1 00:00:00,480 --> 00:00:04,200 Last weekend, Donald Trump fired the first shots in what could 2 00:00:04,200 --> 00:00:07,840 become a devastating global trade war with the announcement 3 00:00:07,840 --> 00:00:11,040 of tariffs against Canada, Mexico and China. 4 00:00:11,400 --> 00:00:14,920 While the Canada and Mexico tariffs were quickly suspended, 5 00:00:15,160 --> 00:00:18,840 it would be a mistake to assume that this is the last these 6 00:00:18,840 --> 00:00:21,320 countries have seen of his tariff hikes. 7 00:00:21,680 --> 00:00:24,760 The tariffs were implemented under the International 8 00:00:24,760 --> 00:00:29,320 Emergency Economic Powers Act, AUS federal law which allows the 9 00:00:29,320 --> 00:00:33,080 president to regulate international commerce after 10 00:00:33,080 --> 00:00:37,480 declaring a national emergency, which can be done in response to 11 00:00:37,480 --> 00:00:41,720 any unusual and extraordinary threat to the United States. 12 00:00:42,200 --> 00:00:45,000 Had these tariffs been implemented, they would have 13 00:00:45,000 --> 00:00:49,600 covered about 40% of American imports, really driving up 14 00:00:49,600 --> 00:00:51,800 prices for the American consumer. 15 00:00:52,200 --> 00:00:57,400 To delay the 25% tariffs, both Canada and Mexico agreed to 16 00:00:57,400 --> 00:01:01,440 deploy additional troops to their borders to combat the flow 17 00:01:01,440 --> 00:01:04,040 of fentanyl into the United States. 18 00:01:04,200 --> 00:01:07,720 This was the stated motive for Trump's tariffs. 19 00:01:08,000 --> 00:01:12,120 China retaliated with additional tariffs on liquefied natural 20 00:01:12,320 --> 00:01:17,000 gas, coal, farm machinery and other US manufactured products, 21 00:01:17,200 --> 00:01:21,200 which will kick in this week. They also placed restrictions on 22 00:01:21,200 --> 00:01:24,680 the export of critical minerals, which are required for the 23 00:01:24,680 --> 00:01:28,360 production of high tech goods, and announced an antitrust 24 00:01:28,360 --> 00:01:32,240 investigation into Google, which has been blocked in China since 25 00:01:32,240 --> 00:01:36,840 2010 but still sells advertising to Chinese businesses. 26 00:01:37,560 --> 00:01:41,440 Trump, who has said that his favorite word is tariff, is very 27 00:01:41,440 --> 00:01:45,720 likely to come back for more and is also likely to broaden his 28 00:01:45,720 --> 00:01:49,960 targets to include the EU and other Asian economies, in 29 00:01:49,960 --> 00:01:54,160 particular those he views as supply chain stop offs and 30 00:01:54,160 --> 00:01:56,800 offshore production platforms for China. 31 00:01:57,240 --> 00:02:00,840 Just yesterday, Trump said that he would consider imposing 32 00:02:00,840 --> 00:02:05,400 tariffs on Japanese exports and pledge to unveil reciprocal 33 00:02:05,400 --> 00:02:08,000 tariffs on other nations next next week. 34 00:02:08,720 --> 00:02:12,920 Tariffs are, of course, a tax paid at the port of entry on 35 00:02:12,920 --> 00:02:16,160 imported goods. The tax is paid by the person 36 00:02:16,160 --> 00:02:20,040 who imports the goods and the money goes to the US government. 37 00:02:20,200 --> 00:02:23,840 It's not paid for by a foreign business or a foreign 38 00:02:23,840 --> 00:02:25,960 government. While Trump has said that he 39 00:02:25,960 --> 00:02:30,200 will create an external Revenue Service to collect the tariff 40 00:02:30,200 --> 00:02:34,680 income, the tax is charged in the United States and pushes up 41 00:02:34,680 --> 00:02:37,480 the price of goods which is passed on to consumer. 42 00:02:38,320 --> 00:02:42,400 Once taxed, the foreign goods might be more expensive, or 43 00:02:42,400 --> 00:02:45,640 their prices might be in line with the price of domestically 44 00:02:45,640 --> 00:02:48,800 produced goods. If the imported goods are more 45 00:02:48,800 --> 00:02:52,120 expensive than domestically produced goods, this gives 46 00:02:52,120 --> 00:02:56,640 domestic manufacturers room to raise their prices and become 47 00:02:56,640 --> 00:03:00,240 more profitable. Tariffs can be used to protect 48 00:03:00,240 --> 00:03:04,080 domestic industry, to raise revenue for the government, or 49 00:03:04,080 --> 00:03:07,240 used to provide leverage in negotiations with foreign 50 00:03:07,240 --> 00:03:09,720 leaders. What makes Trump's use of 51 00:03:09,720 --> 00:03:13,200 tariffs different is that he's the first modern president to 52 00:03:13,200 --> 00:03:17,280 view them as a preferred form of leverage and to see them as a 53 00:03:17,280 --> 00:03:20,880 source of revenue, which they haven't really been used for 54 00:03:20,880 --> 00:03:24,040 much in the past. Most other presidents have 55 00:03:24,040 --> 00:03:27,520 viewed tariffs as a drag on the economy and as something that 56 00:03:27,520 --> 00:03:31,440 you want to negotiate down as part of a free trade agreement. 57 00:03:32,040 --> 00:03:35,600 A big difference, too, is that Trump is using tariffs as 58 00:03:35,600 --> 00:03:40,040 leverage for goals other than trade, which is quite unusual. 59 00:03:40,520 --> 00:03:44,200 Governments can raise revenue in a variety of ways, through 60 00:03:44,200 --> 00:03:48,520 income taxes, corporate taxes, property taxes, sales taxes, 61 00:03:48,800 --> 00:03:52,880 even fees and fines. Tariffs are a method of raising 62 00:03:52,880 --> 00:03:56,640 revenue, but despite what some people claim, they could not 63 00:03:56,640 --> 00:04:00,000 reasonably be expected to replace income taxes. 64 00:04:00,320 --> 00:04:05,040 The US imported about $3.1 trillion worth of goods last 65 00:04:05,040 --> 00:04:08,920 year and raised about $2 trillion in income taxes. 66 00:04:09,320 --> 00:04:14,640 To try and raise $2 trillion in tariffs on $3.1 trillion worth 67 00:04:14,640 --> 00:04:19,040 of goods would involve massive tariffs which couldn't work as 68 00:04:19,040 --> 00:04:22,360 the tariffs would slash the amount of imports and then fail 69 00:04:22,360 --> 00:04:24,360 to bring in the hoped for revenue. 70 00:04:25,040 --> 00:04:28,960 It's worth remembering that all government taxes and fees are 71 00:04:28,960 --> 00:04:33,360 redistributed by nature, as usually one group pays them and 72 00:04:33,360 --> 00:04:36,040 another group benefits from government spending. 73 00:04:36,480 --> 00:04:40,280 Tariffs would be a tax on households and would benefit the 74 00:04:40,280 --> 00:04:44,000 specific businesses who find themselves dealing with lower 75 00:04:44,000 --> 00:04:47,600 foreign competition. As to whether those businesses 76 00:04:47,600 --> 00:04:52,440 would spend their extra profits by hiring or hiking wages really 77 00:04:52,440 --> 00:04:55,600 depends on the supply demand dynamics for labor. 78 00:04:55,920 --> 00:04:59,720 Businesses could just as easily reinvest their profits in 79 00:04:59,720 --> 00:05:03,120 mechanization if that made Better Business sense. 80 00:05:03,400 --> 00:05:07,040 So once tariffs are applied, how inflation, where should we 81 00:05:07,040 --> 00:05:10,560 expect them to be? Well, tariffs can be expected to 82 00:05:10,560 --> 00:05:14,320 push up the prices of both imported and domestically 83 00:05:14,320 --> 00:05:17,600 manufactured goods. The effect on imported goods is 84 00:05:17,600 --> 00:05:21,120 fairly obvious. A 10% tariff will be charged at 85 00:05:21,120 --> 00:05:24,920 the port of entry and be added to the price of imported goods. 86 00:05:25,400 --> 00:05:28,760 That doesn't mean that the goods will increase in price by 87 00:05:28,760 --> 00:05:32,880 exactly 10%, as once goods arrive in the United States, 88 00:05:33,080 --> 00:05:36,040 they're typically transported across the country to their 89 00:05:36,040 --> 00:05:39,080 point of sale, sometimes being repackaged. 90 00:05:39,320 --> 00:05:43,080 The business selling them will spend money on advertising and 91 00:05:43,080 --> 00:05:45,800 pay to staff their retail outlets too. 92 00:05:46,160 --> 00:05:50,200 They'll also apply a markup so that they can earn a profit and, 93 00:05:50,200 --> 00:05:53,200 if the goods are sold online, charge for delivery. 94 00:05:53,480 --> 00:05:57,800 All of those costs go into the end price to the consumer pays, 95 00:05:58,000 --> 00:06:00,800 but only one of them has a tariff applied to it. 96 00:06:01,040 --> 00:06:05,360 So a 10% tariff will push up the price of goods, but it might 97 00:06:05,360 --> 00:06:09,120 only push up the retail price by around 5%. 98 00:06:09,680 --> 00:06:13,600 Domestically produced goods can also be expected to cost more 99 00:06:13,600 --> 00:06:17,440 once tariffs are applied, as many domestically produced goods 100 00:06:17,640 --> 00:06:21,560 require imported raw materials which will, depending on where 101 00:06:21,560 --> 00:06:24,320 they're sourced, possibly be hit with tariffs. 102 00:06:24,600 --> 00:06:28,720 Even if they entirely avoid tariffs, domestic manufacturers 103 00:06:28,720 --> 00:06:32,080 still get to hike their prices when they see their foreign 104 00:06:32,080 --> 00:06:36,000 competitors raise prices. This price hike allows them to 105 00:06:36,000 --> 00:06:40,160 earn a higher profit margin. Now, while consumers think of 106 00:06:40,160 --> 00:06:43,800 prices going up like this as being inflation, that's not 107 00:06:43,800 --> 00:06:46,040 really how economists think about it. 108 00:06:46,320 --> 00:06:51,200 A 2008 paper from the Cleveland Fed points out that inflation is 109 00:06:51,200 --> 00:06:54,800 one of the most misused words in economics, where the term was 110 00:06:54,800 --> 00:06:59,200 originally used to describe a currency and money, not prices. 111 00:06:59,560 --> 00:07:03,720 Strictly speaking, inflation refers only to a drop in the 112 00:07:03,720 --> 00:07:07,440 purchasing power of money that results when a central bank 113 00:07:07,440 --> 00:07:10,440 creates more money than the public wants to hold. 114 00:07:10,720 --> 00:07:16,000 This manifests itself as a rise in all prices and wages, not 115 00:07:16,000 --> 00:07:20,560 just some subset of prices. Milton Friedman famously pointed 116 00:07:20,560 --> 00:07:24,200 out that inflation always results from a monetary 117 00:07:24,200 --> 00:07:26,800 mismatch. It has nothing to do with supply 118 00:07:26,800 --> 00:07:30,520 chain issues or with bird flu pushing up the price of eggs. 119 00:07:31,120 --> 00:07:34,920 Tariffs being imposed would push up the prices of goods in the 120 00:07:34,920 --> 00:07:38,640 same way that a sales tax increase would, but it would be 121 00:07:38,640 --> 00:07:42,320 a one off price hike that the Federal Reserve would likely 122 00:07:42,320 --> 00:07:46,320 ignore except if it caused an economic slowdown that they 123 00:07:46,320 --> 00:07:48,560 decided it requires intervention. 124 00:07:49,000 --> 00:07:53,000 Tariffs can cause an economy to slow down, as if the tariffs 125 00:07:53,000 --> 00:07:56,920 push up the price of essential goods, consumers are left with 126 00:07:56,920 --> 00:08:00,480 less money to spend on other goods and services, and this 127 00:08:00,480 --> 00:08:02,920 could be expected to slow the economy. 128 00:08:03,360 --> 00:08:06,880 There's also the issue of retaliation, where America's 129 00:08:06,880 --> 00:08:11,280 trade partners can be expected to push back by imposing tariffs 130 00:08:11,280 --> 00:08:14,760 of their own, which would then hit American exporters. 131 00:08:15,080 --> 00:08:18,960 This type of retaliation is more of an issue with countries like 132 00:08:18,960 --> 00:08:22,120 Mexico and Canada, who have balanced trade. 133 00:08:22,320 --> 00:08:25,720 It's much harder for China to retaliate with their own 134 00:08:25,720 --> 00:08:29,880 tariffs, as they import very few American goods to begin with. 135 00:08:30,200 --> 00:08:34,480 China instead retaliates by restricting the sports of things 136 00:08:34,480 --> 00:08:38,559 like critical minerals needed to make advanced chips, weapons, 137 00:08:38,559 --> 00:08:41,919 and munitions. Prices of these minerals jumped 138 00:08:41,919 --> 00:08:44,560 as soon as China announced these bans. 139 00:08:45,080 --> 00:08:49,720 China's main form of retaliation will be to put pressure on big 140 00:08:49,720 --> 00:08:54,440 American businesses who rely on manufacturing there, like Apple 141 00:08:54,440 --> 00:08:59,880 and Tesla. the US imports a huge amount of goods from China, and 142 00:08:59,880 --> 00:09:04,560 Trump's 10% tariff could hit more than $450 billion worth of 143 00:09:04,560 --> 00:09:06,960 imports. This is quite different to 144 00:09:06,960 --> 00:09:11,120 Trump's first term in office, as back then the tariffs were more 145 00:09:11,120 --> 00:09:15,600 targeted and applied gradually. This time around, more Americans 146 00:09:15,600 --> 00:09:19,640 will feel the impact. The Tax Foundation estimates 147 00:09:19,840 --> 00:09:25,800 that the new 10% tariff on Chinese goods will add $172 to 148 00:09:25,800 --> 00:09:28,680 the tax burden on every US household. 149 00:09:29,080 --> 00:09:33,040 This time, there's no exemption for Apple, so iPhones and 150 00:09:33,040 --> 00:09:37,080 computers will be hit. During Trump's first term, Tim 151 00:09:37,080 --> 00:09:41,520 Cook managed to convince him to make an exception for Apple, as 152 00:09:41,520 --> 00:09:44,840 while Apple products were manufactured in China, their 153 00:09:44,840 --> 00:09:48,360 biggest competitor, Samsung, were manufacturing in Korea. 154 00:09:48,600 --> 00:09:53,080 So Samsung would have a cost advantage over Apple if iPhones 155 00:09:53,080 --> 00:09:56,880 were hit with a tariff. Starting a trade war with Mexico 156 00:09:56,880 --> 00:10:00,680 and Canada was a surprising decision as the trading 157 00:10:00,680 --> 00:10:04,880 relationship between the US, Mexico and Canada is the most 158 00:10:04,880 --> 00:10:08,120 important relationship for all three countries. 159 00:10:08,520 --> 00:10:12,800 Canada and Mexico are the United States first and second largest 160 00:10:12,800 --> 00:10:17,120 export markets, and the US is the largest export market for 161 00:10:17,120 --> 00:10:20,600 both Canada and Mexico. Trade between these three 162 00:10:20,600 --> 00:10:24,760 countries supports over 17,000,000 jobs, according to 163 00:10:24,760 --> 00:10:28,680 The Economist. The fact that the US exports so 164 00:10:28,680 --> 00:10:33,520 much to Mexico and Canada means that US businesses are much more 165 00:10:33,520 --> 00:10:37,480 vulnerable to retaliation. Supply chains between these 166 00:10:37,480 --> 00:10:40,800 three countries are so intertwined that an all out 167 00:10:40,800 --> 00:10:43,920 trade war would be hugely destructive to all three 168 00:10:43,920 --> 00:10:49,920 economies and no one would win. Mexico provides almost 2/3 of US 169 00:10:49,920 --> 00:10:54,040 fruit and vegetable imports, so food prices would be hit right 170 00:10:54,040 --> 00:10:56,320 away. North American car man 171 00:10:56,400 --> 00:10:59,520 manufacturing is highly integrated between the three 172 00:10:59,520 --> 00:11:03,960 countries, with parts going back and forth across borders as many 173 00:11:03,960 --> 00:11:06,840 as seven times during the production process. 174 00:11:07,080 --> 00:11:10,720 If each time they cross the border they were hit with a 25% 175 00:11:10,720 --> 00:11:14,720 tariff, the US auto industry would really struggle to be 176 00:11:14,720 --> 00:11:18,880 profitable. About 70% of construction lumber 177 00:11:18,880 --> 00:11:23,680 and 70% of drywall come from Canada and Mexico, respectively, 178 00:11:23,920 --> 00:11:27,000 so the tariffs would drive up home construction construction 179 00:11:27,000 --> 00:11:29,840 prices in the United States, where there's already a 180 00:11:29,840 --> 00:11:33,160 construction shortage. In the short term, it would be 181 00:11:33,160 --> 00:11:36,880 extremely difficult to find new sources for these products. 182 00:11:37,480 --> 00:11:41,520 Canada is the largest supplier of energy to the United States, 183 00:11:41,720 --> 00:11:46,680 providing about 60% of its crude oil imports and almost all of 184 00:11:46,680 --> 00:11:49,400 its natural gas and electricity imports. 185 00:11:49,840 --> 00:11:53,160 Given that there are pretty much no tariffs between these three 186 00:11:53,160 --> 00:11:57,840 countries at present, a 25% tariff would cause a significant 187 00:11:57,840 --> 00:12:00,880 economic shock. The impact would be most severe 188 00:12:00,880 --> 00:12:04,880 for Mexico and Canada because a larger percentage of their trade 189 00:12:04,880 --> 00:12:08,360 is with the United States. But the economic hit to the 190 00:12:08,360 --> 00:12:12,000 United States would still be substantial, with some sectors 191 00:12:12,000 --> 00:12:15,120 like auto manufacturing being hit very hard. 192 00:12:15,680 --> 00:12:19,440 Trump's threats against Mexico and Canada are particularly 193 00:12:19,440 --> 00:12:23,680 surprising as they violate the trade deal that he himself 194 00:12:23,680 --> 00:12:27,920 struck during his first term, a deal which was already scheduled 195 00:12:27,920 --> 00:12:31,640 for renegotiation next year. I look at some of the deals 196 00:12:31,640 --> 00:12:33,960 made. I say who the hell made these 197 00:12:33,960 --> 00:12:37,560 deals are so bad? US imports from Canada and 198 00:12:37,560 --> 00:12:41,440 Mexico are in fact higher than US imports from China. 199 00:12:41,720 --> 00:12:45,480 But these two countries also buy a lot from the United States, 200 00:12:45,640 --> 00:12:47,880 and their trade is mostly balanced. 201 00:12:48,200 --> 00:12:52,520 All three countries import more than they export, so it's hard 202 00:12:52,520 --> 00:12:56,280 to argue that Mexico and Canada are taking advantage of the 203 00:12:56,280 --> 00:12:59,360 United States. Trump claims that the tariffs 204 00:12:59,360 --> 00:13:03,400 are unrelated to trade and has tied them to border security and 205 00:13:03,400 --> 00:13:07,680 the opioid epidemic, which may actually be his concern. 206 00:13:07,920 --> 00:13:11,160 But it's hard to know as in order to impose the tariffs, 207 00:13:11,400 --> 00:13:14,880 Trump had to declare a state of emergency, and that was the 208 00:13:14,880 --> 00:13:18,040 reason he gave to declare the state of emergency. 209 00:13:18,680 --> 00:13:22,040 The market reaction to the announcement before the pause 210 00:13:22,040 --> 00:13:26,320 was later announced was quite muted, with the S&P falling 211 00:13:26,320 --> 00:13:29,760 around 1.4% and the dollar rising. 212 00:13:30,360 --> 00:13:33,920 Oddly enough, crypto prices reacted more than the stock 213 00:13:33,920 --> 00:13:38,400 market did, with Bitcoin falling by almost 10% and Ethereum 214 00:13:38,400 --> 00:13:42,200 falling around 25%. This is obviously very 215 00:13:42,200 --> 00:13:45,960 concerning as it appears that the meme coin industry is one of 216 00:13:45,960 --> 00:13:48,680 the real drivers of growth in 2025. 217 00:13:49,160 --> 00:13:53,080 A guy who has the unlikely sounding job title of Global 218 00:13:53,080 --> 00:13:57,360 Head of Digital Assets Research at Standard Chartered Bank gave 219 00:13:57,360 --> 00:14:00,080 some sort of an explanation to the FT about that. 220 00:14:01,000 --> 00:14:04,280 The fact that the stock market mostly shrugged off the tariff 221 00:14:04,280 --> 00:14:08,440 announcement implies that market participants don't believe that 222 00:14:08,440 --> 00:14:12,200 they were likely to be sustained and possibly felt that this was 223 00:14:12,200 --> 00:14:15,640 a negotiation tactic like Trump's quickly cancelled 224 00:14:15,640 --> 00:14:18,240 tariffs against Colombia a week earlier. 225 00:14:18,640 --> 00:14:22,120 The problem with this lack of reaction is that it possibly 226 00:14:22,120 --> 00:14:26,000 gives Trump the green light for more extreme announcements in 227 00:14:26,000 --> 00:14:28,720 the future. Well, it might be reasonable to 228 00:14:28,720 --> 00:14:32,640 believe that the tariffs against Canada and Mexico were just 229 00:14:32,640 --> 00:14:36,920 being used as negotiating tools with no real intention of ever 230 00:14:36,920 --> 00:14:40,360 implementing them. The tariffs against China should 231 00:14:40,360 --> 00:14:43,640 probably be taken more seriously, as while a lot of 232 00:14:43,640 --> 00:14:47,080 negotiation went on between China and the United States in 233 00:14:47,080 --> 00:14:51,240 Trump's first term, not much came of those discussions other 234 00:14:51,240 --> 00:14:55,360 than an agreement to buy more soybeans and eventually tariffs 235 00:14:55,360 --> 00:14:58,480 were applied. The balance of trade between the 236 00:14:58,480 --> 00:15:02,560 United States and China is extremely distorted and there 237 00:15:02,560 --> 00:15:05,120 may be no real desire to negotiate. 238 00:15:05,320 --> 00:15:08,920 The tariffs are just being applied as a tax, which could be 239 00:15:08,920 --> 00:15:12,640 cranked up over time. If businesses believe the 240 00:15:12,640 --> 00:15:16,240 tariffs are just temporary, there are a few things that they 241 00:15:16,240 --> 00:15:20,600 can do, like drawing down their in country inventories while 242 00:15:20,600 --> 00:15:24,520 waiting for a deal to be struck. Since the pandemic, businesses 243 00:15:24,520 --> 00:15:28,480 have been holding larger parts inventories to avoid the supply 244 00:15:28,480 --> 00:15:31,160 chain issues they had to deal with a few years ago. 245 00:15:31,480 --> 00:15:35,600 We also saw a surge in Chinese exports in the lead up to Trump 246 00:15:35,600 --> 00:15:39,560 taking office, likely driven by businesses building up 247 00:15:39,560 --> 00:15:42,440 inventories in preparation for tariffs. 248 00:15:42,800 --> 00:15:46,120 While this works, if there are short disruptions, these 249 00:15:46,120 --> 00:15:50,080 inventories will only last so long and eventually the tariffs 250 00:15:50,160 --> 00:15:54,760 just have to be paid. If Trump's goal is to onshore a 251 00:15:54,760 --> 00:15:58,640 lot of manufacturing, a more gradual roll out of tariffs 252 00:15:58,640 --> 00:16:02,400 would probably make sense, as that would give businesses time 253 00:16:02,400 --> 00:16:07,040 to adjust their supply chains. Trump closed a loophole known as 254 00:16:07,040 --> 00:16:11,080 the de minimis exemption, which allowed packages mailed into the 255 00:16:11,080 --> 00:16:15,240 United States containing less than $800 in goods to avoid 256 00:16:15,240 --> 00:16:19,160 duties, based on the idea that the government shouldn't spend a 257 00:16:19,160 --> 00:16:21,920 dollar to collect $0.50 in taxes. 258 00:16:22,240 --> 00:16:25,640 I believe that this rule was originally put in place so that 259 00:16:25,640 --> 00:16:29,200 individuals could bring back small value goods from overseas 260 00:16:29,200 --> 00:16:32,920 trips without having to pay customs duties or taxes. 261 00:16:33,480 --> 00:16:37,880 Chinese e-commerce firms like Xi'an and Timu, along with a lot 262 00:16:37,880 --> 00:16:41,240 of Amazon marketplace sellers, have gotten very good at 263 00:16:41,240 --> 00:16:45,200 exploiting this loophole, and this is part of the reason that 264 00:16:45,200 --> 00:16:48,440 they can sell goods so cheaply in the United States. 265 00:16:48,880 --> 00:16:52,960 Most countries do have a version of this rule, but with different 266 00:16:52,960 --> 00:16:56,280 thresholds. It's $800 in the United States, 267 00:16:56,480 --> 00:17:03,600 $155 in Europe, $170 in Britain, and only $20 in Canada. 268 00:17:04,040 --> 00:17:07,480 I've occasionally bought something online in the UK and 269 00:17:07,480 --> 00:17:10,640 had to go down to the post office to pay the tax to get my 270 00:17:10,640 --> 00:17:15,359 parcel released, which can be quite inconvenient. the US 271 00:17:15,359 --> 00:17:19,800 Postal Service initially stopped accepting packages from China on 272 00:17:19,800 --> 00:17:23,520 Monday when the announcement occurred, but resumed service 273 00:17:23,520 --> 00:17:26,400 the next day. According to The Economist, 274 00:17:26,599 --> 00:17:30,960 America's customs agency lacks the manpower to examine even a 275 00:17:30,960 --> 00:17:34,520 fraction of the incoming parcels from China, and the cost of 276 00:17:34,520 --> 00:17:38,280 building that infrastructure might cost more than the taxes 277 00:17:38,280 --> 00:17:40,960 raised. It's not crazy to narrow this 278 00:17:40,960 --> 00:17:44,160 loophole, but it would have made sense to put the systems in 279 00:17:44,160 --> 00:17:47,880 place to collect the taxes before implementing the rule. 280 00:17:48,280 --> 00:17:52,720 Now, about 5 minutes before I recorded this video, news broke 281 00:17:52,920 --> 00:17:56,200 that Trump is pausing his suspension of the de minimis 282 00:17:56,200 --> 00:18:00,600 exemption until adequate systems can be put in place to collect 283 00:18:00,600 --> 00:18:03,280 the revenue. You'd normally expect something 284 00:18:03,280 --> 00:18:06,800 like this to be worked out before a rule is passed, but 285 00:18:06,800 --> 00:18:09,280 things are a bit more chaotic now. 286 00:18:09,800 --> 00:18:13,760 So is Trump right about U.S. trade being out of balance? 287 00:18:14,040 --> 00:18:18,920 Well, he kind of is. In 2023, China ran the largest 288 00:18:18,920 --> 00:18:23,080 annual trade surplus for any country in world history, where 289 00:18:23,080 --> 00:18:27,640 they sold $823 billion more goods than they bought. 290 00:18:27,960 --> 00:18:31,640 Then last year they surpassed that when their trade surplus 291 00:18:31,760 --> 00:18:37,920 through by a whopping 20% to $992 billion, which is just 292 00:18:37,920 --> 00:18:42,160 under a trillion dollars. China imports next to nothing 293 00:18:42,160 --> 00:18:45,960 from its trade partners other than commodities and computer 294 00:18:45,960 --> 00:18:48,680 chips. Chinese imports of manufactured 295 00:18:48,680 --> 00:18:54,160 goods as a share of GDP have in fact been falling since 2005, 296 00:18:54,440 --> 00:18:58,240 according to Brad Setzer. If you strip out components that 297 00:18:58,240 --> 00:19:02,400 are bought in for RE export, import of manufactured goods for 298 00:19:02,400 --> 00:19:07,080 domestic use come to less than 4% of Chinese GDP. 299 00:19:07,680 --> 00:19:11,840 The economist Michael Pettis argues that surplus countries 300 00:19:11,840 --> 00:19:16,000 like China suppress domestic consumption, subsidized their 301 00:19:16,000 --> 00:19:19,720 manufacturing industries, and then pass on the costs of these 302 00:19:19,720 --> 00:19:23,600 subsidies to deficit countries like the United States. 303 00:19:23,880 --> 00:19:27,400 He argues that a free trade country would open capital 304 00:19:27,400 --> 00:19:31,360 markets when trading with a planned economy is not really 305 00:19:31,360 --> 00:19:35,120 engaging in free trade. They're instead accepting the 306 00:19:35,120 --> 00:19:39,960 inverse of their trade partners, trade and industrial policies. 307 00:19:40,560 --> 00:19:43,480 Trump's former trade representative, Robert 308 00:19:43,480 --> 00:19:47,880 Lighthizer, recently wrote in the New York Times that nations 309 00:19:47,880 --> 00:19:51,000 are supposed to export in order to import. 310 00:19:51,280 --> 00:19:55,000 This exchange is intended to raise the standard of living for 311 00:19:55,000 --> 00:19:59,280 citizens of both the exporting and importing countries, and 312 00:19:59,280 --> 00:20:02,600 countries should export what they make best and maintain 313 00:20:02,600 --> 00:20:06,560 balanced trade by importing goods that are made relatively 314 00:20:06,560 --> 00:20:08,560 cheaper by their trade. Partners. 315 00:20:08,880 --> 00:20:13,080 That is the theory, he says. But this has mostly not happened 316 00:20:13,080 --> 00:20:15,760 in practice. Instead, many countries have 317 00:20:15,760 --> 00:20:19,480 adopted lopsided industrial policies that allow them to 318 00:20:19,480 --> 00:20:22,040 export much more than they import. 319 00:20:22,280 --> 00:20:25,800 Their objective is not to raise the standard of living of their 320 00:20:25,800 --> 00:20:29,360 citizens, but to accumulate power and wealth by buying 321 00:20:29,360 --> 00:20:33,120 assets abroad. Lighthizer argues the tariffs 322 00:20:33,120 --> 00:20:37,040 are necessary to bring global trade back into balance. 323 00:20:37,520 --> 00:20:40,480 He goes on to argue that countries with democratic 324 00:20:40,480 --> 00:20:44,280 governments and mostly free economies should come together 325 00:20:44,280 --> 00:20:47,840 and create a new trade regime where they work together 326 00:20:47,840 --> 00:20:51,440 imposing tariffs on countries that suppress wages and 327 00:20:51,440 --> 00:20:55,840 consumption in order to export more than they import, forcing 328 00:20:55,840 --> 00:20:58,920 the inverse of their industrial policies on their trade 329 00:20:58,920 --> 00:21:01,400 partners. This argument of trade 330 00:21:01,400 --> 00:21:04,600 cooperation between countries who run persistent trade 331 00:21:04,600 --> 00:21:08,760 deficits is very similar to Michael Pettis's arguments. 332 00:21:09,120 --> 00:21:12,880 This is not what seems to be happening, however, as both 333 00:21:12,880 --> 00:21:17,520 Canada and Mexico are deficit economies like the United States 334 00:21:17,760 --> 00:21:22,520 and should be on the same team. It would appear that Trump takes 335 00:21:22,520 --> 00:21:26,040 a more transactional approach to diplomacy than we've seen with 336 00:21:26,040 --> 00:21:29,600 other presidents in the past, where he doesn't worry about 337 00:21:29,600 --> 00:21:33,400 building long term relationships and cooperation, instead 338 00:21:33,400 --> 00:21:36,680 focusing on striking deals where he wins. 339 00:21:37,000 --> 00:21:40,400 The problem with that approach is that once countries are no 340 00:21:40,400 --> 00:21:44,240 longer expecting long term relationships, they have to make 341 00:21:44,240 --> 00:21:47,960 backup plans that might not be advantageous to the United 342 00:21:47,960 --> 00:21:52,400 States. Canada, for example, exports 97% 343 00:21:52,400 --> 00:21:56,000 of its oil to the United States. And while there have been 344 00:21:56,000 --> 00:21:58,960 discussions for decades about shipping ripping oil to other 345 00:21:58,960 --> 00:22:02,080 countries, Canada's good relationship with the United 346 00:22:02,080 --> 00:22:06,200 States and environmental protesters have meant that 347 00:22:06,200 --> 00:22:08,800 pipelines to the coast were never built. 348 00:22:09,360 --> 00:22:13,240 Canada's natural resources minister said this week that the 349 00:22:13,240 --> 00:22:18,160 country should weigh building a new WE oil pipeline after 350 00:22:18,160 --> 00:22:21,600 Trump's threatened tariffs exposed a vulnerability in 351 00:22:21,600 --> 00:22:25,080 energy infrastructure. It does make good sense for 352 00:22:25,080 --> 00:22:29,160 Canada to have a back up plan like this, but this may not be 353 00:22:29,160 --> 00:22:31,680 good for the United States in the long run. 354 00:22:32,400 --> 00:22:36,000 With so many countries running persistent trade surpluses 355 00:22:36,240 --> 00:22:40,200 following the post World War 2 Japanese and German model. 356 00:22:40,560 --> 00:22:44,440 There's no shortage of supply in the world, and without a handful 357 00:22:44,440 --> 00:22:47,400 of countries like the United States, there would be a 358 00:22:47,400 --> 00:22:50,560 shortage of demand. Well, there has been a lot of 359 00:22:50,560 --> 00:22:54,000 talk about how countries should stop relying on trade with the 360 00:22:54,000 --> 00:22:57,560 United States and trade with Europe or China instead. 361 00:22:57,760 --> 00:23:01,880 We have to remember that these are both trade surplus economies 362 00:23:02,040 --> 00:23:04,760 with no plans to run a trade deficit. 363 00:23:05,080 --> 00:23:08,840 To quote Michael Pettis once more, the idea that trade with 364 00:23:08,840 --> 00:23:12,320 the world's largest deficit economy could be replaced by 365 00:23:12,320 --> 00:23:16,120 trade with the world's largest surplus economy implies a world 366 00:23:16,120 --> 00:23:18,360 in which sellers don't need buyers. 367 00:23:19,040 --> 00:23:23,400 For most countries, trade with China could in no way replace 368 00:23:23,400 --> 00:23:28,280 trade with the United States. If the next four years are 369 00:23:28,280 --> 00:23:32,200 likely to be anything like the last few weeks where tariffs are 370 00:23:32,200 --> 00:23:36,080 threatened, ordered, and then quickly cancelled, it creates an 371 00:23:36,080 --> 00:23:40,120 awful lot of uncertainty for businesses as if a company can't 372 00:23:40,120 --> 00:23:44,520 decide where to build factories or who to sell to or buy from, 373 00:23:44,800 --> 00:23:47,720 they start to take a wait and see approach to business 374 00:23:47,720 --> 00:23:50,480 planning. This may be a wise business 375 00:23:50,480 --> 00:23:54,320 decision, but it would be very bad for the overall economy if 376 00:23:54,360 --> 00:23:58,160 every business were to halt expansion plans because of trade 377 00:23:58,160 --> 00:24:01,000 uncertainty. According to the Financial 378 00:24:01,000 --> 00:24:05,040 Times, tariffs have been discussed on over 200 corporate 379 00:24:05,040 --> 00:24:08,600 earnings calls this year. In a sign of how Trump's 380 00:24:08,600 --> 00:24:12,760 policies are rippling through corporate America, analysts are 381 00:24:12,760 --> 00:24:16,640 grilling corporate executives as to what their contingency plans 382 00:24:16,640 --> 00:24:19,240 are for possible trade disruptions. 383 00:24:20,120 --> 00:24:24,560 One of the benefits of long term trade deals like the USMCA, 384 00:24:24,720 --> 00:24:28,720 which Trump struck five years ago to replace NAFTA between the 385 00:24:28,720 --> 00:24:32,640 United States, Mexico and Canada, is that they lock trade 386 00:24:32,640 --> 00:24:35,920 relationships in place, sidelining government and 387 00:24:36,000 --> 00:24:39,800 allowing businesses to get on with producing and selling goods 388 00:24:39,800 --> 00:24:41,800 in a stable business environment. 389 00:24:42,160 --> 00:24:46,720 As of this week, Canada and Mexico have one month to arrange 390 00:24:46,720 --> 00:24:50,800 a deal with the United States. Even if they work something out, 391 00:24:50,960 --> 00:24:54,080 they'll possibly be left wondering if the United States 392 00:24:54,080 --> 00:24:57,800 will stick to their word or if it'll be broken on a whim like 393 00:24:57,800 --> 00:25:01,160 the current trade deal was. It would probably be wise for 394 00:25:01,160 --> 00:25:05,520 them to come up with contingency plans in case another national 395 00:25:05,520 --> 00:25:09,360 emergency is declared to break whatever deal they strike. 396 00:25:09,560 --> 00:25:11,840 Who the hell made these deals are so bad? 397 00:25:12,760 --> 00:25:17,400 Brad Setzer of the Council for Foreign Relations pointed out in 398 00:25:17,400 --> 00:25:21,440 a recent podcast that there are many reasons for the US trade 399 00:25:21,440 --> 00:25:26,080 deficit, one of which are U.S. tax policies that penalize U.S. 400 00:25:26,080 --> 00:25:29,960 companies who export from the United States, instead 401 00:25:29,960 --> 00:25:33,920 incentivizing them to hold their intellectual property offshore 402 00:25:34,080 --> 00:25:38,480 and manufacture offshore too. Better tax policies would 403 00:25:38,480 --> 00:25:42,320 possibly do a lot to bring manufacturing back to the United 404 00:25:42,320 --> 00:25:45,480 States. In the same podcast, sets are 405 00:25:45,480 --> 00:25:49,360 raised the question of whether Trump's overall goal is to 406 00:25:49,360 --> 00:25:54,520 recouple or decouple from China. Does Trump want to stop trading 407 00:25:54,520 --> 00:25:58,440 with them all together or strike a deal with balanced trade? 408 00:25:58,680 --> 00:26:03,600 Right now, we just don't know. While the US will be able to 409 00:26:03,600 --> 00:26:07,400 reduce its imports from China, which will mean having less 410 00:26:07,400 --> 00:26:11,240 access to cheap goods, China won't be able to find a 411 00:26:11,240 --> 00:26:15,560 substitute for the United States in trade simply because no other 412 00:26:15,560 --> 00:26:19,480 economy or group of economies would be able to absorb the 413 00:26:19,480 --> 00:26:23,560 trillion dollars of excess production China is exporting 414 00:26:23,560 --> 00:26:26,640 every year. If the United States pushes 415 00:26:26,640 --> 00:26:30,680 hard, China would be forced to balance its economy and raise 416 00:26:30,680 --> 00:26:34,440 workers wages so that they can consume more of the goods being 417 00:26:34,440 --> 00:26:38,360 produced in the country. This would be a very difficult 418 00:26:38,360 --> 00:26:41,760 adjustment for both the United States and China. 419 00:26:41,960 --> 00:26:45,920 If the US is to balance global trade by moving in the direction 420 00:26:45,920 --> 00:26:49,440 of a system where countries export goods in order to fund 421 00:26:49,440 --> 00:26:52,240 their imports rather than running persistent trade 422 00:26:52,240 --> 00:26:56,080 surpluses, it would likely require cooperation with other 423 00:26:56,080 --> 00:27:00,760 deficit economies like the UK, India, France, Turkey, Canada, 424 00:27:01,000 --> 00:27:05,000 and Mexico, who would need to work together to strike a long 425 00:27:05,000 --> 00:27:07,440 term, mutually beneficial trade deal. 426 00:27:07,920 --> 00:27:10,800 Thanks for tuning into this week's podcast, with special 427 00:27:10,800 --> 00:27:14,240 thanks to those of you who support the channel on Patreon. 428 00:27:14,520 --> 00:27:17,560 If you'd like to join that group, I'll put a link in the 429 00:27:17,560 --> 00:27:19,880 show notes. Have a great week and talk to 430 00:27:19,880 --> 00:27:21,400 you again soon. Bye.