The Good Half of NAFTA

March 11, 2013

This article marks the beginning of my annual update of trade data for 2012, about a month behind schedule.  Sorry about that, but it’s not my fault.  I’ve been waiting for the Foreign Trade Division of the Census Bureau to publish its annual update of country-by-country trade broken down by the 5-digit “end use code” for all products.  After waiting a month beyond that time when it’s usually published, it became apparent that, for whatever reason (budget cuts, perhaps?), it’s not happening. 

So I’ve had to adjust, switching to data broken down by the 6-digit NAICS code (North American Industry Classification System).  It classifies products in much finer detail than the 5-digit end use code – more detail than necessary for my purposes.  So it’s ballooned my spreadsheets and made my data gathering more difficult.  But for me, at least, it’s fascinating data and interesting work, and so it goes on.

As in the past, I’ll begin with America’s top trading partner, the nation that accounts for 16.1% of all of our exports and imports.  Some may be surprised that it’s not China.  The title of this article should tip you off.  The North American Free Trade Agreement (NAFTA) went into effect in 1994 and established a trilateral free trade zone encompassing the United States, Canada and Mexico.  In terms of total imports and exports, Canada is our biggest trading partner, beating China by $80 billion per year who, in turn, beats Mexico (the other half of NAFTA and our 3rd largest trading partner) by $42 billion. 

Our trade results with Canada stand in stark contrast with our balance of trade with the rest of the world in the critical category of manufactured products.  Here’s a chart of the data for the past twelve years, broken into five categories -  food, feeds and beverages; energy resources (oil, gas, coal & nuclear); metals & minerals; forestry products (lumber, logs, etc.); and manufactured products:  Canada Trade.

Our trade deficit with Canada improved slightly in 2012, declining to $32.5 billion from $35.7 billion in 2011.  The reason for the deficit is no mystery; Canada is, by far, our largest source of imported oil.  Our deficit in that category alone was $83 billion in 2012.  In the category of manufactured products, it’s an entirely different story.  In 2012, we had a trade surplus of $66 billion in manufactured goods with Canada - much larger than with any other nation.  Why do we have such success with Canada when the U.S. suffers a trade deficit in manufactured goods of over $500 billion with the rest of the world?  It’s a matter of population density.  Canada’s is one tenth of the U.S.’s. 

Especially when it comes to our trade deficit with China, economists are fond of blaming low wages in China and a Chinese currency that is kept artificially weak by Chinese manipulation.  But, just as the laws of physics must be valid regardless of one’s frame of reference (the foundation of Einstein’s theory of relativity), so too must the laws of economics.  They should apply to trade with every nation or, if it appears that they don’t, there should be a good explanation.  So let’s see how these claims hold up in the case of trade with Canada.  The following is a chart of our balance of trade with Canada vs. the exchange rate between the Canadian and U.S. dollars:  Canada Trade vs. Exchange Rate.

If economists’ claim that a stronger currency makes imports cheaper for our trading partner and makes their exports more expensive, thus helping our balance of trade, then what we should see is an “X” pattern in this chart.  As the exchange rate drops, the U.S. balance of trade should rise.  (The exchange rate can be a little tricky to understand.  A drop in the rate means that the other country’s currency has gotten stronger.  If it once took two Canadian dollars to buy an American dollar, and now it only takes one, then the Canadian dollar has become twice as strong.) 

In this case, the claim is valid.  As Canada’s dollar has strengthened, from 1.53 in 2001 to being equal to the U.S. dollar in 2012, our balance of trade with Canada (including manufactured goods, as we saw in the previous chart), has improved.  Our deficit has shrunk from $53 billion per year in 2001 to $32 billion in 2012.  But is this improvement really due to the change in exchange rate, or is it due to Canada’s low population density?  The answer to that question will become evident as we explore our trade results with more countries in upcoming articles.

As for the claim that trade deficits are caused by low wages – that is, that manufacturers will move production to where the labor is cheapest –  here’s a chart of our balance of trade with Canada vs. Canada’s purchasing power parity (PPP), a good measure of wage rates relative to our own:   Canada Trade vs. Canada PPP.  As you can see, as incomes have risen in Canada, our balance of trade has improved, just as economists suggest would happen.  But one data point doesn’t validate the theory.  Again, has our balance of trade with Canada improved because of their rising incomes and stronger currency, or has it improved because of Canada’s low population density?

And consider this:  it’s not as though our suplus in manufactured goods with Canada is purely a matter of exporting goods to them while importing nothing.  The U.S. imports more manufactured products from Canada – a high-wage nation - than from any other nation except China.  (We import slightly more from China.)  But China has 40 times more people than Canada.  When expressed in per capita terms, our imports of manufactured goods per Canadian dwarfs those from China!    How do you explain that?  How would economists explain it?  It’s because Canada’s low population density makes them capable of having a high rate of per capita consumption – perhaps even higher than that of Americans.

Free trade with this half of NAFTA – Canada – has indeed been very beneficial to the United States.  This is one situation where it works very well.  There are others, too. But free trade doesn’t always yield such results.  There are situations – as when trading with badly overpopulated nations – when free trade is tantamount to economic suicide. 

So stay tuned.  My next article on our number two trading partner – China – will paint a very different picture.


Weaker Dollar No Solution to Joblessness

November 18, 2010

http://www.cnbc.com/id/40214520

As I was postig the results of my study of currency exchange rates and trade imbalances – a study which showed that changes in currency exchange rate have no effect on trade – the above-linked article titled “Weaker Dollar Seen as Unlikely to Cure Joblessness” appeared on CNBC. 

The article begins by re-stating the now disproven economic theory:

A weakening currency traditionally helps a country raise its exports and create more jobs for its workers.

The article then goes on to make the case that a falling dollar won’t have this predicted effect.  I can add one more reason – the theory is flawed and not supported by the data.  A weaker dollar will have no effect on the prices of imports, as exporting nations will simply cut costs and subsidize their industries to hold the line on price, assuring that they maintain their share of the U.S. market.

Rising prices for imports certainly would bring manufacturing jobs back to the U.S.  But there’s only one way to make sure they rise sufficiently, and that’s for the U.S. to set the prices.  In other words, the U.S. needs to apply tariffs.  Tariffs must be applied to manufactured products, and the size of the tariffs must be proportional to the population density of the country of origin.  This would result in big tariffs on all products from China, even bigger tariffs on products from Germany, Japan and South Korea, but would leave products from nations like Canada, Australia, Saudi Arabia, Brazil and a host of others completely free of tariffs. 

The only problem we’d have then would be building factories fast enough to keep pace with demand.


Study Finds No Relationship Between Currency Exchange Rate and Trade Imbalance

November 17, 2010

Economic theory tells us that a falling dollar helps American exports by making them cheaper for foreign buyers and slows imports by making them more expensive.  Thus, a falling dollar helps domestic manufacturing and improves our balance of trade A stronger dollar has the opposite effect.  It seems to make sense, but the theory isn’t supported by the facts.

My study of the currency exchange rates between the U.S. and its fifteen largest trade partners (and one other) has found no relationship between exchange rates and the balance of trade.  I studied the total balance of trade for these nations for the period from 1990 through 2008, and the balance of trade in manufactured products from 2001 through 2008 against the rise and fall in exchange rates for the currencies of each nation in question.  (Data for manufactured products not available for years prior to 2001.) 

The study finds that, for total trade, there is absolutely no relationship between exchange rate and balance of trade.  The U.S. balance of trade was just as likely (or slightly more likely) to worsen in response to a weaker dollar as it was to improve, and vice versa.  A year-by-year analysis shows that the balance of trade responded to exchange rate changes as economic theory would predict almost exactly (but slightly less) than half of the time.  When the 19-year period is taken as a whole and compared to the change in exchange rate for each country, the balance of trade behaved as economic theory would predict in less than half of the cases.  And it seemed to make no difference whether the trade partner was more or less densely populated than the U.S.

If we narrow our scope to manufactured products only, the story is exactly the same except that if Singapore (the tiniest of America’s 15 largest trade partners) is removed from the data set, then population density does seem to matter.  For trade between the U.S. and nations less densely populated, the balance of trade does seem to respond to changes in currency exchange rates as economic theory would predict.  But that tendency decays with rising population density and, for trade with nations more densely populated than the U.S. by a factor of two, a weakening dollar has no effect on improving the balance of trade.  If anything, in trade with densely populated nations, the balance of trade tends to worsen regardless of a weakening dollar.

The population density of the trade partner is a far better predictor of the balance of trade in manufactured products.  (The population density theory applies only to manufactured products and not trade in natural resources.)  For trade partners less densely populated than the U.S., the theory correctly predicts a surplus of trade in every case.  For those nations more densely populated, the theory correctly predicted a trade deficit in 9 out of 11 cases.  (Since the theory doesn’t apply to tiny city-states, Singapore is excluded from the data set.) 

Here’s a summary of the study’s findings:

Theory Correlation Score

Conclusisons and comments regarding total trade:

  1. Among the trade partners less densely populated than the U.S., the balance of trade responded to changes in currency exchange rate as predicted by economic theory, year-by-year, only 47% of the time.  Taking the 19-year period as a whole, the balance of trade responded as predicted by economic theory for only two out of five nations – 40% of the time.
  2. Among the trade partners more densely populated than the U.S., the balance of trade responded to changes in currency exchange rate as predicted by economic theory, year-by-year, only 46% of the time.  Taking the 19-year period as a whole, the balance of trade responded as predicted by economic theory for only five out of twelve nations – only 42% of the time.
  3. This lack of correlation between total balance of trade and currency exchange rate may be partly explained by the fact that, aside from manufactured products, the remainder of total trade is dominated by oil.  Since oil is priced in dollars, there is no exchange rate involved in the trade of oil. 

Conclusions and comments regarding trade in manufactured products:

  1. Among the trade partners less densely populated than the U.S., the balance of trade in manufactured products responded to changes in currency exchange rate as predicted by economic theory, year-by-year, 49% of the time.  Taking the 19-year period as a whole, the balance of trade responded as predicted by economic theory for three out of five nations – 60% of the time.  Thus, there’s at least some slight indication that currency exchange rate does play a role in trade in manufactured goods with less densely populated nations.
  2. Among the trade partners more densely populated than the U.S., the balance of trade in manufactured products responded to changes in currency exchange rate as predicted by economic theory, year-by-year, only 48% of the time.  Taking the 19-year period as a whole, the balance of trade responded as predicted by economic theory for six out of twelve nations – 50% of the time.  Thus, for densely populated trade partners, currency exchange rate plays no role in determining the balance of trade.
  3. On the other hand, population density plays a powerful role.  In every case in the study, the U.S. enjoys a surplus of trade in manufactured products with less densely populated nations.  Conversely, the U.S. has a surplus of trade with only three out of twelve more densely populated nations.  One of these three, Colombia is only very slightly more densely populated than the U.S.  Both of the remaining two share a common trait – they are tiny nations that serve as a port of entry for the larger surrounding countries. 

In conclusion, other than some slight indication of a correlation for trade in manufactured products with less densely populated nations, currency exchange rate has absolutely no effect upon balance of trade, especially with densely populated nations. 

Clearly, those who are pinning their hopes on a weaker dollar to rebalance the global economy, especially trade with China, are barking up the wrong tree.


Obama Backs Down on China Currency

October 19, 2010

http://www.reuters.com/article/idUSTRE69E0OB20101016

Just about the time you think the Obama administration may be growing a backbone in dealing with China ….. well, no.  Once again, they’ve chosen to duck and cover, leaving American workers to take the brunt.  The administration has decided to hold off on issuing a report that would brand China a “currency manipulator,” opening the door to corrective tariffs.  (See the above-linked Reuters article.)  It seems that Obama wants to hold off at least until after the next G20 meeting in November, giving a “multi-lateral” approach another chance.  Earth to Obama:  the U.S. trade deficit with China isn’t a multi-lateral issue.  Aside from the U.S. and China, none of the other 18 in the G20 gives a damn about our trade deficit. 

The issue here isn’t multi-lateralism vs. a go-it-alone approach.  The issue is that this administration hasn’t the courage to take even the simplest of measures in defense of our economy and American workers.  If it doesn’t have the guts to issue a report, what are the chances that they’d have the guts to actually impose tariffs on China and then make them stick? 

President Obama clearly places more importance on diplomacy, on maintaining an air of cooperation at G20 meetings, and on a legacy of being a world-respected statesman than on providing real leadership for the American people.  Maybe this shouldn’t be a surprise, since he vowed to take such an approach during the campaign two years ago.  But he also vowed to tackle the trade deficit and re-write the North American Free Trade Agreement.  Neither has happened, nor will they happen. 

There will be no improvement in America’s trade deficit under this administration.  The president’s plan to cut into the deficit by doubling exports is less of a plan than it is a dodge.  There’s no hope that American manufacturing jobs will be coming home under this administration.  It’s clear that our only hope for “change” will have to wait until the 2012 election.  Obama and his adminstration will have to go.


$US-TWD Exchange Rate vs. U.S. Balance of Trade with Taiwan

October 15, 2010

Continuing my series of examining the effect of exchange rate (or lack thereof) on trade imbalances, I’ll now examine Taiwan, America’s 9th largest trading partner (year-to-date in 2010).  This study of exchange rates vs. the effect on balance of trade couldn’t be more timely, given the escalating currency war that now dominates economic news.

Taiwan is a nation almost twenty times as densely populated as the U.S.  Therefore, my theory of the effect of population density on per capita consumption predicts that we’d have a trade deficit with Taiwan.  We do, and it’s a whopper.  When expressed in per capita terms, our trade deficit in manufactured goods with Taiwan is four times worse than our deficit with China. 

But how has the deficit responded to changes in the currency exchange rate?  Here’s a chart of the data:

$US-TWD Rate vs Balance of Trade

As you can see, in the 16 years covered by this data, the U.S. trade deficit responded to changes in the currency exchange rate as predicted by economists (improving with a falling dollar and vice versa) only 7 times, or 44% of the time.  In other words, the trade deficit in this case was more likely to do just the opposite of what economists predict.  And, when this 16-year period is taken as a whole, we see that in spite of the dollar strengthening over that period, the balance of trade with Taiwan actually improved instead of worsening, exactly the opposite of what one would expect.

So here’s an update of the theory correlation chart with Taiwan included:

Theory Correlation Score

Again, the population density theory continues to be a far better predictor of balance of trade than the exchange rate theory.  So far, of the 12 countries examined, there has been a strong correlation between exchange rate and balance of trade in only two cases – Australia and Colombia, both nations either less densely populated than the U.S. or about the same. 

There are still five nations to go to round out this study of America’s top 15 trading partners and the effect of currency valuation on balance of trade:  The Netherlands, India, Singapore, Venezuela and Saudi Arabia.  In the interest of wrapping up this study, I’ll include all five in the next installment. 

*****

Exchange rate data provided by www.oanda.com.


$US-DEM/EUR Exchange Rate vs U.S. Balance of Trade with Germany

August 17, 2010

Continuing our series of examining the effect of exchange rate on the balance of trade between the U.S. and its major trading partners, we now turn our attention to Germany.  Previously, we have seen that the effect of changes in the exchange rate on the balance of trade has been as economists would predict when the U.S. is dealing with countries roughly equal in population density or less densely populated – countries like Australia, Canada, Brazil and Colombia.  When the dollar falls, our balance of trade improves, and vice versa.  However, the predicted effect seems to break down when dealing with nations far more densely populated – nations like Japan and China.  Changes in the currency exchange rate seem to have no effect whatsoever or, if anything, yield the opposite effect.  That is, a decline in the dollar is more likely to result in a worsening of America’s balance of trade.  Or more likely, a worsening trade deficit yields a decline in the dollar, as economists would predict, but that decline is powerless to offset the effects of population density disparity and reverse the deficit, contrary to what economists would predict.

So let’s see what happens in America’s trade with Germany, another nation far more densely populated than the U.S., by a factor of 7.  Here’s a chart of the U.S. balance of trade with Germany vs. the exchange rate between the dollar and the Deutschmark (prior to 1998) and the dollar and Euro (following the adoption of the Euro in 1998). 

$US-DEM&EUR Rate vs Balance of Trade

In the case of Germany, there is no correlation, positive or negative, whatsoever.  Exactly 50% of the time, the balance of trade responded as predicted by economists in response to changes in the exchange rate.  But the other 50% of the time, changes in the exchange rate yielded the opposite result.  And look at the changes over the full period of time for each currency.  From 1990 to 1997, a small 7% rise in the dollar (from 1.61 DEMs to 1.73 DEMS) resulted in a 62% worse trade deficit – much worse than the small rise in the dollar would predict.  But from 1998 through 2009, a 21% decline in the dollar from .92 EURs to .727 EURs yielded only a 7.6% improvement in the trade deficit.  By far, most of that decline in the deficit was due to the global economic crisis that took hold in late 2008.  If we take away 2009 trade results, a 21% decline in the dollar actually resulted in a 40% worse trade deficit with Germany.  Were it not for the global economic crisis in 2009, we would conclude that the effect of a falling dollar is actually contrary to what economists predict. 

Here’s an update of the correlation tracking mechanism, with these results for Germany now included:

Theory Correlation Score

As you can see, a trend is taking shape.  When dealing with countries of similar population density, the correlation score tends to be greater than .5, indicating that changes in exchange rate produce the changes in trade balance that ecnomists predict.  But, when the trading partner is more densely populated (and the break seems to occur at about 2.0, when nations are at least twice as densely populated as the U.S.), the effect breaks down, and a weakening dollar has virtually no effect on reversing trade deficits. 

On the other hand, my theory of the effect of population density on per capita consumption and on trade imbalances has accurately predicted in all but one case so far (trade between the U.S. and Colombia) whether the trade imbalance would be a surplus or deficit. 

Next up:  Mexico.

*****

Exchange rate data provided by http://www.oanda.com/


$US-JPY Exchange Rate vs U.S. Balance of Trade with Japan

July 29, 2010

Continuing the series of posts dedicated to exploring the effect of currency exchange rates on the U.S. balance of trade, we now turn our attention to Japan.  Of the countries we’ve examined so far – Australia, Brazil, Canada, China and Colombia – only China has broken the mold, exhibiting a tendency for their trade surplus to grow in spite of a falling dollar.  But China is also the only one of this group that is far more densely populated than the U.S.  Is it possible that the effect of exchange rate breaks down in the face of a far more dominant effect on trade – a big disparity in population density?  We need more data from the ranks of densely populated countries.  So now let’s take a look at Japan.  Here’s the chart:

$US-JPY Rate vs Balance of Trade

In this case, I went back to 1985 and also adjusted the trade data for inflation, expressing the balance of trade in 2005 dollars.  Unlike the less densely populated nations of Australia, Brazil and Canada, this chart exhibits the same tendency that we saw for China – that a falling dollar has had no effect on the balance of trade.   If anything, there is a slightly negative correlation between exchange rate and the balance of trade.  The only exception has been in the last three years, when our balance of trade with Japan improved markedly.  The deficit in manufactured goods shrank by 42%.  However, our total trade deficit with the whole world shrank by about that much in the same time frame, not because of dollar weakness but because of the global near-depression.

A second factor working to erode Japan’s trade surplus with the U.S. is the emergence of China in the global economy.  Beginning in the early part of this decade, the Chinese have been steadily muscling in on Japan’s export business.  This will be an interesting dynamic to watch in the coming years.  If Japanese exports to the U.S. and Europe continue to slide, their economy will be in a world of hurt.  The deficit spending required to keep their economy from sliding into deep recession will make Greece look like a penny-pincher.  And Japan already has a serious deficit and debt problem.

Here’s an update of the theory score sheet:

Theory Correlation Score

So far, exchange rate theory has failed the test when large population density disparities were involved.  But, with the exception of tiny Colombia, the population density disparity theory has accurately predicted whether or not the U.S. would have a trade surplus or deficit.  Still, we only have two data points with big population density disparities.  Next up:  Germany.

*****

Exchange rate data provided by http://www.oanda.com/


$US-$Can Exchange Rate vs Balance of Trade

July 8, 2010

Yesterday we looked at the dollar-yuan exchange rate and found no tendency for a declining dollar to positively impact the balance of trade between the U.S. and China.  But that’s just one piece of data.  Today we’ll examine the effect of exchange rate on trade between the U.S. and Canada.

In this case we have more data available.  The following chart includes the total balance of trade between the U.S. and Canada dating back to 1985, the balance of trade in manufactured goods dating back to 2001 (the data I compiled in researching my book), and the exchange rate dating back to 1990.  Here’s the chart:

$US-$Can Rate vs Balance of Trade

Some observations:

  1. First of all, it’s important to note that, since Canada is America’s largest supplier of imported oil and gas, our balance of trade with Canada is dominated by trade in those categories.  Oil is priced in U.S. dollars.  A falling dollar results in higher oil prices.  Thus, as the dollar declines, one would expect that our balance of trade in oil would worsen.  Economics says that as the price of an imported commodity rises, imports will decline as consumers switch to domestic suppliers.  But that doesn’t work for oil.  Domestic supplies are maxed out and, in fact, declining.  We have no choice but to continue to import at the same rate.
  2. From 1990 through 2002, as the dollar soared in value by 35%, our balance of trade with Canada worsened by 625%, a move in the direction that economists would predict, but the size of the move is beyond what one would expect.  Early in this time frame, NAFTA (the North American Free Trade Agreement) was implemented (on January 1, 1994).  You can see that our trade deficit (again, driven by oil imports) really took off at that point.  Thus, the worsening of our total trade deficit with Canada during that time frame had much more to do with the implementation of NAFTA than it did with the strengthening of the dollar.
  3. From 2003 through 2008, however, our overall balance of trade with Canada continued to worsen in spite of a dramatic decline in the dollar.  This is likely due to the rising price of oil, coupled with rising demand.
  4. Looking at the effect of the exchange rate on trade in manufactured goods from 2001 to 2009, we see what seems to be exactly the relationship that economists would predict – that the falling dollar resulted in an improvement in our balance of trade, improving from a slight deficit to a tidy surplus of over $40 billion in 2009.  But is this really caused by the falling dollar or was it driven by the disparity in population density between the U.S. and Canada?  The U.S. is ten times as densely populated as Canada.  My theory would predict that, upon implementation of free trade between two such countries, the more densely populated will end up with the trade surplus in manufactured products.  And that’s exactly what has happened here. 

So is America’s  rising surplus in manufactured goods due to the falling dollar or due to the population density disparity?  It’s impossible to say with certainty based on just this one data point.  Our experience with China indicates that the falling dollar has no effect.  Our experience with Canada is inconclusive.  My prediction is that, as we examine more exchange rates with other countries, it will become clear that the effect of exchange rates is dwarfed by the effect of population density disparities, if there is any exchange rate effect at all.  Stay tuned.

*****

Exchange rate data provided by OANDA:  http://www.oanda.com/?srccont=breadcrumb

http://www.oanda.com/?srccont=breadcrumb


Dollar-Yuan Exchange Rate vs. Balance of Trade

July 7, 2010

I recently promised a new series of posts that will explore the relationship (or more accurately, the lack of a relationship) between currency exchange rates and balances of trade.  It’s my contention that there is no relationship of any significance; that trade imbalances are much more heavily influenced by disparities in population density between the two trading partners.  In proving that trade balances in manufactured goods are driven by population density disparities, it’s just as important to disprove the usual suspects – currency exchange rates and low wages. 

This is the first post in this series that addresses exchange rates.  We’ll take a look at the dollar-yuan exchange rate and whether or not any relationship is evident between the exchange rate and our balance of trade with China.  The sole focus of the Obama administration’s trade policy has been badgering the Chinese to stop its practice of “pegging” the yuan to the dollar, allowing it to float freely and be determined by market forces.  Congress has threatened to pass legislation branding China a currency manipulator, potentially opening the door (under World Trade Organization rules) to punitive tariffs.  Economists have all agreed – China’s currency is undervalued by as much as 40%, and they have blamed this for America’s enormous trade deficit with China.

So even I was surprised when I compiled the data.  The dollar has steadily fallen since 2004 by 17% vs. the yuan.  Granted, the decline has been slow and has been managed by China, but the impression created by the Obama administration that the yuan has remained pegged at a fixed value is simply wrong. 

So here’s a chart of the exchange rate vs. the balance of trade:

Dollar-Yuan Rate vs Balance of Trade

If economists are right when they say that a falling dollar will improve our balance of trade, then we should see the trade deficit with China improve as the dollar declines.  But that’s not what we see here.  Instead, the trade deficit with China has actually worsened dramatically as the decline in the dollar-yuan exchange rate has progressed, worsening in four of the last five years.  It improved only in 2009.

Regarding the 2009 improvement, one might say that it has simply taken time for the reduced value of the dollar to take hold – that the balance of trade can’t improve until manufacturing capacity is rebuilt in the U.S. – something that might indeed take several years.  Such an explanation might hold water except for one very important fact:  the U.S. trade deficit with the entire world declined by 46% in 2009, thanks to the recession and its corresponding impact on global trade.  But America’s trade deficit with China fell in 2009 by only 15%.  In other words, were it not for the recession, it’s likely that our trade deficit with China would have substantially worsened. 

Therefore, if there is any cause and effect at all between exchange rates and balances of trade, this chart seems to indicate that a falling dollar is probably the result of a rising trade deficit.  The change in exchange rate is caused by the deficit, instead of the opposite cause and effect. 

It seems clear from this chart that those who pin their hopes on a falling dollar to reverse our trade deficit with China are barking up the wrong tree. 

But this is just an 8-year track record with one currency.  In future posts we’ll examine more currencies over a longer period of time. 

*****

Exchange rate data comes from the OANDA web site:

http://www.oanda.com/?srccont=breadcrumb


Is Sony “Dumping” on the U.S.?

January 13, 2009

http://www.reuters.com/article/ousiv/idUSTRE50B7LN20090113

First it was Toyota announcing a loss.  Today it’s Sony.

Japan’s Sony Corp (6758.T) will likely suffer an annual operating loss of about $1.1 billion, its first such loss in 14 years, due to sluggish sales and a stronger yen, a person with knowledge of the matter said.

The mention of a “stronger yen” is a critical point here.  It’s a clear indication that Sony lost money in the U.S., its biggest market.  “So what?” you may be wondering.  “It’s a tough economy.  Everyone is losing money.”  That’s true, but there’s a huge difference between foreign and domestic companies.  It’s a violation of international trade rules for a company to sell products at a loss in a foreign market.  It’s a practice known as “dumping” and is expressly forbidden.  It does’t matter whether it takes place in a good economy or in a recession.  It’s still dumping. 

The U.S. should immediately insist that Sony raise its prices.  If they don’t, the U.S. should lodge a complaint with the World Trade Organization.  And if the WTO doesn’t take swift action, the U.S. would be entirely within its rights to slap tariffs on Sony products, Toyota products, Toshiba products (also expected to post a loss) and any Japanese company that is selling products at a loss in our market. 

“That wouldn’t be very nice,” you may be thinking.  “We wouldn’t want them to treat us that way.”  Think again.  That’s exactly how the Japanese treat us, and even worse.  Japan sustains a $100 billion per year trade surplus in manufactured goods with the U.S.  by refusing to buy from us as much as we buy from them.  That’s approximately 1.34 million high-paying manufacturing jobs they’ve taken from our economy. 

“But we don’t want prices raised,” you may also be thinking.  “I can’t afford things as they are now.”  You can’t afford things because the downward pressure on wages caused by the trade deficit has driven down incomes more than prices have been held in check.  If the prices of imports were raised, the profit potential needed to justify manufacturing in the U.S. would be restored.  Wages would rise faster than prices.  This would be true even if you work in a field not associated with manufacturing, as job-seekers vying for your job would be pulled out of the pool of available labor and put to work in factories. 

For decades the U.S. has blamed currency valuations for our trade deficit and Japan has been a master of manipulating the yen-dollar exchange rate in its favor.  Now the global economic melt-down has overwhelmed their ability to prop up the exchange rate, and the table has turned in our favor.  It’s time to strike and force actions that will restore a balance of trade.  It’s time to stop being played for a sucker in the global trade game. 

One final comment on a quote from the article:

The company has assumed the yen at 100 yen per dollar and 140 yen per euro, compared with the current dollar/yen level of 89 yen and euro/yen level of 119 yen. A firm yen cuts into the value of its profits and makes its products less competitive in overseas markets.

A strong yen only makes Japanese products less competitive if they adjust the dollar price higher in response to the exchange rate.  Have you seen any evidence of that?  Of course not!  If anything, they’ve been cutting prices to try to prop up sales.  That’s dumping!!


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