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In Addressing Trade Deficits, the U.S. is the 340-Pound Weightlifter
Who wins a trade war? The 340-pound weightlifter or the 140-pound couch potato? Well, that’s the choice facing Canada and Mexico as the Trump administration tries to tackle humongous U.S. trade deficits.
As we all know, U.S. President Donald Trump’s favorite word is “tariffs.” He spent his first term threatening or enacting tariffs. So, nobody should be surprised that he is continuing in the same vein. He alternately threatens tariffs, delays, gives a reprieve and threatens some more.
Trump targets goods and services from trading partners considered friends, like Mexico and Canada. He also targets imported goods from countries like China who aren’t necessarily enemies but aren’t exactly allies either.
In response, these countries have at times offered muted replies or threatened reciprocal tariffs. Many analysts predict that the U.S. will lose any trade wars. But I don’t think data backs up that contention.
Most people believe China’s economy is larger than that of the United States. Years of news reports about China economically surpassing the United States had me thinking that. Until I did some research.
In fact, the United States has, by far, the largest economy in the world. In 2024, the GDPs of the countries involved were:
- U.S.: $30.34 trillion
- China: $19.5 trillion (64.27% the size of the U.S. economy)
- Canada: $2.33 trillion (7.68% the size of the U.S. economy)
- Mexico: $1.82 trillion (6% the size of the U.S. economy)
Picking the Right Fight in a Trade War
So, let’s get back to that 340-pound weightlifter and his 140-pound friend. Not trying to offend couch potatoes, but if the two get into a brawl, my money would be on the guy with the big arms and the Gold Gym t-shirt.
That’s not politics – it’s just acknowledging reality.
Want another example? I had a dream come true last April attending the Final Four. I saw my alma mater, Purdue University, beat N.C. State (where I taught for three years) in the semifinals.
Purdue matched up against the University of Connecticut for the NCAA men’s basketball championship two days later.
That game was over in five minutes. Purdue didn’t stand a chance. That doesn’t make me a milquetoast Purdue fan. It’s just acknowledging reality.
The same thing happened with the Super Bowl last month. Four Philadelphia Eagles’ defensive linemen manhandled the Kansas City Chiefs’ offensive line. They knocked Chiefs quarterback Patrick Mahomes around, sacking him six times.
Quarterbacks can’t complete passes when they’re running for their lives or lying flat on their backs.
People don’t like to be told they’re a 140-pound couch potato. But that’s better than getting hurt. I am no couch potato, but under no circumstances will I get into a boxing ring with Mike Tyson, no matter how old he is. (58, according to Wikipedia.)
Pick the fights you can win. Avoid those you cannot. Canada and Mexico are not in a position to win a trade war with the U.S. China has additional economic woes that hinder its ability to fight, as well.
The Trade Deficit Problem
The enormity of the U.S. trade deficit blows my mind. It currently stands at $1.2 trillion. This, combined with the federal budget deficit, could devastate the country’s financial future. Trump was hired to fix this.
His approach is to reduce government spending, encourage domestic production and use tariffs to cut imports and increase exports. Why tariffs? Because Canada, Mexico and China (in that order) were the United States’ three largest trading partners in 2024.
And they account for 44.2% of the massive $1.2 trillion U.S. trade deficit:
- China: $295 billion deficit
- Mexico: $172 billion deficit
- Canada: $63 billion deficit
Trump is addressing these trade imbalances through incentives for domestic production and tariffs. He aims to level the playing field, reducing trade barriers.
The Myth of a U.S.-Only Automotive Supply Chain
However, Trump has shown optionality in his negotiating style. He wants to help, not hurt, the U.S. economy.
Take the fact that he has talked about protecting the U.S. automotive supply chain.
Well, there is no U.S. automotive supply chain. We have a North American automotive supply chain. Raw materials, components and finished products cross borders multiple times between the U.S., Canada and Mexico. Wisely, Trump granted a one-month reprieve on automotive tariffs against Canada and Mexico. He made other adjustments for imports that satisfy the Trump-negotiated U.S.-Mexico-Canada Agreement (USMCA).
But in reality, no U.S. automaker can suddenly build billions of dollars’ worth of new manufacturing and distribution facilities overnight.
So, what does Trump want with such a short deadline? He’s not pushing for Ford, GM and Dodge (Stellantis) to consolidate efforts. Instead, he wants GM U.S., GM Canada and GM Mexico to collaborate. The same goes for the various international divisions of Ford and Dodge (Stellantis). They should distribute value-added services strategically to achieve a more balanced trade flow.
As of 2023, Canada’s bilateral trade with the U.S. in automobiles and parts was balanced, according to TD Economics. Mexico, on the other hand, had a $115 billion trade surplus in those same categories. Clearly, Trump wants to address this imbalance.
Will Trade Wars Trigger Inflation?
A common argument against tariffs is that they cause inflation. I recently explained how reconfiguring supply chains can avoid higher costs.
On the heels of that, The Wall Street Journal commissioned an analysis showing that tariffs vary in their impacts. For example, household linen prices might increase by only 0.8%. Meanwhile, premium products and goods with limited sourcing alternatives could see greater price hikes.
So, consumers likely won’t notice the price hike on that tablecloth. But they might on their wine or their videogame console.
This makes ReGlobalization and supply chain optionality more important than ever. Companies that diversify their supplier base will be best positioned to mitigate cost increases and ensure business continuity.
Short term, yes, retaliatory tariffs could inflate prices. Energy and agricultural goods could cost more. Supply chains will get disrupted and economic growth will slow.
However, the long-term impact depends on negotiations. And, of course, whether these tariffs are short-term bargaining tools or a permanent trade policy shift.
Trump has been adamant that while he prefers free trade, the globe needs fair trade.
In Economics, Pragmatism Beats Emotions Any Day
Canada, Mexico and China should think twice before escalating a trade war with the United States. The U.S. economy is significantly larger than theirs. Pick your battles wisely, whether you’re getting into the boxing ring or engaging in international trade.
Instead of escalating tensions, these countries should focus on negotiation and collaboration. Company executives should focus on smart supply chain adjustments to navigate the evolving trade landscape.
Because at the end of the day, economic pragmatism will always win over emotional retaliation.
Related Reading
- From Assumed Certainty to Known Uncertainty
- For Trump, It’s Leadership at the Speed of Business
- ReGlobalization – Redefining Global Supply Chains
Jim Tompkins, Chairman of Tompkins Ventures, is an international authority on designing and implementing end-to-end supply chains. Over five decades, he has designed countless industrial facilities and supply chain solutions, enhancing the growth of numerous companies. He previously built Tompkins International from a backyard startup into an international consulting and implementation firm. Jim earned his B.S., M.S. and Ph.D. in Industrial Engineering from Purdue University.
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