Trade Deficits Not Caused by Low Wages

May 19, 2020

In my previous posts, we’ve seen that trade imbalances are caused by disparities in population density, and that low wages don’t appear to be a factor at all.  To prove the point, let’s now look at America’s trade with the 20 poorest nations on earth and contrast that with it’s trade with the 20 wealthiest nations.  Surely, if low wages cause trade imbalances, we’ll have big trade deficits with the poorest nations where wages are the lowest.  Here’s the list:  trade with 20 poorest nations, 2019.

As you can see, if anything, the U.S. tends to have a very tiny surplus of trade with such nations, not a deficit.  The reason for the surplus is foreign aid.  All aid is booked as exports.  The fact is that the U.S. essentially engages in no trade whatsoever with these poor nations.

Now look at U.S. trade with the 20 wealthiest nations:  trade with 20 richest nations, 2019.  Now we do see some trade deficits – some big ones – with Ireland, Switzerland, Denmark, Taiwan, Sweden, Germany and Austria, in that order.  Ireland and Switzerland – the two nations on this list with whom the U.S. has the biggest trade deficits per capita – are actually wealthier than the U.S.  The others aren’t far behind.

How can this be?  If companies move manufacturing offshore in search of the lowest cost of labor, why do we have virtually no trade at all with the poorest nations, and have massive trade deficits with some of the richest?  Look again at the list of the wealthiest nations.  The average population density of those nations with whom we have deficits is 565 people/square mile – six times more densely populated than the U.S.  The rest of the list is a mish-mash of oil exporters, low population density countries, and a couple – the Netherlands and Belgium – that, as we previously established, are anomalies because of how imports and exports are booked for those countries.

If anything, these two lists prove that there is a relationship between wages and trade imbalance, but the cause and effect is exactly the opposite of what you’ve been told.  Low wages don’t cause trade deficits.  Trade deficits cause high wages.  It only makes sense.  Manufacturing creates a high demand for labor which drives wages up.  Any nation whose economy has a strong manufacturing sector is going to be a wealthy nation.  It may start out as a poor nation, but quickly grows in wealth as its manufacturing sector grows.

Trade imbalances are determined by whether or not a nation’s manufacturing output is absorbed by its domestic economy, or whether it is dependent on growing its manufacturing sector beyond that point in order to gainfully employ its labor force.  We’ll more fully explore what causes that situation in an upcoming post.

 


America’s Best Trading Partners in 2019

May 15, 2020

We saw in my previous post that the list of America’s twenty worst trading partners in 2019, in terms of per capita trade deficit in manufactured goods, was dominated by very densely populated countries.  Only three of the twenty were less densely populated than the U.S.  Now we’ll look at the other end of the spectrum.  Man-for-man (or person-for-person), which countries buy the most American-made products?  Here they are:  Top 20 Per Capita Surpluses, 2019.

While the average population density of our worst trading partners is 524 people/square mile, the average population density of our best trading partners is 208 people/square mile.  The list includes some very large and very small countries.  The combined population density, the total population of these countries divided by their total land mass, is only 20 people/square mile.  The list also include seven net oil exporters.  As discussed in an earlier post, it’s almost automatic that the U.S. has a trade surplus with oil exporters because all oil world-wide is priced in U.S. dollars.  It leaves those countries with no choice but to buy American products in order to use those dollars.  America’s biggest source of imported oil is Canada, so that factors into their position high up on this list, but the bigger factor is their very low population density – only eleven people/square mile.

Once again, The Netherlands and Belgium appear on this list in spite of their very high population density, but that’s an anomaly caused by their position as the only port on the Atlantic-side of Europe and how exports from and imports into that port are booked.

The average increase in our trade surplus with these nations over the past ten years is only 36%.  That barely keeps pace with the rate of inflation, meaning that our trade surpluses have been stagnant, while the trade deficits with our worst trading partners has risen by 148% over the same time period.

The average purchasing power parity (or “PPP”) of the nations on this list is $43,900.  Take away tiny Oman, the wealthiest nation on earth (and one of the smallest), and the average drops to $39,600 – almost exactly the same as the average for our twenty worst trade partners.  Clearly, how rich or poor a nation is (or how high or low their workers’ wages) has no bearing on the balance of trade.  Whether we have a trade surplus or trade deficit with any given nation is determined almost solely by population density (and also whether a nation is an oil exporter).  To drive home that point, in my next post we’ll look at our balance of trade with the poorest, lowest-wage nations vs. the wealthiest, highest-wage nations.  The results are an eye-opener.

 


America’s Worst Trade Partners in 2019

May 11, 2020

In a previous post, we looked at a list of America’s biggest trade deficits and China was at the top.  But China is a very big country with one fifth of the world’s population – more than four times the population of the U.S.  Sheer size alone accounts for much of that deficit.  But which countries, man-for-man (or person for person, if you prefer) do the most damage to the U.S. economy by siphoning away manufacturing jobs through a big trade imbalance?  To determine that, we need a list of our worst trade deficits in per capita terms.  So here is a list of our twenty worst per capita trade deficits in 2019:  Top 20 Per Capita Deficits, 2019.

Little Ireland is at the very top of list, with a $9,615 per capita surplus in manufactured goods with the U.S. that is nearly three times the size of the next worst on the list – Switzerland.  If we assume that an average manufacturing job pays $50,000 per year, and that two thirds of the cost to manufacture something is labor, then the math tells us that for every eight citizens of Ireland an American citizen has lost his/her job.  Thankfully, there are only 5.2 million people in Ireland, so the damage done to the American economy’s manufacturing sector by Ireland is limited to “only” 650,000 jobs.  But think of that.  America has lost 650,000 manufacturing jobs to tiny Ireland.  No wonder Ireland is the wealthiest nation on the list – significantly more wealthy than the U.S. in terms of purchasing power parity (or “PPP”).

The list is noteworthy for other reasons.

  1.  This list is dominated by wealthy countries.  The average PPP of the nations on this list was almost $38,000 in 2018.  The average of the top ten on this list is almost $47,000 – on a par with the U.S.  It’s the same phenomenon we saw on the list of our biggest deficits in absolute dollar terms.  Clearly, low wages play no role at all in driving our trade deficit.
  2. Exactly half of the nations on this list are members of the European Union.  Another, Switzerland, is a European country, though not a member of the EU.
  3. On average, America’s per capita trade deficit with these twenty nations has grown by 148% over the past ten years, led by Vietnam and Slovakia.  Only one has declined – Israel.  (All of that decline has happened in the past two years.)
  4. Noteworthy for its absence from the list is China.  China has been on the list every year since I began publishing this list in 2010, though near the bottom of the list.  But this year they’re gone, falling to number 25.  Why?  Because of the effect that Trump’s tariffs on China have had on reducing the trade deficit with them.

The most noteworthy takeaway from this list, however, is this:  with only three exceptions, the nations on this list are very densely populated.  The average population density of these twenty nations is 524 people/square mile – more than 5-1/2 times as densely populated as the United States.  Regardless of whether we look at the balance of trade in absolute dollar terms or in per capita terms – no matter how we look at it – population density pops out as the overriding factor in driving trade imbalances.

In the case of Ireland, it must be recognized that there is another factor.  Ireland is a tax haven for companies.  They get a free ride in Ireland.  It’s a grossly unfair trade practice designed to siphon companies away from the U.S.  It’s unbelievable that the U.S. continues to turn a blind eye to this shake-down.  Ireland is growing rich at America’s expense.

Before we explore exactly why population density is such a huge factor, we’ll take a look at the other end of the spectrum – our best trade partners in 2019 – the nations who, man-for-man, are the best customers for American-made products.  That’ll be the subject of the next post.  Stay tuned.


China Reneging on Phase 1 Trade Deal

May 7, 2020

China isn’t living up to its commitments under the “Phase 1” trade deal it signed with Trump in early January.  It’s time for Trump to call China on the carpet.  Here are the year-to-date results through March (released by the Commerce Department on Tuesday):  Phase 1 China Trade Deal 2020 YTD.

China’s imports of goods in March were the best of the year so far, but that isn’t saying much.  Once again, their imports didn’t even come close to the 2017 baseline, much less the goals set in the Phase 1 trade deal.  One might be tempted to cut China some slack because of the Covid-19 pandemic.  However, even if people are locked up in their homes, they still have to eat.  And Chinese imports of agriculture products are the weakest of the four categories of goods, and are consistent with their weak imports of the other goods categories.

At a minimum, Trump needs to give China a stern warning that if their imports don’t rise to meet goals by the end of June – halfway through 2020 – then the deal is off and all U.S. imports from China will be subject to the 25% tariff.  This is yet another example of China playing the U.S. for fools, as it has done for two decades.  The U.S. should never again engage in any trade negotiations with China.  Tariffs are the only thing they understand and they need to be increased until a balance of trade with China is achieved.

 


U.S. Balance of Trade in 2019 vs. Population Density

May 1, 2020

So far we’ve looked at the two ends of the spectrum of America’s 2019 balance of trade – our worst trade deficits and our best trade surpluses.  We found that the list of our worst trade deficits is heavily dominated by nations with a high population density.  Conversely, we found the list of trade surpluses is dominated by two groups of nations – low population densities and net oil exporters.  Now let’s look at the whole 2019 trade picture, which includes 165 nations.  (The CIA World Fact Book lists a total of 229 nations in the world.  Not included in my study are tiny island nations and city-states which, combined, account for less than 1% of trade.)  Here’s a chart of America’s balance of trade with all nations that are more densely populated than the U.S. vs. all nations that are less densely populated, from 2005 through 2019:  Balance of Trade Above & Below U.S. Pop Density.

The difference in the results couldn’t be more stark.  With those nations that are less densely populated than the U.S., we enjoyed a small surplus of $111 billion in 2019 – down slightly from $119 billion in 2018 and essentially flat for the past ten years.  With those nations that are more densely populated than the U.S., we suffered an enormous deficit of $941 billion in 2019 – a deficit that has exploded over the past decade, more than doubling from $428 billion in 2009.

There are 114 nations more densely populated than the U.S., and 51 nations that are less densely populated.  So, you might think, maybe the uneven distribution of countries was a factor in skewing the results.  Fine.  Let’s divide the countries evenly – 82 nations that are more densely populated vs. 83 that are less densely populated.  The results are little different.  With the half of nations more densely populated, the U.S. suffers an enormous trade deficit of $842 billion, vs. a trade surplus of $129 billion with the 83 nations that are less densely populated.  By the way, the median population density is 193 people/square mile – about double that of the U.S.

I should point out that, divided around the median population density, the half of nations that are above the median account for 5.6 billion people, while the half of nations below the median population density account for only 1.7 billion people.  One might argue that, to be a fair analysis, there should be an equal number of people on each side, and not an equal number of nations.  OK, let’s look at it that way.  In order to do that, because it has such a large population, China has to be divided, allocating 59% of its population to the more densely populated half, and 41% of its population to the less densely populated half.  The deficit with China will be divided proportionately.  If we do that, the U.S. has a trade deficit of $557 billion with the half of the world’s population that lives in more densely populated conditions vs. a trade surplus of $273 billion with the half of the population living in less densely populated conditions.

But splitting the population evenly, as we did above, results in a huge discrepancy in the land surface area of the world in one half of the analysis vs. the other – 5.2 million square miles vs. only 0.7 million square miles.  If we divide the world evenly in terms of surface area, the U.S. has a trade deficit of $924 billion vs. a trade surplus of $94 billion with the more densely populated half of the world’s surface area vs. the less densely populated half.

No matter how you look at it, population density is consistently the biggest driving force in determining the balance of trade.  So if the U.S. wants to achieve a balance of trade with the rest of the world, it’s only logical to employ a mechanism aimed at population density – a tariff structure, for example, that’s indexed to a nation’s population density.  Applying tariffs on any other basis isn’t fair.  Should a nation be punished because it’s big instead of little?  Developed vs. undeveloped?  “Free trade” is an example of an unfair tariff system – unfair to the U.S.  It applies a tariff of zero to everyone on no basis whatsoever – without any justification – and the results speak for themselves.  The U.S. is being killed with a huge trade imbalance that has destroyed its manufacturing sector.

Who would (or should) be hit hardest by a population density-indexed tariff structure?  We’ll look at that next.

 

 


Planet of The Humans

April 23, 2020

https://www.reuters.com/article/us-earth-day-documentary/michael-moores-planet-of-the-humans-asks-what-if-green-energy-cannot-save-the-planet-idUSKCN2231U8

It’s the mission of this blog to raise awareness of the economic consequences of “overpopulation,” that is, what happens when we become so densely populated that we become incapable of gainfully employing everyone.  There are other consequences of overpopulation – environmental consequences among them.  There’s no shortage of people, however, devoted to that topic.  I’m the only one dedicated to raising alarm about the economic consequences, so I try to stick to that topic.

On the rare occasions when I’ve addressed the topic, I’ve been highly critical of environmentalists, like in this post.  The environmental movement struck a deal with the devil decades ago when it agreed to turn a blind eye to the problems of population growth and the notion of “sustainable development” (an oxymoron) in exchange for corporations’ embrace of simpler issues like air and water pollution controls.

The above-linked article is perhaps the first example I’ve seen of a life-long environmentalist who is finally opening his eyes to the fact that the environmental movement has been a colossal failure, and that reining in population growth and “sustainable development” is this planet’s only hope.  The documentary film that’s the subject of the article, directed and narrated by environmentalist Jeff Gibbs, can be watched for free on youtube.  Here’s the link:  https://www.youtube.com/watch?v=Zk11vI-7czE&feature=youtu.be.  It’s a great film and I encourage you to watch.


America’s Biggest Trade Surpluses in 2019

April 21, 2020

In my last post, we saw from the list of America’s worst trade deficits that every country but one was more densely populated than the U.S., suggesting a relationship between population density and balance of trade.  If that’s true, then we should see the opposite when we look at a list of our biggest trade surpluses.  We should see a list of countries with lower population density.  So here’s the list of our biggest trade surpluses in manufactured goods in 2019:  Top 20 Surpluses, 2019.

At first glance, this list doesn’t seem quite as supportive of a relationship between population density and balance of trade.  Exactly half of the nations on this list are less densely populated than the U.S., whose density is 93 people per square mile.  But look more closely at the list and some countries jump out at you:  United Arab Emirates, Saudi Arabia, Qatar, Kuwait and Nigeria.  Four of these five nations are far more densely-populated than the U.S.  What comes to mind when you look at this list?  Oil.  All are net exporters of oil to the U.S.  And without exception (including smaller oil exporters who didn’t make this list), the U.S. has a trade surplus with net oil exporters.  Why?  Because all oil sold world-wide is priced in U.S. dollars.  If you want to buy oil from Saudi Arabia, you pay for it with U.S. dollars.  If you want to buy oil from Nigeria, you pay with U.S. dollars.  The result is that net oil exporters are loaded with U.S. dollars and – you may not realize this – but the United States is ultimately the only place where U.S. dollars can be used as legal tender (with the one exception of oil in other countries), meaning that net oil exporters must buy something from the U.S. with those dollars.  It can be anything – products, government securities, real estate – anything that is sold in the United States.   A good share of those petro-dollars are used to buy American exports.

Two other very densely-populated, non-oil-producing nations on the list also need explanation.  The Netherlands and Belgium are both very densely populated.  But together they have the only deep-water ports on the Atlantic side of the European Union.  So many of the American exports that are destined for other nations in Europe are imported through those two countries.  Ships arrive full of American exports.  Somehow, however, only half as many imports from those countries head back to the U.S.  Obviously, those ships don’t return only half full.  So how do I explain it?  Frankly, I can’t, but what I suspect is happening is that imports from other European nations that depart from the Netherlands and Belgium ports are actually booked as exports from those originating nations and not from the port of departure.  We need to look at Europe as a whole (a continent nearly as densely populated as China) and, when we do, we find a massive trade deficit.

In spite of the presence of those nations that cloud the results from this list, the validity of the relationship between population density and the balance of trade is still evident.  The average population density on this list is 248 people/square mile vs. 617 people/square mile on the list of our biggest trade deficits.  And the combined population density (total people divided by total land mass) is only 46 people/square mile vs. 510 people/square mile on the list of deficits.  That’s a pretty powerful correlation!

There are other important takeaways from this list:

  1. The total of the trade surpluses on this list is $180.4 billion, vs the total of our top twenty trade deficits of $978.7 billion.  That’s a difference of almost $800 billion, which pretty accurately represents the amount of money drained from our economy each year through trade.
  2. Over the past ten years, the average growth in the trade surpluses with the nations on this list is only 7%, which is less than the rate of inflation, meaning that our actual trade surpluses are shrinking.  Compare that to the average rate of growth in the deficits of 298%.  It’s clear that the manufacturing sector of our economy is very rapidly being decimated by trade.
  3. The average “purchasing power parity” (“PPP”) of the nations on the list of our top twenty trade surpluses is $36,780.  That almost exactly matches the average PPP of the list of our top twenty trade deficits:  $35,445.  It seems clear from comparing these two lists that wages play absolutely no role in determining balance of trade.

These two lists that we’ve compared contain both very large countries and very small countries.  For example, the list of deficits includes China and India who together represent almost half of the world’s population, but also include Ireland and Denmark who together represent less than one tenth of one percent of the world’s population.  Is it possible that these results are skewed by the sheer size of countries?  Can we factor that out?  Yes, and that’s exactly what we’ll do in an upcoming post.

However, before we do that, and now that we’ve looked at both ends of the spectrum, we’ll take a look at the entire trade picture with the whole world to see whether the influence of population density is still evident.  That’ll be my next post.