They had ten thousand men: How to avert a trade war

Like the Grand Old Duke of York in the nursery rhyme, President Sheinbaum of Mexico and Prime Minister Trudeau of Canada had ten thousand men and decided that deploying them to patrol the border with their big, bullying neighbour was a small price to pay to avert a trade war. Such a conflict could have cost them (and their neighbour) billions of dollars and plunged their economies into recession.

When the rule of law that governed the world trading system for eight decades is shattered and replaced with the law of the jungle, even the most basic laws of economics need revisiting.

With free trade, neighbouring countries are naturally inclined to trade more intensively, and larger economies attract greater trade flows. Conversely, smaller countries, such as Canada and Mexico in this case, may become highly dependent on exports to their larger neighbour (the US). This dependence is also a result of economic specialisation, with each country focusing on producing and exporting goods in which they have a comparative advantage.

As a consequence, Canada and Mexico’s exports have become overly concentrated towards the US, which accounts for 80% of their total exports. This outcome is efficient but also creates risks and dependencies—something the global economy experienced firsthand a few years ago when the overly efficient global supply chains were disrupted by COVID-19 and international conflicts.

The lesson from the short-lived trade war among the allies of the US-Mexico-Canada Agreement (USMCA) is that countries may need to diversify their trading patterns, prioritising resilience over efficiency to withstand unexpected shocks.

Against this background, we can appreciate the rationale behind the UK government’s strategy of maintaining a degree of equidistance between the EU and the US, avoiding overdependence on either of its major allies and trading partners. In this endeavour, Sir Keir Starmer may take comfort in President Trump’s words that issues with the UK “can be worked out” and he may not need the Grand Old Duke of York’s army after all.

The UK has a relatively balanced trade relationship with the US, which exports more to Britain than Britain does to the US. The £120 billion in US exports to the UK provides a more effective arsenal for retaliating against potential US tariffs. More importantly, given Donald Trump’s well-known fascination with the British royals, a State Banquet in the Ballroom at Buckingham Palace may be worth more than ten thousand men.