Trade War
In a nutshell, the economy of a country can be defined as the total of supply and demand for products and services. The supply of a good or service, and the demand for the good or service, are both regulated by price.
For the last two weeks the United States has been using the threat of a trade war with Canada, Mexico and China to achieve at least two political goals: to reduce the amount of fentanyl and undocumented immigrants crossing our borders. The tool the US government is using to ensure cooperation along our borders is the tariff.
A tariff is essentially a trade barrier between countries by acting as a tax that increases the cost of a good or service to a level that reduces demand. Other trade barriers include import quotas, domestic subsidies, currency devaluation, embargoes, red tape, and bans on products or services, like TikTok. A trade war ensues when two competing countries reciprocate trade barriers.
Trade wars are often started due to unfair labor practices such as politically accepted minimum wages that are well below the wages paid by communities in other countries, resulting in considerably lower costs to make and sell a product, a competitive advantage. Intellectual property theft is another source of global economic conflict, which means a country is allowing businesses to use the ingenuity of businesses in other countries without licensing or paying for the right to use it.
Trade deficits occur when one country imports more than it exports, often another source of frustration. Although the United States has the highest Gross Domestic Product (GDP) in the world, calculated by estimating the value of all goods and services a country produces annually, it’s interesting that our consumption is even higher, which means we import more products and services than we export.
Our current administration believes levying tariffs will eliminate our trade deficit. They’re very likely wrong, though. The cost of labor in the United States is considerably higher than in China and Mexico, the two countries where our deficits are the highest, giving them a competitive advantage we won’t be able to match, even with tariffs. On the other hand, the United States also has a trade deficit with the European Union, comprised of countries that generally have a healthier standard of living, including better social benefits and higher labor costs.
The consequences of a trade war can be long lasting. On a global scale, entire supply chains could change. Capital markets that provide funding for investment opportunities can become non-existent, altering the entire economic landscape of a country or region. Trade wars have resulted in real wars, as we’ve seen during the Anglo-Spanish Wars of 1585-1604, 1654-1660, and 1762-1763 between France, England and Spain.
Immigration from South America is an important issue for voters, and it’s very likely the reason the current administration won the last election. It’s ironic, though, that the United States is considering placing tariffs on goods from Mexico. After all, if Mexican companies have difficulty selling their goods in America, it’s possible they’ll need to let many of their workers go. If Mexico ends up in a recession the first place their unemployed workers will look for work is America, meaning the United States will have an influx of undocumented workers. More than 80% of Mexico’s exports, about $800 billion, cross the border into America each year.
Fentanyl is a serious problem. Apparently, the drug is 50 times more potent than heroin. It’s estimated that opioids cause 70,000 deaths per year in the United States. China produces the majority of the chemicals used to make fentanyl, but those same ingredients are also used to make prescription pain killers, making them difficult to regulate. Nearly 21,000 pounds of fentanyl were confiscated at the Mexican border last year. While adding troops at the border might help prevent undocumented immigration, experts agree they very likely won’t have an impact reducing the amount of fentanyl crossing into the United States. More effective detection methods are needed.
About 43 pounds of fentanyl were seized by authorities at the Canadian border last year, which amounts to less than 1% of the total amount of fentanyl seized in 2024. Although we certainly need to be able to identify every immigrant that crosses our borders, immigration has never been a serious problem along our border with Canada. Yes, the United States does have a trade deficit with Canada, about $41 billion in 2023, but that’s peanuts compared to our total 2024 fiscal deficit of about $1.8 trillion. The United States is remarkably fortunate to share a border with Canada. As a people and as a nation, Canadians deserve far better from our government than tariffs.
Canada’s Justin Trudeau and Mexican President Claudia Sheinbaum have done a remarkable job agreeing to work with our administration here in the United States to avert a catastrophic trade war. Their efforts not only rescued their own economies, but very likely America’s as well. Yes, tariffs would have harmed our economy, too. With a shortage of goods crossing our borders, prices would have increased, which means inflation would have started going up again. That’s the reason the Federal Reserve declined to drop the Federal Funds rate last week, because of the uncertainty surrounding the proposed tariffs.
At Doo Dah Apparel, we do agree, though, that America needs to manufacture more goods at home, but not at the expense of harming our neighbors in the process. American industry should focus less on the bottom line and more on the wellbeing of their workers and the communities where they live. Quality of life should matter more.
We’ll leave you with a quote from Dennis the Menace this week: “Of course they’re gonna raise the prices! They know you’re not gonna stop eating.”
That’s true, but they just might start eating Top Ramen instead!
