Earlier this month, we examined the list of America’s twenty worst trading partners – those with whom the U.S. has the largest trade deficits in manufactured goods on a per capita basis. We saw that the list was dominated by nations with very high population densities. Eighteen of the twenty were more densely populated than the U.S. The average population density of the group was five times that of the U.S. And they were wealthy nations, with an average purchasing power parity of $35,000 per person, debunking the myth that trade deficits are due to low wages.
What about the other end of the scale? Who are America’s best trading partners – those with whom the U.S. has the largest trade surpluses in manufactured goods on a per capita basis? Here’s the list: Top 20 Surpluses, 2012. This list looks very different. Thirteen of these twenty nations are less densely populated than the U.S. Of the remaining seven who are more densely populated, there is a very simple explanation why four of them – United Arab Emirates, Qatar, Kuwait and Brunei - are big buyers of American manufactured exports: they are tiny nations literally afloat on large seas of oil. They are flush with American petro-dollars which, ultimately, can only be used for purchase of American goods, services and investments.
Of the remaining three that are more densely populated than the U.S. – Panama, the Netherlands and Belgium – Panama is only a bit more densely populated than the U.S. But Belgium and the Netherlands are each more than ten times as densely populated, seeming to defy the population density theory for trade deficits. But both are very small nations, and both are the only nations on the European continent with deep water ports on the Atlantic coast. Perhaps they are merely distributors of American products to other European countries. If rolled into the Euro zone, the U.S. still has a large trade deficit with the Euro zone.
In contrast to the list of our twenty worst trade partners, whose average population density was almost 500 people per square mile, the average population density of America’s twenty best trade partners is only 188 per square mile. But that’s a figure that’s skewed by a few very tiny but very densely populated nations. If we divide the total population of these twenty nations by their total land area, the population density is only 19 people per square mile. (This figure is 344 people per square mile for our twenty worst trade partners.)
It’s also interesting to note that the average purchasing power parity (a good measure of the wages paid in those nations) for our twenty best trading partners is almost exactly the same as our twenty worst trading partners – about $35,000 per person. Clearly, wages have absolutely no role in determining trade imbalances.
The data is clear. This is absolute, undeniable proof that population density plays a dominant role in determining whether free trade with any given nation will yield a trade deficit or surplus. It’s irresponsible to apply free trade in a manner that’s blind to this reality. When trading with badly overpopulated nations, tariffs must be employed to maintain a balance of trade, to offset those nations’ inability to provide us with access to a market that’s equivalent to ours in terms of its citizens’ ability to utilize products.