A Turning Point for the U.S. Economy...

There are growing fears of a major global trade war tonight. Or as the Wall Street Journal dubbed, the dumbest trade war in history. Is there anything China, Canada and Mexico can do tonight? No. Republicans point to this already and say, look, Trump's strong arm tactics work. Sir, your previous tariffs during your first administration cost Americans some 80 billion dollars. Can you guarantee American families won't pay more? I can't guarantee anything. Well, we heard for a long time that Donald Trump would look to take charge of US trade policy. And in his first few weeks in office, he certainly hasn't disappointed with some, namely Donald Trump, hailing this as a big turning point for the US economy. Just a few weeks ago, he announced a 25% tariff on both Mexico and Canada, with just a 10% tariff on Canada's energy products. He also announced a blanket 10% tariff on Chinese goods. And more recently, he's been toying with the idea of reciprocal tariffs with other US trading partners, including the EU and Japan. Now, as of the time of recording, those tariffs on Canada and Mexico have been temporarily halted, but the tariffs on China have gone live. And it seems as though Donald Trump is going to continue exploring further tariffs on other countries over the next few weeks. The interesting thing, though, is that the president can't just slap tariffs on any country for any reason. However, he has to work within existing laws. For example, Section 232 of the Trade Expansion Act of 1962 allows the president to impose tariffs for national security reasons. Section 301 of the Trade Act of 1974 allows the president to impose tariffs if a foreign country engages in unfair trade practices. And the Tariff Act of 1930 allows the president to impose retaliatory tariffs if a foreign government discriminates against US products. But beyond that, the tariffs need congressional approval. There's no power that the president has that enables them to place tariffs on countries just cause. The only other way a president can use executive powers to impose tariffs is if they declare a national emergency. And that's why we've seen Trump tie these tariffs specifically to illegal immigration and fentanyl. By framing the tariffs on Canada and Mexico as a response to the border crisis, he can justify them under a national emergency. But obviously, China's a bit of a tougher sell in that department, which is why the White House has now linked the national emergency to fentanyl, arguing that China hasn't done enough to curb the flow of precursor chemicals into the US. So it's an interesting tactic to watch play out. But the point is, it seems like Trump will try as best he can to impose tariffs where possible to increase the tax revenue and reduce the trade deficit of the United States. It's a plan he's touting as the turning point of the US economy, improving America's strategic and financial position. But many economists are seeing it as a turning point for much different reasons. So is Trump's tariff plan likely to be a good thing for America? As I discussed in a recent video, a tariff is simply a tax applied to a country's imports or goods brought into the country from elsewhere. Now, Trump has tried very hard to convince people that it's these external countries that will pay the tariffs. But that is actually false. It's also quite misleading. It is, in fact, the US businesses that buy foreign products that have to pay the tariff before the goods are allowed into the country. For example, almost all of America's avocados are grown in Mexico, about 90%. And it's a trade that was worth about $2.7 billion in 2024. But if a 25% blanket tariff is put on goods from Mexico, it means that companies like Walmart will have to pay a 25% additional tax to the US government on their avocado orders before they get that stock. So if they previously bought avocados at $1 apiece, then after the tariffs are put in place, that avocado now costs Walmart $1.25. But that's the thing. In reality, Walmart doesn't just eat the additional cost. They pass it on to consumers so that Walmart's profitability doesn't take a hit. So ultimately, the people that pay the tax are still American citizens. But there are still advantages to the implementation of tariffs. And one big one that Trump is focusing in on is fixing America's trade deficit. While the White House has officially been messaging that these new proposed tariffs are around a national immigration and fentanyl emergency, the real underlying motivation of Trump implementing these tariffs is purely economic. And this can be seen because as soon as Donald Trump isn't talking about China, Mexico or Canada, his messaging completely changes and focuses much more on trade imbalances. This is him talking to the media after meeting with the Japanese prime minister. We have a trade deficit with Japan of over $100 billion, but we're going to work that out. And I think very quickly, frankly, we can do it just on oil and gas. We can work it out. So we intend to do it very quickly. Now, a trade deficit is one of those fancy economic terms that gets thrown around. But it's really quite a simple concept to understand. Countries around the world make certain goods. When they have an excess, they might sell those goods to other countries, their exports. And when they don't or can't make a certain category of goods, they'll buy it from another country like America buying avocados from Mexico. Now, a trade deficit occurs simply when the country imports more than exports. This is seen as a problem because over time, you lose domestic jobs as more goods consumed in America are made outside of America. And that can lead to a decline in American industry and also dependence on other countries, which is a big problem in times like COVID when the global supply chain just completely freezes. Overall, it just gives foreign countries a bit of added leverage over the United States at the negotiating table, as at the end of the day, the United States needs the other country's stuff. Now, in 2024, America's trade deficit was $918.4 billion, with their goods trade deficit reaching a record $1.2 trillion, meaning the US is importing $1.2 trillion more goods than they're exporting. And on a country by country or region by region basis, the biggest trade deficits are seen with China, the EU, Mexico, Vietnam, Ireland, Germany, Taiwan, South Korea, Canada, and the list goes on. In the case of China alone, the US in 2024 bought $295.4 billion more goods from China than what China bought from the United States. And this shows that the US is quite dependent on Chinese made stuff for their economy to function normally. Now, that number has actually been falling. In 2018, America had a record trade deficit with China of over $400 billion. But despite that number improving to Donald Trump, any trade deficit is still a problem, and it's a problem he is hell bent on fixing. How? You guessed it. Tariffs. Take the recent 10% tariff placed on Chinese goods as an example. The US buys lots of goods from China, smartphones, computers, batteries, toys, video games, consoles, the list really goes on. But with a 10% tariff, importers now have to sell those goods in America at a 10% markup to avoid any hit to their profitability. Now, that increased price on the imported goods naturally encourages more Americans to buy American made products. The foreign made products are just way more expensive now. But even more importantly than that, the main effect Trump wants to see from his tariffs is a return of manufacturing to America. The idea is if Americans start buying more American products, then hopefully that leads to growth in domestic industries, higher profitability for American businesses, and more jobs for American people. Then on top of that, the government also earns a little bit more tax revenue, which it may use to lower income taxes for its citizens. It sounds like a perfect strategy. But there are some problems. The biggest and most obvious problem is that tariffs increase prices, aka they spur inflation. Because it's the American importer like Walmart that has to pay the tariff, they're the ones that raise their prices. So at the end of the day, Americans pay more for the goods that they need. We already discussed the avocado example. 90% of American avocados come from Mexico. A 25% tariff on all Mexican goods means avocados are 25% more expensive now. But now apply that logic to all the products that America imports from these various countries, from Mexico, vehicles, electronics, petroleum, fruits, vegetables. In fact, 18 out of every 100 cars sold in America are made in Mexico. Tariffs go through, those cars sold by American automakers like GM, Ford, Chrysler, they get 25% more expensive. You know, from Canada, petroleum, gas, agricultural products, from China, smartphones, computers, batteries, toys, video games, it all gets more expensive. And for a lot of people, that rubs them the wrong way. The Federal Reserve is finally starting to get a hold of this COVID inflation. Americans are unfortunately struggling much more with the cost of living than they were five years ago. And now Trump is voluntarily inflating prices and calling it an America first policy. For some, that's a hard sell. So that's the fundamental argument against the tariff plan. And it's why some economists describe it, sure, as a turning point for the US economy. But for all the wrong reasons. The Wall Street Journal just the other week even went so far as to call Trump's plan, quote, the dumbest trade war in history. Going back to the trade deficits the US has with many countries, another problem with imposing tariffs is that sometimes it doesn't even help American industries all that much. For example, if Trump announces a 10% tariff on Chinese electronics to try and spur American companies to manufacture electronics in America, history actually tells us that that typically doesn't happen. And instead, companies look for the next cheapest alternative. For example, the US imposed tariffs on China during Trump's first term, but the trade deficit with China didn't disappear. It just shifted to Vietnam, Mexico and India, other low cost countries. American companies didn't magically decide to boost their expensive US manufacturing. And this is a tough pill for America to swallow because they're such a rich nation. You know, workers have rights and they earn good wages. Naturally, most companies will always be able to find cheaper manufacturing alternatives elsewhere. Instead of boosting US manufacturing, many companies will simply move their production to another low cost country. So that's another problem with tariffs. And it's why this time around we're seeing Trump is trying to target a lot of countries broadly with tariffs. So by covering, you know, China and Mexico, this may be more effective at getting some manufacturing back to American soil. Time will tell. Then the last reason why economists aren't super thrilled with the Trump tariff plan and the reason why it's being touted as the dumbest trade war in history is quite simply that it annoys the heck out of US allies. I couldn't believe it the other day. I saw a video of Canadian basketball and hockey fans booing as they played the American national anthem. It just shows you how quickly you can offside nations if you're not careful. Another example is my home country. You know, Australia and America are pretty darn close allies. We couldn't get much closer. We trade a lot with each other. We have a strong military alliance. We share intelligence. Aussies love Americans and Americans, as far as I'm aware, also like Aussies. You know, we're close, right? Well, then out of nowhere, Trump announces a 25% tariff on our steel. I mean, what's with that? Now, you can argue that America is just flexing its muscles, and you might even argue that America should flex its muscles as much as it can. But at the end of the day, for resources like steel, there are many buyers, and putting tariffs on things like Australian steel will probably just mean that we'll sell it to China cheaper, which helps their economy flourish while steel prices rise in America. It's the same idea behind the formation of the BRICS countries. America wielded so much power over these countries and flexed so hard on them that eventually they just got fed up with it to a point where American sanctions on these countries have fast-tracked a new BRICS payment system that ditches the SWIFT network and the US dollar and ultimately reduces the influence that America has. So looking at these tariffs through a diplomacy lens, out of nowhere, the President of the United States has moved to impose tariffs on America's two biggest export markets, Canada and Mexico, its largest supplier of goods in China, and key strategic economic allies in the EU and Japan. Now, of course, while no other country will really try and stick it to America outside of the BRICS nations, I don't know, they still all know that America has a very large trade deficit, aka they know America's economic strength is dependent on the rest of the world sending them foreign goods. There's a classic saying, don't bite the hand that feeds you, and already economists are pointing out that this hardline approach to trade policy might not have America coming out on top. Overall, it simply might not be worth pursuing these punishing tariffs on the rest of the world when the rest of the world could apply reciprocal tariffs or export controls on you. China is the big one to talk about here. They may very well retaliate, restricting exports of rare earth minerals, critical for US tech production. They may buy fewer US treasuries, weakening the US dollar and making American debt more expensive. US tariffs may also open up trading opportunities between China and other tariff-affected countries. The EU, Japan, and Australia are already building stronger trade relationships with China, and we've seen that over the years, China has been very opportunistic in trade to increase its influence with foreign countries. If the US keeps pushing allies away, could America's influence in global trade actually shrink instead of grow? These are the many factors that economists around the world will be watching closely as this all plays out. So I hope that outlines some of the major pros and cons with America's new trade policy, and I'd love to hear your thoughts on the issue as well. Do you think it's a net positive or a net negative? All things considered. One more thing as well, if you'd be interested in learning about rational long-term investing either through ETFs or through the classic Warren Buffett stock selection strategy, please do check out NewMoneyEducation in the description. We have two really thorough, professionally researched, professionally edited courses over there to help get you guys started out on the right foot in the stock market. And that's also the number one way that you can support our free content here on YouTube. But with that said, thank you all very much for watching, and I'll see you guys in the next video.