Global Trade Reality…Tariffs are NOT the answer!
Have you noticed that the U.S. stock market has stalled out? As of the close of the market last night the S&P 500, the Nasdaq 100, the Dow Jones Industrial Average, and the Russell 2000 are all below their closing price on November 6th, the day after the election. On Wednesday, Nvidia, darling of Wall Street, reported a year over year increase in revenue of 142%, and the stock went down! If that report happened three months ago NVDA would probably have popped upward 10 to 20%. The bond market is suddenly flashing warning signs. Wednesday the 10 year U.S. Treasury yield crossed below the 3 month yield. This is a classic “inverted yield curve” and often a forecaster of slowing economic conditions, if not a recession.
So what’s holding the markets back? Tariffs, Tariffs, Tariffs! If you watched CNBC the past few days you saw a number of guests talking about tariffs. Wednesday afternoon Jim Cramer said, “This markets decided that, as much as it matters if there’s good news, like Nvidia, what matters more is that we have very little certainty on trade policy, aside from the fact that the President loves tariffs….”
Every day we see new headlines about tariff proposals. We see debates about how effective they might be, whether or not they will cause inflation or an economic slowdown. All of the debates miss the critical point that if there ever was a time to raise tariffs, this isn’t it.
Twenty-five years ago the U.S. dominated world trade. Many countries in the world traded with the U.S. on our terms or they didn’t trade with the U.S. That is no longer true. Whether you like it or not, whether you realize it or not, China is now the major trading partner for most countries in the world and their domination is growing. Putting up barriers that will make it more difficult to trade with the U.S. is not going to change that. In fact, it could easily make it worse. We need solutions that are going to make it easier and more desirable for countries to trade with us, not harder!
There are two maps below, displaying global trade dominance of the U.S. vs China in the year 2000 and again in 2024. In 2000 most of the map is colored blue. That is because the U.S. was the larger trading partner for all the countries in blue at that time. In 2024 most of the map is colored red, because China is now the larger trading partner for all the countries in red. They are now the world’s largest trading partner!
An amazing transition has taken place in less than 25 years. Stalwart U.S. allies like South Korea, Japan, Australia, and much of Europe trade more with China today than they do with the U.S. Every country in Africa trades more with China. Do you know why? Because the U.S. all but ignores Africa. This is a huge mistake for the U.S. because today many of the fastest growing economies in the world are in Africa. Conservative estimates are that its GDP could quadruple in the next 25 years. China has been there for many years building relationships. We haven’t. Sadly, there is not much more to say.
Look at South America, which was mostly blue in 2000. It’s almost all red in 2024. Look at Greenland, which I consider the most ironic situation, given that Trump wants to own it. It was blue in 2000. It is red in 2024.
If the caption on the maps is too small for you to read, here is what it says: In 2000, U.S. trade totaled $2.0 trillion, more than four times China's $474 billion. From 2000 to 2024, U.S. trade expanded by 167% (4.2% CAGR), while China's trade surged by 1,200%| (11.3% CAGR), surpassing the U.S. in 2012. By 2024, total trade reached $5.3 trillion for the U.S. and $6.2 trillion for China. If I were to describe this in “fight terms” I’d have to describe it as China’s version of “Rope a Doping” the U.S. over a 24 round match. It wasn’t a knockout. Our trade grew from $2 trillion annually to $5.3 trillion, which is very solid growth. But theirs grew from only $474 billion to $6.2 trillion at the same time. They stayed focused and crushed the numbers.
(Source: The Visual Capitalist)
Trump loves to blame Biden for all of the world’s problems, but during these 24 years, Bush and Trump were Presidents of the United States for 12 years. Obama and Biden were Presidents for 12 years. Most of this transition had already happened by the time Biden became President.
While the United States has trade agreements with countries around the world, consistency, coordination and longevity of policy have been lacking. There isn’t a comprehensive, well-coordinated strategy that survives from one administration to the next. Consider that Trump renegotiated the North American Free Trade Agreement (NAFTA) during his first administration. He called NAFTA “the worst trade agreement ever made”. The United States, Mexico, Canada Agreement (USMCA) replaced NAFTA in 2018. Trump called USMCA “the best trade agreement ever negotiated”. Now he is repudiating it. Also consider that 12 Pacific rim countries took 8 years to negotiate the Trans-Pacific Partnership (TPP), from 2008 to 2016. The United States played a very key role in those negotiations. Other original members of TPP included Japan, Canada, Australia, Mexico, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore, and Vietnam. Trump repudiated the agreement in 2017, before Congress was ever able to ratify it. On the other hand, the Chinese have a consistent and multifaceted plan which they have been doggedly working at since the 1990s.
Much has been made of the fact that NAFTA caused the loss of manufacturing jobs in the U.S. That is true. Most of the lost jobs were in the automobile manufacturing industry. The U.S. has done nothing to retrain workers for other high paying replacement jobs. Hi-tech jobs could have easily replaced those lost jobs. It’s estimated that the U.S. currently faces a shortfall of 67,000 technicians, computer scientists and engineers in the semiconductor industry alone. The shortage is not limited to the semiconductor industry. We face a gap of at least 1.4 million skilled workers throughout the broader hi-tech economy.
It may surprise you that only about 34% of American’s have a Bachelor’s degree. It may not surprise you that the 10 least educated states are West Virginia, Mississippi, Louisiana, Arkansas, Alabama, Oklahoma, Kentucky, Nevada, New Mexico, and Texas. “Least educated” considers ranking for education attained and quality of education. (Source: Visual Capitalist) The labor shortage for high tech jobs is a pressing issue that requires a multifaceted approach to address the “skills gap”. We have people to educate if we want to fund it and if those that need it want to make the commitment.
So where does this all leave us? Answer, in second place and falling farther behind. The United States still doesn't have a policy except to put “reciprocal tariffs” in place. In simplest terms that means that if a country is charging 10% tariffs on goods it imports from the United States, the US will charge a 10% tariff on goods imported from that county. If the US actually does that the United States is letting the other country dictate our trade policy with them.
Do you know what the Chinese are doing instead? They have negotiated “free trade zones” all over the world. They have over 100 bilateral trade agreements with countries worldwide. We have 40. They launched the “Belt and Road Initiative" (BRI) in 2013. Its purpose is to create a massive network of trade routes and infrastructure. BRI is not about negotiating treaties. It is about building roads, power plants, transmission lines, pipelines, railroads, bridges, ports, airports, industrial parks, and all other facilities necessary to conduct trade. BRI is at work throughout Asia, eastern and southern Europe, Africa, and South America. China has invested billions of dollars in these various projects, all outside their own borders.
Several years ago I met Bruce Cheung here in Napa. He is Chinese and extremely well connected in their business and government circles. He owned a home in Napa at the time. He told me a lot about BRI, including that China had at least 10 million to 12 million people living in various countries around the world, working on BRI projects. They are not only ahead of us in trade relations with other countries, but they are also building out the global infrastructure that is required to boost trade for decades. The U.S. has no equivalent effort.
Assume for a minute that everything I’ve told you in this letter is true. Assume that I did a lot of research in preparing to write it. Assume I knew a lot about this topic anyway. Assume the reason I’m writing it is because I care deeply about our country. I also care about you. I don’t want you bamboozled. I don’t want to see our country compounding its mistakes. We need a long term, well-coordinated, thoughtful global trade plan that will be mutually beneficial to the U.S. and our many trading partners. We need to understand that this is a long game. We need to understand that no one wants to be bullied, whether you are thought of as friend or foe. Particularly if you are a friend…
WHICH BRINGS ME TO CANADA
Canada has been a friend and trading partner for decades. If you ask Meta.ai if there is a trade imbalance between the U.S. and Canada, here is the answer you get:
“The trade relationship between the U.S. and Canada is incredibly strong, with the two countries enjoying the world's most comprehensive trading relationship. In 2023, they exchanged nearly $3.6 billion worth of goods and services daily. While there isn't explicit information on a trade imbalance, Canada did have a significant energy trade surplus with the U.S., with exports valued at CAD$134 billion in 2023 ¹.
The U.S. and Canada have a long history of trade agreements, including the United States-Mexico-Canada Agreement (USMCA), which has facilitated their strong economic ties. The two countries also have a significant investment relationship, with the U.S. being the largest investor in Canada and Canada being the largest source of foreign direct investment in the U.S.” (They list their source as www.international.gc.ca)
Exactly how Canada is taking advantage of the U.S. is a mystery to me, given the long and expansive relationship between the two countries. Together we have the longest boarder in the world that is unguarded by military forces. People are not walking across that border, like they are from Mexico. Fentanyl is barely coming across that boarder. Check out this graph that show the amounts of fentanyl seized at our borders from 2021 through December 2024. The dark blue section, that you can barely see, represents the seizures at the Canadian border. The large light blue section shows the amount seized at the Mexican border. Note that the source of this graph is U.S. Customs and Border Protection! If President Trump’s proposed tariffs on Canadian goods are really about preventing border crossings and fentanyl traffic, I think he is aiming at the wrong country! If that is his real motive, Mexico yes, Canada no!
The next chart shows the largest trading partner for each or our 50 states, with Canada leading in 23 states. Why would we ever want to put 25% tariffs on Canada, our leading trading partner. To make their goods more expensive for U.S consumers? I’m sorry, it makes no sense to me!
This letter wasn’t written as investment advice. This letter was written to provide some honest history and perspective on our international trade relations. If you want our perspective on “Navigating Market Uncertainty: Key Considerations for Investors” please click here for our newsletter published on February 10, 2025. It is also located on our website under our Newsletter Archive section.
All the best,
Paul
Paul Krsek
CEO
5T Wealth, LLC
Main (707) 224-1340
595 Coombs St
Napa, CA 94559
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