deficit (exports minus imports) since 1990, and the bottom one, the EU’s trade deficit, split between a large and growing surplus in its US trade, and a growing and very large deficit in its China trade. (Bottom diagram: Black is export surplus with the US; Red is import surplus with China). Source: Visual Capitalist.
Since 1990, and actually since 1970, the United States has consumed more than it produced. It does this by buying stuff abroad. To pay for it, it borrows and goes into debt. It can do this, because US money, the dollar, is the world currency and those who earn the dollars are willing to hold them or turn them into US bonds. (If you or tried this, it would not take long to go broke. When the US does it, it can print the money to enable it.) The infusion of US demand in the world economy has made Asia, specifically China, wealthy. There are 400 Chinese billionaires! In a Communist nation! But it also helped Europe. The EU sells more to the US than it buys.
Most of what the US consumes, above what it makes, is manufactured goods, mostly from China, but also, from Mexico, Vietnam, Japan and Germany.
The US gave away its manufacturing to China and the rest of the world, under Clinton, Bush, Obama…and Trump (2016-2020). Trump thinks it can return, by imposing high tariffs on imports. It will make us a fortune, he says. If it does, it means that imports remain very high. So – forget US manufacturing. If it doesn’t make a fortune, it means that imports become very expensive and import inflation, not just Chinese EV’s.
China has had 25 years to build its manufacturing supremacy. In a country that controls the economy directly. To get its manufacturing back, the US will need at least 25 years, probably more, in a free market economy, if, IF, all the right policies are put in place. But …of course, they are not. Tariffs are not the answer.
The EU is in huge trouble. For two reasons. Defense. And Economy.
Defense: The US is throwing Europe and Ukraine under the Russian bus. After years of sponging off the US $850 billion defense budget, Europe now has to defend itself. That will take large resources and a lot of time. And Russia is knocking on the door right now. The next few years will be very dangerous for Europe.
Economy: The US wants to shut down its big trade deficit with the EU. IF it does, through tariffs, it will hurt the EU economy, with Germany already in recession or nearly so. Meanwhile, the EU has a large and growing trade deficit in manufactures with China. Europe’s car industry is in desperate trouble. With technology shifting to electric vehicles, China is swamping the world with its EV’s, and Europe is way way behind. So Europe faces big challenges from BOTH the US and from China.
The economies of the US, EU, and China are roughly equal in size, and comprise 75% of world GDP. All three have big problems. China has a bloated construction, real estate and finance sector, deep in debt. US has an unpredictable president with wrong-headed ‘quick fixes’ that really are quick disasters. EU needs a rapid, smart, strategic U-turn, very unlikely in a group of 27 countries where you need unanimity to do anything – and outliers like Hungary are happy to put up roadblocks.
The US gave away its manufacturing to China, under four presidents, Democrats and Republicans. You cannot have a strong healthy growing economy without making stuff. The US stock markets are reflecting this.
Because the US consumed much more than it made, it has a heavy burden of debt, 110% of its GDP, and a trillion dollars in interest alone. And as Trump slashes taxes, the budget deficit grows and with it, US debt.
EU enjoyed trade surpluses with the US, offsetting in part its trade deficit with China. The US under Trump wants to end that.
In a EU economy already slowing, and with a Russian army on its flank, and with EU technology trailing that of the US and China, the EU is in deep hot water.
And, when 75% of the world economy is in some degree of trouble – we are all of us in hot water.
Friends: Set aside a bit more in saving. You may need it.
# “This Is Who Loses in a Trade War. Karen Karniol-Tambour, New York Times, March 10, 2025. The author is co-chief investment officer at Bridgewater, an investment management company.
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.
TIMnovate 