Testing the Free Trade Hypothesis

It has long been a mantra of the free trade crowd that both sides lose from a trade war. President Trump has called that mantra into question by launching a trade war with Canada, and likely Mexico and China as well:

Canada will retaliate against President Donald Trump’s new tariffs with 25% levies on a raft of U.S. imports, Prime Minister Justin Trudeau said on Saturday, warning Americans that Trump’s actions would have real consequences for them.

As relations between the long-time allies who share the world’s longest land border reach a new low, Trudeau told a news conference he was slapping tariffs on C$155 billion ($107 billion) of U.S. goods. Those on C$30 billion will take effect on Tuesday, the same day as Trump’s tariffs, and duties on the remaining C$125 billion in 21 days, he said.

Trudeau’s announcement came just hours after Trump ordered 25% tariffs on Canadian and Mexican imports and 10% on goods from China, risking a trade war that economists say could slow global growth and reignite inflation. Trump said he would impose 10% tariff on all energy imports from Canada.

The Canadian leader said tariffs would include American beer, wine and bourbon, as well as fruits and fruit juices, including orange juice from Trump’s home state of Florida. Canada would also target goods including clothing, sports equipment and household appliances.

Trudeau said the coming weeks would be difficult for Canadians but that Americans would also suffer from Trump’s actions. “Tariffs against Canada will put your jobs at risk, potentially shutting down American auto assembly plants and other manufacturing facilities,” Trudeau said, addressing U.S. citizens during a press conference in Ottawa. “They will raise costs for you, including food at the grocery store and gas at the pump.”

Canada is considering non-tariff measures, potentially relating to critical minerals, energy procurement and other partnerships, Trudeau said. The 9,000-km (5,600-mile) U.S.-Canada border handles over $2.5 billion in trade a day, especially in energy and manufacturing, according to Canadian government data from 2023.

In 2023, Canada exported close to C$550 billion worth of goods and services to the U.S., or more than three-fourths of its total exports. Energy accounted for 30% and manufacturing contributed around 15% to exports south of the border. Exports to the U.S. accounts for roughly 17.8% of Canadian gross domestic product and more than 2.4 million jobs in Canada.

Let’s look at the three trade balances:

  • Canada: Canada’s merchandise trade surplus with the U.S. last year was C$100 billion. That equates to 3.2% of Canadian GDP. The U.S., however, enjoys an edge in services trade, mainly related to Canadians flowing over the American border. This impact shrinks the trade surplus to C$85 billion, or 2.8% of Canadian GDP, and $45 billion, or -0.2% of U.S. GDP.
  • China: China had a surplus of $990.6 billion with the US. This accounts for 5.4% of Chinese GDP and -4.4 percent of US GDP.
  • Mexico: Mexico had a surplus of $171.5 billion with the US. This accounts for 9.5% of Mexican GDP and -0.8% of US GDP.

Conclusion: the USA will handily win a trade war with all three countries, which is presumably why President Trump singled them out. The US economy will observably benefit from removing foreign competitors taking sales away from domestic businesses; the GDP cost to the foreign countries is an order of magnitude greater to them because their interaction with the USA is more parasitical than symbiotic.

The maximum direct impact to US GDP would be expected to be +5.4 percent, or a benefit of $1,215 billion to the US economy. The maximum direct impact to the three foreign economies would be expected to be an average of -5.9 percent. So even a trade war that leads to a complete end to all trade between the US and the three countries would be expected to significantly help the US economy and increase US wages, and harm all three foreign economies.

Remember, the theoretical justifications for free trade have always been false and incorrect, as first demonstrated by Ian Fletcher and then conclusively disproved by me. Free trade is absolutely and inherently detrimental to a nation, because its logic of efficiency and optimally pairing labor with capital absolutely requires the complete destruction of families, local communities, and the demographics of the nation itself.

The fact that decades of even partially free trade within and without the US borders has significantly fostered these three negative societal trends isn’t an accident, it is specifically predicted by my theoretical observations and argument in my 2016 book ON THE QUESTION OF FREE TRADE.

Here is the relevant Presidential order. It’s informative to see that instead of cracking down on its illegal fentanyl production and exports, the Canadian government has elected to embrace trade war. The irony here is that the USA is simply attempting to do what China tried, and failed, to do in the Opium Wars.

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