“The great virtue of the free market system is that it does not care what color people are; it does not care what their religion is; it only cares whether they can produce something you want to buy. It is the most effective system we have discovered to enable people who hate one another deal with one another and help one another.”

Prof. Milton Friedman

 

There’s been a lot of noise lately about tariffs and global trade wars looming on the horizon. And while many in the media, friends, and yes, clients have questioned President Trump’s negotiating “style”, I think there is a method to his madness.

 

What the President knows, is that the world needs the US and its consumer more than they need them. A quick look at the size of global economies and you get the picture:

 

(Source: Wikipedia)           

 

 

The recent tax stimulus package passed by the Trump Administration was worth about $850 billion in economic stimulus. Does China think $50 billion in tariffs will make a difference? Or does PM Trudeau believe $5-6 billion worth of tariffs make even a dent?

 

Not a chance.

 

The USA is not just the World’s largest economy, it is a powerhouse, and sometimes people forget how massive a $20 trillion economy is. The only one close is #2 China, but much of China’s economic boon is comprised of empty ghost cities, ambitious government megaprojects, etc. …

 

One image which has always stuck with me which really reinforces just how huge the US economy is the chart below, created by Carpe Diem, and it matches the size of the US state economies (based on nominal GDP numbers) with comparable countries around the world.

 

For example our nation of Canada (with $1.65 Trillion in GDP) would be roughly the equivalent of Texas (at $1.7 trillion). Here’s how the entire country breaks down:

 

 

They say a picture is worth a thousand words. That picture is powerful, and it reinforces what a force the US economy is.

 

And the rest of world needs them to be economically successful…

 

… and President Trump knows it…

 

You want to know how markets are going to do? Just follow the US economy. Get the US economy right, the rest of the world simply follows. And the biggest part of the US economy? The US consumer which accounts for about 71% of the US economy’s GDP.

 

And those US consumers are the oil to the engine of the global economy. The rest of the world knows it… the President knows it.

 

So when he claims the rest of the world has treated the US economy like their own “piggy bank” to raid, he may have a point. A car comes from China to the USA, a 2.5% tariff comes into play. A US built car goes to China, a tariff of 25% is applied. A level playing field? Not in the least.

 

In fact, the average USA tariff is about 3.50% , the EU 4.00%, China 9.90%, and even Canada clocks in at a higher number (Source: World Trade Organization)

 

So when countries think $5 billion, $10 billion, even $50-100 billion in tariffs on USA goods will be significant to a $20 trillion machine, they’ve been smoking what Canada is about to legalize.

 

And President Trump knows it.

 

Stay tuned,

 

Vito Finucci, B.COMM, CIM, FCSI

Vice President and Director, Portfolio Manager

 

 

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