Donald Trump’s impatience, impulsivity, and love of simplistic solutions may yet be his undoing. In starting a trade war with the whole world, he may have set forces in motion far beyond his ability to control.
The One Against the Many
Contrary to Donald Trump’s expectations, trade wars are typically expensive for both sides. Given that, it is wise to choose your battles carefully.
David Stockman recently did an excellent, in-depth essay on America’s trade relationships. It turns out that America has major trade deficits with only thirteen countries. Taken as a whole, the United States has a small trade surplus with the other 182 nations on the planet. Given that, it would make sense for America to impose tariffs only where its trade balance is unfavorable; if it ain’t broke, don’t fix it.
Instead, Trump has started a trade war with literally the whole planet, imposing ‘reciprocal tariffs’ between 10 and 50 percent. (Don’t believe me: look at the list here.) Technically Canada and Mexico escaped reciprocal tariffs, but this is cold comfort given existing 25% tariffs on steel, aluminum and automobiles.
Let’s think about what that means. One hundred and ninety-four nations face disruption and damage in their trade relationship with one nation: the United States. Fortunately for each of those 194 nations, they can augment and/or enhance their trading relationships with 193 other nations to offset whatever damage a trade war causes them.
The United States, on the other hand, faces simultaneous disruption and damage in its trading relationship with 194 countries. And it has precisely zero countries with which it can mitigate those losses by shifting exports to stable trading relationships.
The Best Case Scenario with America’s Three Biggest Trading Partners
So far, Canada, Mexico and Europe have responded to Trump’s tariffs in ways that try to keep a lid on the scale of the battle, instituting targeted tariffs against only a relatively small number of American products.
If that conflict-phobic strategy were to continue, economists estimate Canada would likely see its GDP drop by 3%, Mexico could see a 5% drop, and Europe would see at least a 2% drop. Recessions in all three jurisdictions can be expected to result in a marked decline in US exports, with significant US job losses. It’s a given that America cannot hammer the economies of it’s three largest trading partners without experiencing significant blow-back on itself.
The Risk of a Full-blown Trade War
Canada, Mexico and Europe are unlikely to continue with the meekness they’ve shown so far.
Escalating the trade war would be dead easy. Simply boost tariffs on all US goods by the same amount the US has boosted tariffs. Trump will then impose retaliatory tariffs. Canada, Mexico, and Europe can then retaliate back. Back and forth it goes until all trade between the United States and Canada, Mexico and Europe grinds to a halt.
The United States sells a total 1,055 billion dollars in goods to Canada, Mexico, and Europe every year, representing several million American jobs. Stop those exports even for a month and there will be a massive economic slowdown in the United States.
That is the last thing the US needs at this point in time. The faux prosperity of the Biden years, built as it was on unsustainable deficits, is already winding down. US stocks typically fall hard during a recession, which will make the downturn even worse.
This is the definitely the nuclear option in trade terms, particularly if Canada, Mexico and Europe act in concert: Just make it so goddamn painful the US has to cry ‘uncle.’
New Alliances
When you punish everyone, you create new alliances overnight. Korea and Japan have long had frosty trade relationships with China. Now the three nations are in talks on how they can mitigate the damage caused by the Trump tariffs.
The BRICS countries should hire Donald Trump as their chief recruiter. The BRICS alliance already includes more than half of the world’s population. I expect its membership will grow rapidly in the coming months. Again, we can expect a to see a united front from that expanded BRICS alliance in fighting the Trump tariffs.
Global Boycotts
Canada and Europe are already seeing consumer boycotts of US products. America normally hosts millions of foreign tourists every year, but this year American tourism is slumping. “Boycott US Goods” is trending on Google pretty much everywhere in the world.
The Dollar and US Bonds
Being in a trade war with the United States is going to put downward pressure on a lot of national currencies. One really good way for a nation to defend its currency, is to sell its holdings of US bonds and use the proceeds to buy their own currency. Canada, Japan, Korea, China, and much of Europe are already doing that. What if the rest of the world also unloads their holdings of US bonds in a year when the United States needs to sell eight trillion dollars in new Treasury Bonds? How high will interest rates on US Treasuries have to go to attract enough buyers for that combined bond tsunami? And what happens to the US dollar if there are far more sellers than buyers?
Carmageddon
The North American Auto Pact was designed on a relatively simple principle. Canada, the United States and Mexico each build roughly the number of cars, and car parts, as are sold in each country. Canada builds millions of a few models of American vehicles, exports most of them to the US, and imports roughly the same number of a large variety of American-made cars duty-free.
Yes, Canada could over time start exporting more Canadian-made cars and parts than it imports US-made cars and parts. But the auto pact has built-in mechanisms to re-balance trade back to even when and if that happens.
In imposing a 25% tariffs on cars made in Canada, Trump has created absolute chaos in the North American automobile industry. Which is hardly surprising when you suddenly shut down a continent-wide supply chain for both vehicles and parts. No wonder the stock prices of Ford and General Motors are tanking.
Canadian Energy
If you take energy out of the Canada-US trade relationship, the United States would have a small trade surplus in its trade with Canada.
Mark Carney has already started moving to bring Canada-US trade into balance by shifting Canada’s oil exports to China.
Canadian oil is well-suited for use in US refineries, much better suited than US-produced oil, which is often exported for that very reason. If Canada sends all its oil to China or Europe, US refineries will need to go through a hugely expensive re-tooling to be able to refine US oil.
Canadian natural gas is often closer to where its needed in the US than is American natural gas. Imports of Canadian natural gas also mean the US can export American Liquified Natural Gas to Europe at a huge mark-up.
Canada could also agree to voluntarily stop all electricity exports to the US.
Taken together these three measures would eliminate Canada’s trade surplus with the United States. Be careful what you wish for, Mr. Trump!
China’s BATNA (Best Alternative To a Negotiated Agreement)
China has worked hard to diversify its trading relationships in recent years. Trade with the United States now makes up only 15% of China’s trade with the world. China likely has the capacity to sell a goodly part of what it now sells to the US to its other trading partners, given some discount incentives. And, with some serious money put into domestic stimulus, China’s 1.5 billion consumers could sop up much of the rest. While a sharp drop in exports to the US would be quite painful for China, the pain would not be unmanageable.
Today Donald Trump imposed a 34% tariff on everything China sells into the United States. If my understanding is correct, this is on top of the existing 20% tariffs, for a total of 54% in tariffs.
Trump has also threatened one million dollar docking fees for all Chinese freighters coming to America. Plus a further 25% in tariffs if China continues to buy oil from Venezuela.
If China is smart, they’ll set up a Government fund to support all exporters who meet two conditions; first that they do not reduce prices to offset the Trump tariffs, and second that exporters add a surcharge to everything they sell to America to cover the cost of the threatened docking fees. Then China should very publicly declare an unwillingness to be bullied into halting purchases of Venezuelan oil.
Between the 34% percent in new tariffs, plus the 20% in existing tariffs, plus 25% in punitive tariffs, and the docking fee surcharge, everything China sells into the US would approximately double in price overnight. No-one else in the world makes anywhere near enough of many of the products that China sells to the US to replace those imports, either from the US, or from anywhere else.
US consumers shopping at Wallmart or Amazon would oftentimes have only two choices: Pay double, or do without. Yes, it would be a huge stimulus for American manufacturers to ramp up production, but it would take many, many months to do so. In the meantime, inflation in the US would ramp up rapidly, and retail sales would fall precipitously.
If the chaos caused by all the other factors discussed previously hasn’t already caused US lawmakers to rein in Donald Trump, I’m pretty sure China’s BATNA will do so.
I’m sure there will be many who will dispute the picture I have outlined here. But if even a third of what I have described comes to pass, the trade wars will not turn out well for Donald Trump. I’ll grant you the cost for both Canada and the United States of Donald Trump’s comeuppance will be excruciatingly high. I didn’t say it would be easy…
Donald Trump’s goal to re-shore America’s manufacturing base is both worthy and necessary. It his need for instant gratification that is the problem here, with serious consequences for both America, and the world.
PS: They’re wearing these MAGA hats in Greenland:
PPS: If you’re worried Mr. Trump may start WW3 with Iran, here’s some Dr. Strangelove therapy for you from Randy Newman:
Good morning, Bruce. Here's another substack I read every day and his take on the tariffs. What do you think of what he says?
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