U.S. Trade with Peru

When I published Five Short Blasts in 2007, the most recent trade data available was for 2006.  At that time, the U.S. enjoyed a small trade surplus in manufactured goods of about $1.1 billion with Peru.  But, overall, we had a trade deficit with Peru thanks to high imports of metals and minerals. 

So, as I continue my slog through the 2008 data, I found the evolution of trade between the U.S. and Peru to be particularly interesting.  Because Peru is less densely populated than the U.S. – with 56 people per square mile vs. 85 for the U.S. – Peru is one of those countries that would remain completely free of tariffs under my population density-indexed tariff plan for manufactured goods. 

So what’s happened since 2006?  Take a look:

Trade with Peru

As a result of rising prices for metals and minerals, our overall trade balance with Peru deteriorated from 2002 to 2006.  But from that point, their increased wealth enabled them to import a lot more manufactured products from the U.S.  In 2008 we had a slight overall trade surplus with Peru, thanks to our exports to Peru almost tripling in just two years.  The U.S. is Peru’s largest trading partner. 

Once again, we see that free trade with nations similar in population density to the U.S. is a win-win situation for both nations, in stark contrast to what happens when we attempt to apply the same free trade policy to those that are much more densely populated.

U.S. Trade with New Zealand

I’ve resumed my slow slog through all of the U.S. trade data and just finished New Zealand.  New Zealand is a fairly small country, but a relatively wealthy, developed one.  With combined imports and exports of over $3 billion, I thought it was worth a look.  With a population density less than half that of the U.S., the new economic theory I proposed in Five Short Blasts predicts that the U.S. should enjoy a trade surplus in manufactured goods with New Zealand.  Is that what we have?  Let’s take a look.  The following chart displays the balance of trade with New Zealand for five major categories of trade:  food products, energy raw materials (primarily oil and gas), metals & minerals, lumber and manufactured products. 

Trade with New Zealand

As you can see, as the theory predicts, we have a nice trade surplus in manufactured goods with New Zealand.  But that surplus is offset by deficits in food and lumber products.  Thus, we trade manufactured products for natural resources.  This is exactly how free trade is supposed to work to both nations’ benefit when both are relatively comparable in population density, unlike the disastrous results we get when trading with badly overpopulated nations. 

Yet another data point in support of the theory.  What a shame that economists have closed their minds to the consequences of population density.  They’re completely missing the most powerful relationship in the global economy and thus continue to make a mess of it.

October Trade Headlines Look Good, Details Not So Much

http://www.census.gov/foreign-trade/Press-Release/current_press_release/ft900.pdf

Trade data for the month of October, released this morning by the Bureau of Economic Analysis (BEA), was all good news, as long as you don’t look too deeply into the report.  The big headline is that the trade deficit fell by $2.8 billion to a deficit of $32.9 billion.  Indeed, that is good news.  Exports rose by $3.5 billion – more good news, more than off-setting a smaller rise of $0.7 billion in imports.  However, the 3-month moving average rose from a deficit of $32.5 billion per month in September to $33.0 billion in October – not good news. 

The trade balance is a combination of goods and services.  The balance in services improved by $0.1 billion, so almost all of the improvement is in goods - more good news.  The trade deficit in goods improved from -$47.4 billion in September to -$44.8 billion, a reduction of $2.6 billion. 

Of that improvement in the goods trade deficit, most is due to oil.  The volume of oil imports, 8.34 million barrels per day, was the lowest level since January of 2000.  So our trade deficit in petroleum products fell by $2.7 billion.  But the BEA reports that the deficit in non-petroleum goods (which includes manufactured products) also fell by $0.6 billion.  (The reason these two add up to reductions of more than $2.6 billion is what the BEA calls “adjustments.”)

Any time I hear that the trade deficit in manufactured goods declined in this environment of free trade with overpopulated nations, I get suspicious.  So let’s examine the data more closely.  Click the above link to the BEA report and go to “Exhibit 6.  Exports and Imports of Goods by Principal End-Use Category” found on page 6 of the report.  There you’ll see six end-use categories.  The first, “Foods, Feeds and Beverages,” is exactly that – trade in food products.  The second, “Industrial Supplies,” is dominated by trade in petroleum.  It’s the next four categories that comprise manufactured products – “Capital Goods,” “Automotive Vehicles, Etc.,” “Consumer Goods” and “Other Goods.”  Let’s examine these categories and see where any improvement in manufactured goods may be found. 

The first category, “Capital Goods,” is basically the machinery and equipment used by industry.  As you can see, we have a pretty good balance of trade there, with $33.72 billion in exports and $32.04 billion in imports, a trade surplus of $1.68 billion.  In September we had a trade surplus of $1.6 billion in that category.  So there’s very little improvement there.

The second category, “Automotive Vehicles, Etc.,” includes both cars and parts.  In September we had a trade deficit of -$8.83 billion.  In October it remained unchanged at -$8.83 billion.  Small increases in exports were off-set by imports.  No improvement in the trade balance in this category of manufactured goods. 

The third category, “Consumer Goods,” includes just about every other product you can imagine that you might buy including clothing, appliances, electronics, etc.  In September we had a trade deficit of -$22.63 billion.  It remained unchanged in October at -$22.63 billion.  Once again, absolutely no improvement.

The fourth category, “Other Goods,” by far the smallest of the goods categories, representing only 3.5% of trade in goods, will remain a mystery to anyone who tries to figure out what it is.  Nowhere is it explained in the report.  However, since I’m able to match up the product descriptions found in “Exhibit 8″ on page 9 with the product codes in the trade data I track country by country, I can tell you for certain that “military aircraft” and “military equipment” are included in this category.  So what happened in this category?  In September we had a trade deficit of -$1.40 billion.  In October that fell to -$0.46 billion, an improvement of $0.94 billion. 

If you’ll examine the “Other Goods” category more closely, you’ll see that the level of imports and exports swing fairly dramatically (in percentage terms) from one month to the next. 

In conclusion, all of the improvement in the trade deficit in October can be traced to two factors – unusually low levels of oil imports (almost certain to be reversed in November), and a big swing in the category that includes military aircraft and equipment and is likely influenced by big swings in shipments.  In other words, there’s nothing in the October trade deficit data that shows any improvement in U.S. manufacturing vis-a-vis other countries.

Obama’s Jobs Plan: Much Ado About Nothing

http://money.cnn.com/2009/12/08/news/economy/Obama_TARP_jobs/

Following my post last week, in which I flow-charted the various options available to President Obama to help boost hiring by businesses, I looked forward to analyzing the actual plan.  Unfortunately, the “plan” he unveiled yesterday was so vague and short on specifics, that there’s not much to say, except to observe that this was more political theater than political action.  The vague proposals would all be dependent on action by congress, already clogged with two major plans awaiting debate:  health care and climate change legislation.  Nothing meaningful on yesterday’s proposals is likely to happen anytime soon, other than perhaps extensions of unemployment benefits. 

Nevertheless, the above-linked article contains the high-lights, as follows:

Here’s how Obama’s proposals break down:

Small Business: Obama would eliminate for one year capital gains taxes on new investments in the stock of small businesses. The details are not clear but the plan builds on an existing, less generous, Recovery Act tax break.

Obama would also extend through 2010 tax breaks for certain small business capital investments up to $250,000. And small businesses would get a tax break for hiring new employees. He would also eliminate fees for loans made through the Small Business Administration. Those fees had been waived for most of this year, but the funding ran out two weeks ago.

This wasn’t an option I put on my flow chart, since it does nothing more than add to business’ bottom line.  One could argue that it might encourage business investment, but such investment is just as likely to destroy jobs by encouraging investment in automation in order to reduce labor costs. 

Tax breaks for hiring new employees falls under “option 5″ on my flow chart – providing government incentives for hiring new workers.  Sounds great, but many have questioned the practicality of managing such a program in a way that avoids gaming the system.  What is really a “new employee” vs. a replacement?  I’ll be surprised to see any such program enacted and, if it is, the impact will be minimal.  Few businesses are going to grow their labor costs (by $30,000 per employee, let’s say) in order to get some small tax break.  For others who were going to hire anyway, it’ll simply be a give-away.   

And eliminating fees on small business loans?  The problem small businesses are having is that they can’t get credit at all.  Those that can have such good business plans that loan fees aren’t going to stand in their way.  I don’t see much effect from this.

Business: All companies would for another year pay fewer taxes on capital expenditures – a temporary benefit that kicked in with the Recovery Act.

Same comment as the first paragraph above. 

Infrastructure: Obama would spend approximately $50 billion on infrastructure projects for roads, bridges, airports and ports. The House has talked about spending $70 billion on a similar initiative.

Again, this falls under the category of “option 5″ on my flow chart – government incentives to hire more workers.  Though in this case it’s likely to be more effective, as projects will begin that otherwise would have gone by the wayside for lack of funds.  And there’s no shortage of work needing to be done on our infrastructure.  An unanswered question is the time frame over which this $50 billion would be spent.  The more it’s spread, the more it waters down the job-creating effect.  And whether it should be done at all with deficit spending is another issue.

Energy: He would offer rebates to consumers who retrofit their homes, making changes such as caulking or replacing windows with more energy efficient products. Obama would also expand a stimulus program that gives greater borrowing power to private companies that create manufacturing jobs producing machines, such as wind turbines, that cut down on greenhouse gasses.

This was “option 2″ on my flow chart, cutting taxes to boost spending.  But it’s done in a very targeted way that is likely to provide at least some temporary boost in employment in industries involved in manufacturing home building products.  As such, it’s probably the most meaningful element of the president’s plan. 

No doubt it will work.  People with homes that are anywhere close to needing windows, furnaces and air conditioners replaced would be foolish not to take the plunge and get a huge discount.  I did it myself this year, replacing deteriorating wood windows on my 21-year old home to take advantage of a 30% tax credit.  Next year I plan to replace the furnace to use the rest of the unused tax credit, but it sounds like there might be a bigger windfall for me if I wait for this new plan.  So Congress better hurry on this one.  Otherwise, I’ll actually be delaying my furnace purchase while I wait for this better deal.  Gee, did Obama just put a temporary crimp in energy efficiency sales?  Quite possibly!  And, again, the problem is that this is all unfunded, worsening the country’s fiscal problems.

And all of this talk about creating green jobs with tax incentives has proven to be nothing but talk.  Oil and gas prices are still too low to make alternative energy sources viable.  I’ve looked at both solar and wind energy for my home and it just doesn’t make economic sense at these prices.  Sure, there are a few token projects going on, but nothing serious.  The tax incentives would have to be huge to stimulate any meaningful activity in this field. 

Safety net: Obama said he wants Congress to extend unemployment benefits and offer more help for the jobless paying for Cobra health insurance. He wants to give seniors and veterans $250 payments and also give money to states to prevent layoffs of teachers, police officers and firefighters.

No new jobs here.  Some saved perhaps, although municipalities are reluctant to take advantage of such federal stimulus plans, knowing that they’re kicking the can down the road and setting up a worse fiscal crisis for the following year. 

I’d give the president a big “F” for this plan.  Once again, he’s passed on doing anything meaningful for the economy by fixing broken trade policy, which he could do with the stroke of a pen.  He’s taking the politically correct way out.  Worse, he continues to demonstrate a lack of concern for unemployed Americans by continuing the long-standing practice of importing over a half million immigrant workers a year to take jobs away from Americans. 

Sorry, Americans, no help here.  The hope is that you won’t remember by the time the next election rolls around.

U.S. Playing Chicken with Credit Rating Agencies

http://www.usatoday.com/money/markets/2009-12-08-moodys-warns-us-uk_N.htm

As the Obama administration and the Federal Reserve desperately try to restore the economy to its debt-fueled status quo, relying on deficit spending and Fed balance sheet expansion to goose the economy, they are playing a game of chicken with credit rating agencies that could leave the American economy scattered in pieces all over the road to nowhere down which we’ve been headed for decades. 

As reported in the first of these articles, Moody’s Investor Services has once again warned the U.S. (along with Britain) that its soaring national debt may lead to loss of its triple-A credit rating.  Such a downgrade would have serious consequences for America’s ability to raise cash to finance its deficit spending. 

The United States and Britain must take action soon to get their public finances in order if they want to avoid threats to their top triple-A credit ratings, a leading credit ratings agency said Tuesday, accelerating U.S. and European stock markets’ decline. In an assessment of eight triple-A countries, Moody’s Investors Services said the public finances in both countries are deteriorating considerably and may therefore “test the Aaa boundaries” in the future. 

Moody’s has essentially put the U.S. on notice that it has perhaps only a year or so to get its act together or risk a down-grade:

“Next year, Aaa governments with stretched balance sheets will find themselves under pressure to announce credible fiscal plans and, if markets start losing patience, to start implementing them,” he (Pierre Cailleteau, managing director of Moody’s sovereign risk group and lead author of the report) said. 

None of this is new, of course.  The ratings agencies have been blustering about this for some time.  But this time, at the same time, comes evidence that they’re getting serious. 

http://www.reuters.com/article/idUSGEE5B70TN20091208

Ratings agency Fitch has cut Greece’s debt rating, sending markets in Greece into turmoil:

Ratings agency Fitch cut Greece’s debt to BBB+ on Tuesday with a negative outlook, the latest blow to the troubled euro zone country, driving its bonds, bank shares and the euro itself lower.The cut was the first time in 10 years a major ratings agency has dropped Greece below an A grade. Fitch cited fiscal deterioration in one of the 16-member currency bloc’s most indebted member states.

Listen to what Fitch has to say about Greece and tell me it doesn’t sound like they’re talking about the U.S.:

“The lack of substantive structural policy measures reduces confidence that medium term consolidation efforts will be aggressive enough to ensure public debt ratios are stabilised and then reduced over the next three to five years,” it said.

… Greece’s socialist government, elected in October, has revealed the budget deficit was twice as big as previously reported and has pledged to bring it under 10 percent next year.

Debt would soar to more than 120 percent of GDP in 2010, it said.

Analysts said Fitch’s cut would add pressure for the government to take yet more drastic measures and expected more downgrades to follow.

In the terms defined above, the U.S. budget deficit and national debt aren’t terribly different than Greece’s.   And what’s driving Greece’s financial problems?  Their trade deficit.  Among the 31 developed nations of the world (those with per capita purchasing power parity above $25,000 per year), Greece ranks dead last in terms of its per capita trade balance with a deficit of $6,032 per person.  Where is the U.S. on that list?  We’re 28th on the list, with a deficit of $2,734 per person.  (See http://petemurphy.files.wordpress.com/2009/11/trade-balance-per-capita-ppp-gt-25k.pdf)

Congress is in the process of drafting financial reform regulation, and among those proposed reforms is a crack-down on credit rating agencies who played a big role in the global economic collapse by awarding unrealistic credit ratings to securities backed by risky sub-prime loans.  The rating agencies have gotten the message, so the U.S. can no longer expect that its own debt will continue to get high ratings with a wink and a nod. 

If the U.S. wants to avoid the economic disaster that would accompany a falling credit rating, it’s got to get serious about reducing its trade deficit.  The time for incessant talk with our trading “partners” is past.  It’s time to take matters into our own hands and finally do what’s necessary to assure a balance of trade – impose tariffs on manufactured goods from overpopulated nations.

Obama: “How do we get businesses to start hiring again?”

http://www.usatoday.com/money/economy/2009-12-03-obama-jobs-summit_N.htm

President Obama kicked off the start of his jobs summit at the White House yesterday by challenging participants with the question, “How do we get businesses to start hiring again?”  What he is interested in, of course, is what the government can do to facilitate the process of boosting hiring in the private sector.  (What the government can do itself to boost hiring in the public sector is an entirely different question.) 

He got the predictable responses from business leaders.  Disney’s CEO wants to flood the country with immigrants to boost attendance at Disney World.  To a man, he and other CEO’s want tax breaks.  Only Teamsters’ leader James Hoffa raised the issue of trade policy, a suggestion that surely fell on deaf ears.

Putting all of the self-serving suggestions aside, what really would be an effective way to address the president’s question?  The following is a simple flow chart that explores the various options that would boost hiring by private business:

Hiring Flow Chart

There are two broad approaches.  The first is to boost sales.  The second is to boost hiring without boosting sales – in effect, reducing productivity.  There are four options that could accomplish the goal of the first approach and two options to accomplish the goal of the second.  Those options are high-lighted in green, yellow and red to indicate those actions that would be effective (green), marginally effective (yellow) and either ineffective or counter-productive (red).

The only two highly effective approaches would be to (a) impose tariffs to drive a dramatic boost in sales for domestic businesses (option number “1″ on the chart), and (b) to legislate reductions in productivity (things like a shorter work week, more holidays, more overtime pay, etc.) – (option number “6″ on the chart).  This latter approach, however, would also have to be combined with the first approach to prevent making domestic manufacturers uncompetitive relative to imports. 

It’s the latter approach that is employed by many developed nations around the world.  The workers of most developed nations enjoy more leisure time than American workers. 

However, presidents who are more interested in being remembered as world leaders and diplomats instead of effective leaders of the American people(and Obama has already proven himself to be one of these by refusing to address our failed trade policy), is unlikely to opt for either of these approaches.  Instead, we continue to pursue option 3 – growing our population, which is perhaps the worst choice of all - while considering only those other options which will be marginally effective and which will all increase the deficit. 

In the end, though, this jobs summit will prove to have been nothing more than political theater.  Nothing will come of it that wouldn’t have been done anyway – more deficit spending, probably the result of tax breaks.  As this morning’s unemployment report has demonstrated, deficit spending has already begun to reverse the unemployment trend and so it is deficit spending that the government will continue to rely upon.  All the while they will say, “We need to get serious soon about cutting the budget deficit, but now is not the time.”  Without fixing our broken trade policy, that time will never come.

Another Study Corroborates Link Between Population Density and Global Trade Imbalances

Last week I reported on a study of global trade balances, using data published by the CIA in its World Fact Book, which showed a clear link between population density and the per capita balance of trade in manufactured goods.  The following is the final chart from that article which shows the correlation:

Manf’d Goods vs Pop Density2

Today we’ll look at this from a different angle.  If population density is a factor in international trade, then what’s really important is not a nation’s population density relative to the rest of the world, but relative to those countries with which it actually engages in trade.  No country trades equally with every other nation.  Most countries’ trade is concentrated with just a handful of other nations.  This is important because a nation with a high population density relative to the rest of the world might actually have a trade deficit in manufactured goods instead of a trade surplus if it trades mostly with other nations who are even more densely populated. 

So I’ve used the CIA data for each nation’s major trading partners to calculate the difference (or disparity) in population density between each nation and a weighted average of its trading partners.  For example, over half of all U.S. exports are sent to only six nations:  Canada (20.1%), Mexico (11.7%), China (5.5%), Japan (5.1%), Germany (4.2%) and the U.K. (4.1%).  And well over half of all of U.S. imports come from these nations too.   In the case of the U.S., the difference (or disparity) in population density is -79.8 people/sq km.  That is, while the U.S. has a population density of 31.26 people per square kilometer, the weighted average population density of its major trading partners is 111.06.  So the density of the U.S. is less than that of its trading partners by 79.8.

My expectation was that this approach would reveal an even stronger correlation between population density and per capita trade balance in manufactured goods.  But this approach is not without problems.  First of all, the CIA data on trade partners includes all trade – not just manufactured goods.  Also, the CIA only provides data for each nation’s top trade partners, accounting for 50-75% of trade for each nation.  Also, it should be remembered that free trade is not universally practiced around the world.  The World Trade Organization (WTO) actually enforces protectionist trade practices in favor of two thirds of its member states for the purpose of helping undeveloped and developing nations.  (The United States is not one of them.)  Such uneven trade practices will tend to obscure the effects of other parameters like population density. 

So what did I find?  Here’s a scatter chart of the results for all nations with per capita purchasing power parity greater than $25,000 per year (in other words, for all developed nations). 

Disparity vs PC Balance

Once again, we see that Qatar is a statistical outlier.  Also, Ireland is nearly one as well.  If we remove these two data points, the relationship between population density and per capita balance of trade in manufactured goods becomes quite strong.

Disparity vs PC Balance2

Here we can see that the data points conform more closely to the trend line, indicating a stronger relationship.  A couple of other interesting observations can be made:

1. Note that the trend line, which was generated by the computer and not drawn in by me, intersects exactly the zero point of both the x and y axes.  This means that the data indicates that trade between nations equal in population density will, in all likelihood, yield a perfect balance of trade in manufactured goods. 
2. Nations that are more densely populated than their trading partners can, on average, expect a trade surplus in manufactured goods of about $700 per person for each increment of 100 people/sq km by which their population density exceeds that of its trading partners.  The numbers are reversed for nations less densely populated than their trading partners by that amount.  Returning to the U.S. as an example, our population density disparity of -79.8 would predict a per capita trade deficit of about $560 per capita.  The actual figure is $1,344 per capita.  This deviation from the prediction is likely due to U.S. trade with China, who benefits from WTO-enforced tariffs. 

So what does all of this mean for trade policy in general?  Clearly, if you’re a very densely populated nation, it’s in your best interest to advocate free trade with nations less densely populated, which would be nearly everyone.  Such a policy will almost guarantee a surplus of trade.  (Note that, of the ten developed nations that are more densely populated than their trading partners, only one has a trade deficit in manufactured goods.) 

On the other hand, for more sparsely populated nations, while free trade with other sparsely populated nations is just fine, free trade with more densely populated nations is almost a sure-fire loser.  (Only seven of nineteen nations in this situation have a trade surplus.)  If such nations are interested in maintaining a balance of trade, some mechanism is needed to to counter-act the population density effect:  either import quotas or tariffs.

Conclusion:

The effect of disparities in population density between a nation and its trading partners is real and significant.  For nations engaged in trade with others more densely populated, some mechanism to counteract this effect must be factored into their trade policies if trade deficits are to be avoided.

Study Reveals Link Between Global Trade Imbalances and Population Density

 

As judged by the balance of trade expressed in per capita terms, thus adjusting for the sheer size of each nation, the effectiveness of the United States’ trade policies ranks near the very bottom of the nations of the world.  (See U.S. Trade Policy Ranks Among World’s Worst.)  Since the near-total collapse of the global economy last year, most economists who once shrugged off the effects of global trade imbalances now admit that these imbalances were the root cause of the collapse and can’t be sustained. 

The biggest trade imbalance has been between the U.S. and the rest of the world.  In spite of the best efforts of American manufacturers to get leaner and become more competitive, the trade deficit has been worsening for decades.  It begs the question whether there are factors at work that make these trade imbalances inevitable in a free trade environment. 

In Five Short Blasts,  I used U.S. trade data to argue that disparities in population density are a major (if not dominant) factor behind the U.S. trade deficit in manufactured goods.  But if population density is a factor, then the same impact on trade should be evident in the trade data for all nations of the world.  Densely populated nations should tend to have trade surpluses in manufactured goods while more sparsely populated nations should tend to have trade deficits.   To test my theory on such a global scale, I’ve completed a study of trade data for all nations of the world, using trade data provided by the CIA in its World Fact Book.   I began by breaking down the trade balance into exports and imports.  The following spreadsheets rank the exports and imports of all nations* in per capita terms:

Exports Per Capita, All Nations    Imports Per Capita, All Nations

You can see that the U.S. ranks 46th out of 154 nations in terms of exports per capita, and 118th in terms of imports.  But I soon realized that the top of the exports chart and the bottom of the imports chart were dominated by wealthy, developed nations.  That’s why I included the per capita Purchasing Power Parity (PPP, roughly equivalent to per capita GDP) for each nation in the charts.  To determine whether wealth was a factor, as logic would seem to suggest, I plotted x-y scatter charts for each:

Exports vs PPP Chart    Imports vs PPP Chart

As you can see, the wealth of a nation has a powerful influence on the volume of its exports and imports.  It makes sense.  A wealthy oil-producing nation, for example, may export oil in exchange for imports of manufactured goods.  A poor nation, on the other hand, has little to sell and, thus, has little money to buy.  That’s why this effect wasn’t evident when we looked only at the overall trade balance.  A poor nation is just as likely to have a balance of trade because it has nothing to sell or buy as a wealthy nation that exports and imports a great deal while maintaining an overall balance.

Therefore, it becomes necessary to confine our analysis of trade to developed, wealthy nations in order to avoid having other influencing factors muted by the wealth effect.  So I chose to confine my analysis to those nations with purchasing power parity (PPP) per capita (roughly a measure of GDP per capita) of $25,000 or greater.  (For reference, the U.S. had PPP in 2008 of $47,500.)

The following spreadsheet ranks the balance of trade of the 31 nations with a per capita PPP greater than $25,000. 

Trade Balance Per Capita, PPP GT 25K

I included a column with each nation’s balance of trade in oil and natural gas because I noticed what seemed to be a strong correlation.  High-lighting the net oil-exporting nations in yellow, it becomes easy to see the effect.  Like the effect of wealth, the effect of oil isn’t surprising either.  Naturally, those nations that export huge volumes of oil and gas are going to have favorable trade balances.  (As an aside, I found it interesting that, among developed nations with a deficit in oil and gas, America’s deficit, when expressed in per capita terms, is rather mundane – about the same as other nations.)

Since natural resources tend to be distributed unevenly around the world, trade in resources is vital and beneficial to all.  What’s really important is how nations use trade in manufactured products to offset deficiencies in natural resources and to maintain an overall balance of trade.  Unfortunately, no data for manufactured goods is available.  (If it is, I haven’t found it.)  However, I know from my experience in analyzing U.S. trade data that oil and gas tend to dominate trade in natural resources.  Subtracting them from the overall trade balance usually yields a pretty good approximation of trade in manufactured products.  So, using the CIA’s data and subtracting oil and gas from the overall trade balance, the following is a ranking of developed nations’ balance of trade in manufactured goods:

Manf’d Good Trade Balance, PPP GT 25K

Because my goal in analyzing this global trade data for manufactured goods was to determine whether or not there is any evidence of population density having an effect, it was here that I included the population density data.  And a relationship seems to jump out at you when you compare the population density of the nations at the top of the list (those with the most favorable balance of trade in manufactured products) to those at the bottom of the list.  (Here I should note that the overall population density for this group of 31 nations combined is 30.4 people per square kilometer.  The United States is almost right on this figure, at 31.3.  But the only proper way to determine whether a relationship exists is to plot the data on an x-y scatter chart and then have the computer generate a trend line.  A flat line indicates no relationship while a sloping line indicates the presence of a relationship.  Here’s the chart:

Manf’d Goods vs Pop Density

There is a fairly strong relationship evident.  But the slope of the line is somewhat muted by the presence of what is known in statistics as an “outlier” – a data point that is so far out of the range of the other data points that it’s statistically insignificant.  In this case it’s Qatar, the world’s champ in oil exports, at least in per capita terms.  Qatar exports so much oil that it has no need whatsoever of producing anything else.  They simply kick back and enjoy the good life with a PPP that far exceeds that of any other nation, net oil exporters included.  So, if we delete that data point, the chart changes as follows:

Manf’d Goods vs Pop Density2

Now the trend line conforms more to the data.  And if we were to eliminate Ireland, the data point at the other extreme end of the scale, but not quite an outlier, it’s easy to see that the trend line would conform to the data even more closely. 

It’s also important to note that by confining this analysis to developed nations – those with per capita PPP exceeding $25,000 – I excluded the most dominant player in world trade today:  China.  If China’s data point were included, it would fall right on the trend line, with a population density of 140 people/sq km and a balance of trade in manufactured goods of $351. 

It’s impossible to overstate the significance of this relationship.  Because economists adamantly refuse to give any consideration to the role of population growth in economics, they have completely overlooked the relationship between population density and per capita consumption, and its ramifications for trade.  (To learn more about the relationship between population density and per capita consumption, see “the theory explained” category on this blog.)

Finally, it’s worth noting here that population density also plays a role in driving trade imbalances in oil.  Very densely populated nations tend to be net oil importers, forcing them to export even more manufactured goods in order to maintain a balance of trade, combining with the effect of population density on their low per capita consumption.  High oil consumption and low domestic consumption of manufactured products team up to make such nations heavily dependent on exports of manufactured products. 

Summary and conclusions:

1. The balance of trade of the U.S., a nation with a low population density relative to most other nations, ranks near the bottom of all nations.
2. Global trade is dominated by oil and gas.  Oil exporting nations use their profits to purchase other natural resources and manufactured goods.  Oil importing nations export manufactured goods to fund their purchases of oil and gas.
3. How successful a nation will be in using manufactured goods to maintain a balance of trade is heavily influenced by its population density.  The effect is real and significant. 
4. The practice of free trade between two nations grossly disparate in population density is very likely to result in a trade deficit in manufactured goods for the less densely populated nation. 
5. Failure to account for the population density effect in global trade policies will likely result in sustained trade imbalances. 

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* Small island nations, whose economies are dominated by tourism, are excluded.  Tiny city-states are included in their surrounding or neighboring countries.  (Example:  Hong Kong is included in the data for China.)

Obama Returns from Asia Empty-Handed

http://www.reuters.com/article/newsOne/idUSTRE5AK0K920091121

President Obama has returned from his week-long trip to Asia empty-handed.  No commitment by China to unpeg its currency from the dollar.  (In fact, Obama barely even raised the subject with the Chinese.)  No promises to  rebalance trade.  No promises to boost imports of American products.  And now we see that his big plan to boost American exports (see http://petemurphy.wordpress.com/2009/11/13/obama-has-plan-to-boost-exports-i-smell-a-rat/) was nothing more than a vague hope.  The whole trip was a complete waste of time – time that would have been better spent in the oval office, signing executive orders that could do far more to restore our economy and put us on track to a sustainable future for our children.

Speaking as an independent who voted for Obama, primarily because of his promises to do something about our trade imbalance, this is what I find most disappointing – that he has the power to single-handedly accomplish what needs to be done.  Sure, Congress moves at glacial speed on issues like health care reform and global warming, but Obama doesn’t even need the help of Congress to address our most critical issues.  He doesn’t need Congress’ help in changing trade policy.  He has full authority to impose tariffs and bring millions of manufacturing jobs back home.  He has full authority to halt the annual importation of a million more oil consumers, a million more carbon emitters and a half million laborers to compete with Americans for a dwindling supply of jobs.  All it takes is the courage to sit there at his desk and sign the executive orders.  In one eight-hour work day he could completely change the trajectory of the American economy and help put us on a path to a sustainable future.  Instead, he does nothing. 

During the campaign, his interest in and admiration of Lincoln was widely reported.  But it was not eloquence or diplomacy that made Lincoln a great president.  It was action – bold action that angered many but, ultimately, was in the best interest of his country.  He abolished slavery, resulting in a split in the union.  He led the nation through the bloodiest war in history.  He blockaded confederate ports and imprisoned confederate sympathizers.  At one point, he even authorized the naval bombardment of New York city to put down an anti-war uprising.  He authorized his generals to completely destroy the civilian infrastructure of the confederacy to assure the finality of its defeat.  Lincoln made gut-wrenching and often unpopular decisions that changed the course of history, not just for the U.S. but the entire world.

President Obama has similar opportunities.  The global economy has been collapsed by an over-reliance on faulty economic theories, developed by people blind to the economic consequences of unending population growth.  He was elected because we believed in change and hope for something different.  We were promised action to correct our trade imbalance.  But so far, all we’ve gotten is talk, diplomacy and now, as reported in the above-linked article, appeals for patience. 

The American people are patient.  We have the patience to allow action and change to produce the desired results.  It’s the lack of action for which we have no patience.

U.S. Trade Policy Ranks Among World’s Worst

In Five Short Blasts, I based my conclusions on the relationship between population density and per capita consumption on trade data between the U.S. and the rest of the world.  However, if my theory is valid, the same effect upon global trade imbalances (in manufactured products) should be found for every nation’s trade relationship with the rest of the world.  Clearly, America’s trade imbalance in manufactured goods with other nations is driven by the disparity in population density between us and our trading partners, especially those much more densely populated.  America has huge trade deficits with nations like Japan, Germany and China, for example.  So it stands to reason that nations like these should have large trade surpluses with the world as a whole – not just the U.S.  And sparsely populated nations like Australia and Canada should have deficits in manufactured goods, much like the U.S.

To determine whether this is true, I’ve begun a study of global trade for every nation on earth*, using data provided by the CIA on “The World Fact Book” page of its web site.  Once I had compiled all of that data onto a spreadsheet and calculated the balance of trade for each nation, I was interested in learning how each nation compared when its balance of trade was expressed in per capita terms, putting large and small nations on an equal basis. 

Essentially, this is a measure of the effectiveness of each nation’s trade policies.  An effective trade policy works to the benefit of that nation’s citizens, with a trade surplus contributing to their wealth.  An ineffective trade policy results in a deficit, resulting in a drain of wealth and low or negative savings rates.  Effective trade policy trades what a nation has in abundance for what it lacks, while at least maintaining an overall balance.  For example, a Middle East nation may trade oil for other resources like food, as well as manufactured products.  Or an extremely densely populated nation, lacking resources, may trade manufactured products to obtain those resources. 

Here’s the data:

Trade Balance Per Capita, All Nations

Some observations are in order:

1. I’ve made no attempt to correlate this data with population density.  (That will come in a subsequent article.)  This is just the total trade balance for each nation, divided by the population of that nation. 
2. By this measure, the United States ranks near the very bottom of nations, coming in at 147th out of 154 nations.  Every man, woman and child in America is poorer each year by more than $2700, thanks to our trade policy.  (That’s over $10,000 for a family of four!) 
3. Of the top 13 nations, all are oil-producing nations except one – Ireland.  Ireland is world champion in terms of trade among non-oil-producing nations, followed by the Netherlands and Germany.
4. For all of the talk about China’s trade surplus with the world, they rank only 36th,  with a per capita trade surplus that is less than 3% that of Ireland’s.
5. It’s interesting to note that Britain, one of the very worst in terms of trade policy effectiveness, especially considering their exports of North Sea oil, sits right next to Ireland, the world’s best among non-oil producing nations.  Ireland is doing something right while the U.K. (like the U.S.) is clearly doing something wrong. 

This isn’t an indictment of Obama’s trade policies in particular.  It took many years of trade policy bumbling by both Democratic and Republican administrations to get us into such a mess.  But it is a call to action for Obama to stop tip-toeing around the issue and begin making bold moves to restore a balance of trade.  What should he do?  Is our trade balance problem a function of too few exports, too many imports, or both?  Where should he focus his attention?  I’ll tackle that in the next article.

In a future article, I’ll zero in on manufactured products.  In the meantime, I though this data might explode some myths out there in regards to global trade.

* – Small island nations with economies based on tourism are excluded from the study.  Tiny city-states like Hong Kong, Singapore and Luxembourg are rolled into the data of their surrounding or neighboring nations.