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.

Was November Dip in Unemployment Faked or a Fluke?

http://www.dol.gov/opa/media/press/eta/ui/current.htm

The Labor Department announced this morning that jobless claims rose to 480,000 last week, the second consecutive week of rising claims since bottoming at 454,000 in the November 28th week.  (Link to the Labor Department report provided above.)

In light of the continuing high level of claims, one has to wonder if the administration was playing games – the same kind of games they’ve been accused of using to inflate their figures for jobs created by the stimulus program – to show a drop in unemployment last month.  In November the Bureau of Labor Statistics reported that the employment level actually rose by 227,000 – a key factor in holding job losses to only 11,000.

That seems highly unlikely, given the current rate of weekly jobless claims.  In a normal, healthy economy we typically see weekly jobless claims of about 250,000.  Yet, unemployment holds steady because laid off workers normally find employment elsewhere at about the same rate.  About a million are laid off each month and about a million find new work, keeping the employment level steady.  But analysts have noted that in today’s environment, almost no one is hiring.  Hiring is well below the rate we’d see in a normal economy. 

So if no one is hiring, how did the employment level jump by 227,000 in November?  In order for that to happen, employers would have to be snapping up workers at a much higher than normal rate.  At this rate of weekly jobless claims, employers would have to be rehiring these workers at a rate almost double that of a normal, healthy economy.  It doesn’t seem plausible.

The current rate of weekly jobless claims – 200,000 more per week than normal, should be translating into unemployment rising at a rate of about 0.5% per month, especially considering the rate at which the labor force is growing as a result of a growing population.

Are they fudging the numbers as part of a campaign to talk up the economy and restore confidence?  I don’t generally subscribe to conspiracy theories, but these numbers just don’t add up. 

                                       *****

As an aside, the Labor Department report for this week reports that only two states – Kansas and Kentucky – reported that weekly jobless claims (unadjusted) fell by more than 1,000.  By contrast, 29 states reported increases in claims of at least 1,000.  California was by far the worst, with a rise of more than 28,000.  Now, let’s do some more math:  If we add up the net increase in jobless claims for these 31 states, the figure comes out to an increase in jobless claims of 200,000 in one week.  Not exactly a picture of a stabilizing employment situation.

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.

Unemployment Ticks Downward as Employment Level Rises

 

This morning the Labor Department announced that unemployment fell to 10.0% from 10.2% as job losses were far lower than expected.  But the government’s unemployment calculation is famous for hocus-pocus.  Let’s take a look at the real data:

Unemployment Calculation PDF

As you can see, the employment level actually rose nicely for the first time since April.  And, of course, the government continues to rely on the phenomenon of “the mysteriously vanishing labor force” to embellish the unemployment rate, claiming that the civilian labor force fell by another 98,000 workers in spite of the fact that the population grew by nearly a quarter of a million people in the same month. 

So a more accurate reading is that unemployment has fallen by 0.1% to 11.6%.  (The broader measure of U6, if the government was honest about it, continues to hover around 20.8%.) 

Clearly, the stimulus spending is having an effect on employment.  It had to.  The real question is what happens when that stimulus spending ends.  As I reported earlier (see 3rd Quarter GDP Up, Erosion in Underlying Economy Continues), all of the gain in GDP in the 3rd quarter (and then some) is directly attributable to the stimulus spending.  If that spending is factored out, the underlying economy is actually still contracting at an annual rate of 4%. 

We may soon find out what happens.  Just this past week, the Federal Reserve has ended its program of buying up U.S. Treasuries, and bond yields have begun rising again.  More on this in a subsequent article.

Silverdome Sells for 0.0025 X Original Cost

http://www.freep.com/article/20091117/NEWS05/911170324/Silverdome-fetches–583-000

How bad is the economy and how far have property values fallen in Southeast Michigan, an area now beset by depression conditions?  A good indication came earlier this month when the Pontiac Silverdome and its 127 acres of land, home to the Detroit Lions from 1975 to  2002, was sold to a Toronto-based company for $583,000.

The Pontiac Silverdome and its 127 adjacent acres could become home to a Major League Soccer team now that the city has accepted a bid of $583,000 from a Toronto-based real estate company to buy the facility.

The Silverdome was built in 1975 at a cost of $55 million.  That’s $226 million in today’s terms.  It was sold for a mere 0.25% of that figure.  The selling price is less than the value of three houses and one acre of land in my neighborhood (or at least what I thought the value to be before this happened). 

The city of Pontiac had previously received much larger offers, $17 million and $20 million.  But, in each case, the deals fell through when the buyers were unable to obtain financing. 

The city of Detroit now has 30% unemployment and state-wide unemployment is 15.1%.  And that’s using the government’s low-ball U3 calculation method.  Southeast Michigan is truly experiencing 1930s depression-like conditions. 

In 2008, political candidates came to Michigan and dismissed the economic worries of its voters with the claim that Michigan was experiencing a “one-state recession.”  By the end of the year, it was clear that Michigan was actually the canary in the coal mine for the national economy.  America should be praying that Michigan isn’t still the harbinger of worse economic conditions to come.

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.)