Trade Tariff Analogy

Very Brief

Photo by chris robert on Unsplash

Trump’s trade wars with Canada, Mexico and China are currently on temporary hiatus. Since its start, it’s been narrativized as Trump starting a fight with some innocent countries. In reality, it is an American President finally standing up for America. The other three countries would love nothing more than to keep the trade relationships unchanged, because they greatly benefit from the incredibly unfair situation.

Instead of joining in and supporting Trump for rectifying a bad situation, democrats like AOC and Chuck Schumer have used press conferences with props to show how everything in America will cost more. They are essentially standing behind Canada, Mexico and China. This shows how little they truly care about America and Americans.

When it comes to GDP, trade with China, Canada and Mexico is very lopsided. US exports to China accounts for 0.5% of the US GDP. US exports to Canada accounts for 1.4% of the US GDP. US exports to Mexico accounts for 1.2% of the US GDP.

In comparison, Chinese exports to the US accounts for 3% of China’s GDP. Canadian exports to the US accounts for 19% of Canada’s GDP. Mexican exports to the US make up 33% of Mexico’s GDP.

In theory, if the US stopped doing business with all these countries, its overall GDP would drop by 3.1%. Not really that significant. It would be roughly the same as if China stopped exporting to the US. If Canada stopped exporting to the US, it would account for one-fifth of their GDP, and with its excessive government run programs, they could no longer afford to fund their socialist programs.

Mexico would be hit the hardest. One-third of their GDP would go away if they stopped exporting to the US. The US doesn’t just fund the Mexican economy, but it also financially supports many of their citizens through the American welfare system, while also taking in their criminals. Beyond even this, many who are working in the US illegally send money home to Mexico, which goes towards supporting the Mexican economy even further. Sending illegals back to Mexico, while tariffing their exports 25% would devastate Mexico.

Analogy.

If one thinks about trade between the US, China, Canada and Mexico and its impact on each country’s GDP as being the renting of a four-bedroom house, it looks a little like this. The rent is $4k per month, each gets their own bedroom, with equal access to the rest of the house. In theory, each should pay $1k per month, but after living together a while and their lease about up, it now looks a little more like this. The US is currently paying $2.8k, China is paying $750, Canada is paying $300, and Mexico is paying $150. Not only is Mexico paying the least amount, but their girlfriend unofficially moved in a few months after renting the house and isn’t paying any rent.

After becoming increasingly frustrated over time, the US finally tells the other roommates that they are no longer going to pay almost three times more than they should be paying. The other roommates are going to have to pay their fair share of the rent, or the US will move out in a few months, as soon as the lease is up.

Instead of thanking the US for carrying their portion of the financial burden for way too long, and offering to pay more rent, Canada and Mexico have threatened to no longer pay their rent with the few months left on the lease, leaving the US with Canada and Mexico’s portion to pay as well until the lease is up and the US can move out.

The US just has to get through the next few months remaining on the lease before they can move out and either get an apartment on their own (onshore production, creating American jobs) or rent a house with others (new trading partners).

In the meanwhile, the threat Americans face is the possible need to go without guacamole on their Chipotle burritos and maple syrup on their IHOP pancakes for a while. I think they can manage just fine.

The US is not only in a position of power to negotiate, but they are the ones that have been victimized for far too long. If the US chooses to no longer continue on with the current trade scenario with Canada, Mexico and China, it might hurt for a little while, but in the end, it would make the US more independent and create more jobs.

Either Canada, Mexico and China start playing fair or the US moves on from trading with them and brings more production back home. Seems like a win win situation to me.