American Capitalism’s Worst Nightmare
Donald Trump’s War on America’s $5.4 trillion of two-way trade with the rest of the planet is surely one of the most senseless acts of state aggression in modern times, if ever. That’s because its predicate—that America’s giant, unsustainable trade deficits are owing to unfair trade—is dead wrong.
And we do mean wrong—as in completely, unequivocally and with no if, ands or buts. Indeed, Trump thinks large trade deficits are prima facie evidence of cheating by our trading partners, yet the evidence debunks that primitive axiom with such alacrity as to literally shutdown the argument.
For instance, the Donald never stops bragging about his negotiating the USMCA in late 2018, which he claims was a vast improvement upon the existing three-way free trade arrangement between the US, Mexico and Canada known as NAFTA. In truth, of course, it was mainly a name change with some sops to the UAW and other American unions, which provided more stringent wage standards in Mexico. But the core feature—zero tariff trade between the three countries—was maintained.
Here’s the thing, however. During 2017—before the Donald’s new and improved USMCA— the US trade deficit with Mexico and Canada was -$65 billion, representing a modest 5.0% of total two-way trade of $1.298 trillion between the US and its two NAFTA partners. Self-evidently, that deficit was not caused by tariff barriers because, by definition, there weren’t any.
2017 NAFTA Trade:
- US Exports To NAFTA: $616 billion.
- US Imports From NAFTA: $681 billion.
- Trade Deficit With NAFTA: -$65 billion.
- Total Two-Way Trade: $1,298 billion.
- NAFTA deficit as % Of Two-Way Trade: 0%.
Fast forward to 2024 and you will see that the US combined deficit with Mexico and Canada has soared to $235 billion, and actually represented 14.6% of two-way trade which totaled $1.6 trillion with the two USMCA partners. So in a structural sense, the US trade deficit with its partners to the north and south significantly deteriorated.
That’s right. The Donald’s new and improved USMCA deal extended the zero-tariff approach of NAFTA and also added some additional features designed to remove so-called NTBs (nontariff barriers) by ensuring that Mexico’s labor and environmental standards didn’t give it any unfair trade advantages. In the case of wages, in fact, the USMCA’s Annex 23-A required Mexico to eliminate company controlled unions and raise wages by $4 to $6/hour by 2024.
Still, what happened on a completely level playing field over that seven year period is that US exports to the USMCA partners rose by 11% but imports soared by 35%, causing the trade deficit to expand by nearly four-fold. So either the Donald scored an own goal or this huge deficit with Mexico and Canada was caused by factors other than trade barriers and cheating partners.
2024 USMCA Trade:
- US Exports: $683 billion.
- US Imports: $919 billion.
- Trade Deficit With USMCA: –$235 billion.
- Total Two-Way Trade: $1,602 billion.
- USMCA Deficit as % of Total Trade: 6%.
What didn’t remain level, of course, was the wage gap—especially as between US and Mexican manufacturing wages. Not surprisingly, the US trade deficit with Mexico alone rose from -$63 billion in 2016 to -$172 billion in 2024.
As shown in the table below, in fact, average hourly US manufacturing wages including payroll taxes, health care, pension funding and other fringes rose from $27.50 per hour in 2016 to $37.32 per hour in 2024. In turn, the wage gap with far lower hourly pay levels in Mexico increased from $23.90 in 2016 t0 $29.91.
So there is now a $30 per hour wage difference on either side of the Rio Grande. Accordingly, the Fed should have been deflating the US economy in recent years, attempting to wring out decades of cumulative inflation that was making US industry increasingly uncompetitive in global markets. The Donald was having none of that, however, given that he spent most of his first term berating the Fed for being too tight, and then demanded that it unleash the inflationary cyclone that hit the economy after he shut it down and then pumped households full of trillions of free stuff in 2020.
As it happened, therefore, the Fed’s dunderheaded pro-inflation policies caused average fully loaded manufacturing wages in the US to rise by nearly +36% during that eight year period, albeit to hardly any advantage at all to US factory workers. When adjusted for the rise in the CPI, average 2024 manufacturing wages of $24.55 per hour in base pay plus $12.77 per hour in payroll taxes and fringe benefits or $37.32 per hour total were only 4% higher than they had been in 2016.
Fully Loaded Manufacturing Hourly Wage Table (2016–2024)
Needless to say, the USMCA story is not an aberration or exception; it’s actually the rule. Take the case of South Korea, which entered into a bilateral free trade agreement with the US in 2012 requiring the phase out of all industrial and agricultural tariffs over the next eight years. By 2020, therefore, tw0-way trade with South Korea was tariff-free with upwards of $200 billion of trade now crossing the borders of both sides without any import duties.
Yet in 2023, the US trade deficit with South Korea was huge, amounting to 27% of the total bilateral volume of imports and exports.
US/South Korea Trade In 2023:
- US Exports to South Korea: $66.6 billion.
- US Imports from South Korea: $116.0 billion.
- US Balance with Korea: -$49.4 billion.
- Trade Deficit as % of Two-Way Volume: 27.1%.
Again, the explanation for the huge US trade deficit is production costs, not tariffs or other trade barriers. During that 12 year interval fully loaded US hourly wages rose by 46%, while those for South Korea rose by nearly the same ratio, ticking higher by 45%. But it terms of dollars and cents on the cost sheet, the wage gap widened from $6.23 per hour when the South Korean free trade deal was signed in 2012 to $7.21 per hour when it became fully effective in 2020 to $9.21 per hour in 2024.
The Donald is always berating his predecessors for allegedly making bad trade deals, claiming that they have stupidly sent money and jobs abroad. Yet here is a solid free trade deal that produced one of the largest US bilateral trade deficits because all the while the Fed was inflating wages and costs in the US economy to increasingly uncompetitive levels.
Again, the Fed pro-inflation stance did precious little for the purchasing power of the workers’ paychecks. The 2024 US wage cost in inflation-adjusted dollars was up by only 3.4% from 2012 levels.
And that’s not the half of it. It turns out that nearly a
Article from LewRockwell
LewRockwell.com is a libertarian website that publishes articles, essays, and blog posts advocating for minimal government, free markets, and individual liberty. The site was founded by Lew Rockwell, an American libertarian political commentator, activist, and former congressional staffer. The website often features content that is critical of mainstream politics, state intervention, and foreign policy, among other topics. It is a platform frequently used to disseminate Austrian economics, a school of economic thought that is popular among some libertarians.
