The U.S. trade deficit with Germany shattered the record set only one year earlier, soaring from $49.3 billion in 2011 to $59.7 billion in 2012. The deficit in manufactured goods was $59.9 billion, completely erasing a small surplus in all other categories of goods. Here’s a chart of the U.S. trade balance with Germany since 2001: Germany Trade.
Economists say that a strengthening currency with our trade partner should improve the balance of trade in our favor. They also say that low wages cause trade deficits, and that our trade deficit should improve as wages rise, making theirexports more expensive and our exports more affordable. Here are two charts that plot our exploding trade deficit in manufactured goods with Germany against their currency (Euro) exchange rate and against the change in their per capita purchasing power parity (PPP) – a measure of their wealth and analagous to wages there: Germany Trade vs Exchange Rate, Germany Trade vs PPP.
As you can see, as our trade deficit with Germany has worsened dramatically, the Euro has been rising, from 1.16 Euros per dollar in 2001 to 0.8 Euros per dollar in 2012. And German PPP has risen by 44% during that same time frame (while U.S. PPP rose 38%). Clearly, the currency theory holds no water in this case. Nor does the theory about low wages. So much for economists’ usual trade scapegoats. Furthermore, economists, how do you explain the following?
- If low wages cause trade deficits, why is our deficit with Germany, when expressed in per capita terms (thus factoring the sheer size of nations out of the equation), the worst among our top five trade partners (Canada, China, Mexico, Japan and Germany) – almost three times worse than our deficit with China – in spite of the fact that they are a wealthy nation, second only to Canada?
- And why is our next worst deficit with Japan (again, almost three times worse than our deficit with China), also a wealthy nation?
- Why does Canada have a large trade deficit in manufactured goods with the U.S. when U.S. wages are higher than those in Canada?
- Of these top five U.S. trading partners we’ve examined so far, why has our trade imbalance responded to changes in currency valuation as economists would predict with only one country – Mexico?
- And why has our trade imbalance responded to rising incomes as economists would predict in only one case – Canada?
In contrast to economists’ theories on trade imbalances, the disparity in population density between the U.S. and these top five trading partners has accurately predicted the trade imbalance in every single case. With the one nation less densely populated than the U.S. (much less), the U.S. enjoys a healthy trade surplus in manufactured goods. With all four other nations – all of whom are more densely populated than the U.S. – we endure big deficits.
If you’re new to this blog and don’t understand why population density disparity is by far the single biggest determinant of the balance of trade between the U.S. and other nations, making free trade with badly overpopulated nations tantamount to economic suicide, please read my book, Five Short Blasts, and explore the other data presented on this site.
My next article will summarize in a similar fashion U.S. trade with our top 15 trade partners.