Why is President Trump starting trade wars with our largest trading partners? Why does he risk inflation, recession and a stock market correction? Why is he so obsessed with tariffs?
If you really want to know, all you have to do is look at this map. Created by economist Mark Perry, it shows the relative size of the economy of each U.S. state compared to countries with commensurate GDP.
It’s eye-opening.
California’s economy is bigger than the United Kingdom’s. Pennsylvania’s is bigger than that of South Korea. Mexico, with a population of 130 million, its economy is only the size of Florida’s (23 million). Canada’s economy is smaller than that of Texas.
In fact, for all their bluster, it’s no secret to the leaders of both Mexico and Canada that the U.S. economy is eight times larger than both of their countries’ economies combined.
Trump knows this map very well. He knows that America’s economy is huge. He’s fully aware that it’s the biggest, most stable and most judicial in the world. It’s bigger than China. It dwarfs Russia’. And it certainly dominates all the European countries (even combined), not to mention Canada and Mexico.
To him, something doesn’t make sense. Why should the world’s biggest economy be treated unfairly?
Trump doesn’t think it’s fair that German’s tariffs on American cars are 10 percent compared to the 2.5 percent rate we charge on theirs, so he wants reciprocity. He’s not amused over the fact that dairy products purchased from Canada can be priced as much as 200 to 300 percent higher than what we’re selling back. Or that Mexico has a 16 percent “value-add” tax to most imported products.
Trump wants parity. Like any business person, he doesn’t want to see costs go up. In fact, he wants to bring them down.
His aim is for other countries to simply lower the artificially raised prices of their goods so that American companies and consumers can buy them cheaper — just like the citizens in their countries can do with the products we sell them. And if countries aren’t going to level the playing field, then he’s prepared to make our goods more expensive for their businesses and consumers. Sometimes you have to endure some pain to get to that goal.
To level the playing field, Trump wages a tariff war. He bumps up the tax charged on foreign products to discourage consumers from buying them and corporations from using them to build their products. By doing so, he encourages companies to buy and make those products in the U.S., which in turn rebuilds the infrastructure we have lost over the past five decades and adds jobs.
Of course this will take time. But have patience.
Trump can wage this war because he has the world’s largest weapon: the U.S. economy. When a consumer of our size changes its buying patterns, it can have a devastating effect on others. Canada and Mexico can talk a big game. But the U.S. has all the resources to outlast them in the long run.
Of course, higher tariffs will cause higher prices. Yes, they will generate disturbances in supply chains. They’re disruptive to markets. They create uncertainty, and even anger our partners. But Trump asks: shouldn’t we be angry too?
Is it right that we pay so much more for products when we’re in such a position of power? Usually it’s the big guy — the large corporations — that squeezes the smaller guy (I know this. I’m the smaller guy). So why is that not happening with international trade?
Will Trump’s trade war work? Economists hate it. Academics hate it. But business people? Well, that depends.
My clients in the construction industry aren’t too happy about potentially paying more for Canadien lumber. Some farmers aren’t thrilled either. But those I work with in the steel industry are cheering. So are companies that manufacture furniture and cabinets in the U.S. that have been faced with the dumping of competing products from China. Automakers are thrilled. Unions like it. Equipment and material manufacturers want more.
Long term, U.S. businesses will adapt. They will bring more work back here. They will re-invest in infrastructure particularly, as Trump also plans, by taking advantage of tax incentives to be soon passed. U.S. businesses will find new trading partners located in countries that offer a fairer playing field. They will re-negotiate terms with existing overseas suppliers who are facing a serious slowdown in orders from these biggest customers spiked by higher tariffs. They will pivot and adjust and alter their buying patterns.
They can do this freely, legally and with minimal interference because they operate in the world’s largest and most powerful economy. And they can do this with more ease than their counterparts in most other countries that face more regulations and bureaucracy. What will ultimately happen is that these countries will come, hat in hand, to the negotiating table.
Tariffs will never be eliminated. But they will be corrected, and more in the favor of U.S. interests. There will be no choice. This will happen. If you don’t believe me, just look at the map.
Gene Marks is founder of the Marks Group, a small-business consulting firm.