Given the market turmoil, you should turn off the television. Don’t even think about looking at your investment balances. Stop reading this newsletter and all other pieces of financial commentary. By all means, go outside. Have a picnic. Be as young as you want to be and have fun. All that boring economic and stock market stuff can wait.
Okay. Obviously, you didn’t take my advice.
The last couple of days haven’t been fun for investors and have left more than a few of us scratching our heads. Did the United States really just start a trade war with the remainder of the world? Or will foreign trade representatives queue up outside the White House to beg for forgiveness?
It is pretty clear what the Administration thinks is going to happen. I am not quite as sanguine. The reason being a fistful of countries make up a disproportionate share of our trade deficit. It seems dealing with them directly would have made more sense than stirring up a hornet’s nest with the entire planet.
| 2023 (USD Billions) | |||
| Country | US Exports | US Imports | Imbalance |
| China | 147.80 | 426.90 | (279.10) |
| Mexico | 322.70 | 475.20 | (152.50) |
| Vietnam | 9.80 | 114.40 | (104.60) |
| Germany | 76.70 | 159.30 | (82.60) |
| Japan | 75.70 | 147.20 | (71.50) |
| Ireland | 16.80 | 82.30 | (65.50) |
| Canada | 354.1 | 418.60 | (64.20) |
| South Korea | 65.10 | 116.20 | (51.10) |
| Taiwan | 40.00 | 87.80 | (47.80) |
| Italy | 28.90 | 72.90 | (44.00) |
| TOTAL | 1,137.90 | 2,100.80 | (962.90) |
| Rest of World | 880.20 | 979.40 | (99.20) |
So, why are we picking a fight with everyone? Shoot, why are we picking a fight with, say, The Netherlands, with whom we run a sizable trade surplus?
The countries in the table are all heavily reliant on exports, and, not surprisingly, the U.S. is a leading destination for all of them. Washington would be wise to closely examine their trading practices are as fair as ours. I would be surprised if it is. However, would leveling the proverbial playing field ensure a favorable balance of trade?
Hmm. That is a great question, and I am not sure of the answer.
Now, look again at that chart, and throw out Mexico and Canada. We already have some form of trade agreement with them and/or have been working on one. What do you notice? From which continent are most of the rest? Do you see a lot of South American countries on there? Africa?
Or do you see a majority of Asian countries? Obviously, that is a rhetorical question, but I would ask you to consider the table below.
| 2023 (USD Billions) | |||
| Country | US Exports | US Imports | Imbalance |
| China | 147.80 | 426.90 | (279.10) |
| Vietnam | 9.80 | 114.40 | (104.60) |
| Japan | 75.70 | 147.20 | (71.50) |
| South Korea | 65.10 | 116.20 | (51.10) |
| Taiwan | 40.00 | 87.80 | (47.80) |
| India | 40.40 | 83.70 | (43.30) |
| Thailand | 15.60 | 56.30 | (40.70) |
| Malaysia | 19.40 | 46.20 | (26.80) |
| Indonesia | 9.80 | 26.80 | (17.00) |
| TOTAL | 423.60 | 1,105.50 | (681.90) |
| Rest of World | 1,594.50 | 1,974.70 | (380.20) |
What does that chart suggest to you? All the more so when you consider those countries have a combined population of 3.503 billion? Might it be we don’t export terribly much to those countries, in aggregate?
Yes, I did the math. In aggregate, in 2023, the U.S. exported roughly $121/person worth of goods to those countries. By comparison, it exported a little over $344/person to the remainder of the world. That is quite a disparity.
Even if we assume these countries have adopted all sorts of nefarious trade practices in order to throttle the United States, it would be difficult to not come to another conclusion, a relatively simple one in my opinion.
It appears as though we don’t make a lot stuff Asian consumers want. Huh? How can I say that? Well, we run a pretty significant deficit with the Mexicans, don’t we, yet we still export close to $2,500/person in goods to them. It is over $8,500/person to the Canadians, and around $3,100/person goes to Ireland. The Germans import about $918/person from the United States, and the Italians are good for around $490/person.
As such, it would seem as though there is a real disconnect between what we produce domestically and what our largest Asian trading partners want. Even more so, the poorer the Asian country, the worse we do. So much so, I feel it isn’t much of a stretch to say American producers probably aren’t as proficient at meeting the needs of the average household in ‘emerging Asia’ as the Administration would like or care to admit.
Please note, in total, the 10 countries from the first table PLUS the four additional Asian countries in the second table, a total of 14, account for: 62.6% of US exports, 78.0% of U.S. imports and 107.2% of the U.S. trade deficit.
That is right. We run a trade surplus with the remainder of the world. So, again, why are we slapping tariffs on countries with whom we have a positive balance of trade?
Apparently, that is what investors want to know.
Make no bones about it. I strongly suspect a majority of Americans would support strengthening the blue-collar middle class in this country. While some economists would argue the United States doesn’t have to produce anything in order to have a strong economy, a lot of us realize the problems with a declining manufacturing base aren’t always economic.
Further, I am not sure how many people truly want a lot of those, often, low margin jobs to return. They weren’t always as great as politicians would lead us to believe.
To that end, I suspect more than a few folks wax nostalgic about a time when happy, healthy people gladly marched off to the mill or the mine, collected a healthy paycheck, dined on steak 5 nights a week and went to the beach during the summer.
Let’s just say that wasn’t necessarily the norm in coal mines, paper mills and textiles plants here in the Deep South. A lot of it was backbreaking work in unsafe conditions for little pay. While there is certainly no shame in hard work, a lot of people did this type of labor so their children didn’t have to do so.
With that aside out of the way, what would, could or should the Administration have done in order to shrink the trade deficit and potentially strengthen that element of the workforce? That is, of course, if shrinking the trade deficit is as necessary as many claim. Perhaps that is a topic of discussion for another time.
Obviously, it is very easy to ‘armchair quarterback’ the President after the two disastrous trading sessions since his so-called “Liberation Day.” The jaw-dropping evaporation of wealth on Thursday and Friday would suggest just about anything else would have been better than what he did. It was a little too public, a little too confrontational and a little too head-scratching. Again, why are slapping tariffs on countries with whom we have a trade surplus? And how did you come up with those calculations again?
However, the long-term ramifications of Liberation Day will depend on how other countries behave in the short-term. I mean, if The Netherlands work out a deal with the White House, that doesn’t move the needle. Hey, I love the Dutch, but they aren’t the problem, if that is the right word.
How will China respond over and after the weekend? What will the Germans do? Aren’t we already working with the Mexicans and Canadians? Can the Vietnamese really do anything? They can’t make their people want complicated software overnight, can they? The South Koreans, Japanese and Taiwanese? Aren’t they supposed to be our allies to counter the Chinese? And what of the Irish and Italians? Don’t the Irish simply export a bunch of stuff made by American companies? And aren’t we supposed to be getting along with Rome because of Meloni?
Oh, the mind boggles about what may or may not happen. However, suffice it to say, the longer this plays out. The longer the countries in those two tables drag their feet and refuse to come to the negotiation table. Well, the worse the economic downturn will be.
I know what the Administration thinks is going to happen, and I hope it is right so we can forget about all of this tariff nonsense. However, I also hope the President will ‘do something’ to allow these countries, most of them in Asia, to ‘save face,’ which is incredibly important there, so we can get past this.
In the meantime, again, and I mean it this time, turn off the television and enjoy the outside. It is much nicer out there.
Thank you for your continued support. As always, I hope this newsletter finds you and your family well. May your blessings outweigh your sorrows on this and every day. Also, please be sure to tune into our podcast, Trading Perspectives, which is available on every platform.
Chief Economist
Please note, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as well as those of our Investment Committee, is subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the rest of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.