Liberation Day: Do We Suck at Trade?

Last April, President Donald Trump announced “Liberation Day”. This isn’t to be confused with freedom from military conflict or oppressive forces, but rather a declaration of the breaking of economic agreements that dictate international trade.  This was done via an Executive Order with the intention of rebalancing trade deficits and ultimately boosting the US economy, whether by better international deals or growth in domestic production.  This order applied a 10% tariff on all imported goods and tariffs ranging from 11-50% on countries with non-reciprocal trade practices. We soon found out these weren’t set in stone amounts, but rather a tool to force the other countries to the table to get a better deal. What else would you expect from the author of “The Art of the Deal”?

Trade has been a hot topic in agriculture for almost the last decade. It is always a necessity, but dating back to the first Trump presidency, volatility has been the name of the game when it comes to trade. The term “Liberation Day” brings forward the slight ring of Independence Day or Victory over Europe that marked the end of World War 2, which means we mostly associate it with military strength. But in this case, it feels just a little fitting because we have been involved in trade wars, so why not use military terminology? In fact, these trade wars are a lot like the Cold War experience, with two world leaders having a staring contest across the table to see who blinks first.

Last year, I wrote about how we were experiencing record trade deficits in agriculture. It had been building for a few years and was impacting local agriculture economies. We made deals where agriculture products were included, but then we failed to hold other countries to these deals when prices lowered and they went for value elsewhere.

So while we spend a lot of time talking about these trade deficits, we don’t spend nearly as much talking about why we had them in the first place. In the modern economic era, one of the top products that America has to sell is access to the American economy. If you look throughout South America, Central America, and Africa, many countries rely on money coming back from the United States to make up almost 25% of their GDP. This is an absolutely astounding number. The craziest part is that this is just money transferred from individual to individual, as the ability to sell into the United States is much higher yet.

Since that time, trade deals have been announced sporadically, with smaller countries prioritizing speedy resolutions to avoid disruptions in trade and larger countries, like China, moving at a slower pace. The smaller countries rely heavily on access to the US market in order to keep goods flowing both directions. The larger countries have more of a buffer to negotiate deals and fight over the small percentages because at the bulk amounts they are dealing in, every small part matters.

So how did we end up here? Do we just suck at making deals? Have we had decades of incompetence and every other country has figured this out? Does the country with that coined the phrase “it’s just business” as an opportunity to not take accountability for shorting  someone else just become instantly passive when dealing internationally? The short answer is no. When the United States entered World War 2, and even before through the sale of arms and supplies to warring nations, they jump started a stagnant domestic economy. The US had experienced a decade long hardship as a result of The Great Depression and saw the opportunity to capitalize on global disruptions. This created a couple decade long stretch of prosperity to America, as soldiers returned and manufacturing infrastructure shifted to accommodate this population boom now referred to as the Baby Boomers.

Another key economic event was the Marshall Plan. The Marshall Plan was revolutionary because it provided aid to rebuild Europe after its demolition during the war. Previously, the victor had looted the losing country and taken control of its financial and economic assets as a prize and to recoup costs of the war effort. This philosophy of retribution post World War 1 was actually a primary driving force behind Adolf Hitlers rise to power and deadly Third Reich. Stiff fines and penalties against Germany crippled its ability to recover from war and fostered a nationalist us against the world mentality that doomed us to repeat massive international conflict.

George Marshall predicted that if Europe was left to its own devices, it would fall into socialist or communist style governments that would change the scope of Europe forever. Instead, by rebuilding the infrastructure, the US crafted trade partners and reliance on American goods. Europe rapidly rebounded, both economically and politically and US exports went up 50%. The same type of efforts were taken in Japan, resulting in a strong trade relationship that still exists today.

It is no mistake that one of the most peaceful times in the history of the world followed the implementation of the Marshall Plan and the creation of strong trade agreements. Leaders were far less likely to jump into armed conflict if they knew they relied on other countries for their economic success. This is why when Russia invaded Ukraine, you saw many countries jump into economic sanctions and avoid military conflict. While this hurt their own economies, specifically on the energy side, it was crippling to Russia. They had to pay more to reroute needed goods through gray markets instead of being able to go directly to the source.  This added cost to everything the average citizen did, increasing political pressure on leadership to resolve the conflict. While this has been effective and limited bloodshed, it has not persuaded Russia to withdraw themselves from the conflict.

The United States used trade to purchase peace. While this strategy was very effective during booming economies, it has its limits. We can’t continue to give access to our greatest resource, our marketplace economy, at reduced rates to achieve non-monetary victories. It has recently hit agriculture hard, as farming has become unprofitable in large part because of the lopsided trade deals. We are buying more and more inputs from overseas while our own crops are being undercut by imports. We saw record high trade deficits in agriculture under the Biden administration, as a combination of trade abuse for other objectives as well as failure to hold other countries to their agreements deeply cut farmers profitability.

So where does this leave us? Are we giving up on the proposition of peace for short term financial gain? I don’t believe so. Most of the deals that have come across rebalance the deficit without destroying the relationship. It will be an adjustment for developing and still building economies, but one they should be able to withstand. It’s the superpowers that are concerning. We are approaching key dates of trade meetings with China, and reports of stagnant population growth are concerning, as China has been a buying superpower for the last three decades. Russia has at least come to the table on ending the conflict in Ukraine, both seem unwilling to exchange territory in order to bring it to a resolution. While China and Russia are two different trade scenarios, both tariffs and economic sanctions are trade tools that can help achieve the desired resolution.

Recently, a new wrench has been thrown into the Liberation Day saga. The Supreme Court ruled that Trump’s tariffs were illegal and vacated them. This is a mixed bag. Many of the trade deals had been renegotiated since the Liberation Day, so this doesn’t affect them. Unsettled deals are a whole different story. Trump vowed to and did reapply the tariffs almost immediately, restarting the timeline to get through the courts again, but now the other countries have newfound leverage in that they can outwait Trump, and our own legal system will ultimately side with them.

Trade deficits can actually be a good thing, as long as they are serving a purpose and not being abused. They are a peace tool, not the answer to everything. Agriculture is typically a beneficiary of countries desire to balance out trade deals, as they buy more US farm products to offset the ability to get textiles and technology into the US.   Russia and China have become steadfast partners since the end of World War 2, developing trade a trade relationship regardless of the rest of the world with most of the market revolving around energy. The United States used agriculture production as the way to keep lines of communication with China, but in recent years they have turned their purchasing power to Brazil, weakening the ability to barter with trade, at least from the agriculture side. It will be very interesting to see what happens with this many trade agreements being resettled at once. It has rarely occurred, at least in modern history, so the effects are unknown. My best advice; buckle up because it will be a bumpy ride.