Tariffs Working. Trade Deficit and Unemployment Down in November.

December 7, 2019

As announced by the Commerce Department, the trade deficit fell again in October to $47.2 billion, the lowest since March of 2018.  And the all-important deficit in manufactured goods fell to $66.9 billion, the lowest level since June of 2018, and nearly $10 billion less than the record set one year ago.  Most notably, thanks to the tariffs enacted on Chinese imports, the deficit with that country fell to $31.3 billion.  Year-to-date, the deficit with China is $294.5 billion, down by over $50 billion from the same time last year.  This is proof positive that the tariffs enacted by the Trump administration are working.

What about the effect on America’s farmers?  Contrary to reports about how much they’ve been hurt by retaliation by the Chinese, overall exports of foods, feeds and beverages are actually up by $59 million year-to-date.  And soybean exports are up dramatically by $3.2 billion to $20.3 billion year-to-date.  See for yourself on page 20 of this report from the Commerce Department: https://www.bea.gov/system/files/2019-12/trad1019_2.pdf.   How can this be, when the media is constantly reporting that farmers are angry over lost exports due to Trump’s tariffs?  As in all occupations, some farmers are Republicans and some are Democrats.  Some are doing well, some not so well.  If you cherry-pick which farmers you want to listen to, you can build a narrative that makes it sound like the farming industry is being hurt by the tariffs.  The real data paints an entirely different picture.

Before I leave the subject of the trade report, it’s worth noting here that, year-to-date, imports of “automotive vehicles, parts and engines” stands at $316.7 billion (page 23 of the report), vs. exports of only $136 billion (page 21) – a deficit of nearly $180 billion for that one category of products alone.  The Trump administration has been threatening to levy a 25% tariff on all auto imports.  I can’t understand what in the world he’s waiting for!  Such a move would rapidly shift demand toward domestic makes in a big way.  The tariffs should be applied to Mexico as well.  If President Trump wants to get the new USMCA agreement with Mexico and Canada passed by Congress, who’s been sitting on it for over a year now, just tell them that the tariffs on Mexican imports will stay in place until USMCA is passed, and then watch how fast Congress moves!

The news on unemployment was just as good.  The economy added 266,000 jobs in November, and September and October were revised upward by 41,000 combined.  Here’s the report:  https://www.bls.gov/news.release/empsit.nr0.htm.  Unemployment fell to 3.5%.  And per capita employment held at 48%, it’s highest level in almost ten years.  Here’s a chart:  Per Capita Employment.

This is all great news and none of it would be happening without the U-turn on trade policy that the Trump administration made when it started levying tariffs.  We need more tariffs, applied to more countries that are running big surpluses with the U.S., until a balance of trade is restored.


A coming civil war? Is “Americanism,” or the lack thereof, driving us toward it?

December 5, 2019

https://www.usatoday.com/story/opinion/2019/12/04/modern-day-civil-war-in-united-states-how-americanism-can-save-us-column/4309670002/

I came across this above-linked opinion piece on the USA Today web site yesterday and just had to comment.  As the author observes, we’re beginning to hear an undercurrent of rumblings about the potential for another civil war in America.  I’ve heard and read reports of groups – motorcycle gangs and clubs and various militias – that are reportedly prepared to take up arms in the event that President Trump were to be impeached.  (Kudos to the author of this piece for his even-handedness in laying blame on both sides.)

Let me preface this by saying that I voted for Trump in 2016.  I did so on the basis of his promises to do something about our trade deficit and about illegal immigration, the two issues which I believe lie at the root of the ills that have beset our economy for decades.  I also voted for Obama in 2008 for the very same reason – his promise to reduce our trade imbalance – a promise not kept.

I’m not a particularly big fan of Trump.  He can be obnoxious and arrogant.  He’s not a great communicator.  But, after many decades of do-nothing presidents who stood idly by while the rising tide of “globalism” plundered our economy and while other countries played us for fools, I’m thrilled that we finally have a leader who’s willing to stand up and tell the world enough is enough and we won’t tolerate it any longer. He’s backed up his words with action, levying large tariffs on Chinese imports in spite of the tremendous pressure from the Chinese and the global business community not to do it.  Good for him.  I want to see more of it.

Does that make me a Republican?  Hardly.  The Republican party has traditionally been a big supporter of free trade – even more so than the Democrats – and staunchly opposed to the use of tariffs.  So what does that make me?  An American, one who, like million of others, was infused with the spirit of “Americanism” as I grew up, the very kind of “Americanism” the author of this piece describes when he says:

America once was, and hopefully still can be, a nation for the ambitious, hard-working, creative, productive, adventurous and entrepreneurial. That is the meaning of Americanism and the spirit of American liberty.

America once was all of that.  A few paragraphs earlier, the author stated, “If we are to avoid civil war, Americans must rediscover the principles and promise of American life that united us for over 200 years.”  Interesting that the author takes note of the 200-year milestone of our country.  That bicentennial happened in 1976.  Coincidentally, 1976 was the year that America’s trade balance swung from a small surplus to an ever-growing deficit.  2018 marked the 42nd annual trade deficit and was the largest in history.  2019 will be the 43rd.  While “the promise of American life” united us for over 200 years, it didn’t last much beyond that.

I entered the labor force in the private sector in 1974 and spent my entire working career watching “the promise of American life” steadily eroded by the forces of globalism, as global corporations turned their backs on Americans, licking their chops at the prospect of more and faster growth in the underdeveloped world – primarily in China.  I listened to the daily drumbeat about how Americans could no longer compete with foreign labor and watched our factories shut down as “made in the USA” products on store shelves were steadily displaced by those from China and Mexico.

By 2016 “the promise of American life” was gone, replaced by a dog-eat-dog existence of working minimum wage jobs while the severance packages and retirement savings were slowly exhausted.  Americans were seething with anger and ready to elect anyone who promised to do something about it.

Hillary Clinton blamed her loss to Trump on the E-mail investigation that was announced by James Comey in the final week before the election.  Baloney.  Americans didn’t care about her E-mails.  That story was already old news.  But three other things happened in that final week that set Americans on fire:  first, the Social Security administration announced that, for the 2nd year in a row, there would be no cost-of-living adjustment to social security benefits.  That was followed closely by an announcement from the Obama adminstration that “Obamacare” premiums were being jacked up by a third or more.  Finally, that announcement was followed the very next day by announcements of similar huge premium increases for private health insurance.

A “coming” civil war?!?!?  We’ve been in one for three years, and those events of the final week of the 2016 election campaign that I just described were the opening salvo, fired by globalists at the downtrodden American workers, accompanied by their battle cry, “The American Dream is dead!”  The election a week later was the return volley, fired by furious Americans whose sense of “Americanism” was reawakened.  If there was any doubt that a war was on, it was erased on January 20, 2017 when, during his inauguration speech, Trump swung a rhetorical battle-ax at the heads of globalism.

Globalism is in a full-blown panic.  They’ve done a masterful job of portraying Trump as a self-serving oligarch that threatens our very democracy.  The American media, owned and controlled almost lock, stock and barrel by foreign interests, has been relentless and unmerciful in their efforts to bring Trump down.

Will this war turn into an actual shooting war?  God, let’s hope not, but globalism won’t go down without a fight.  You can bet on that.  “Americanism?”  It’s alive and well, much to the chagrin of the globalists.

 


Why Population Density Drives America’s Trade Imbalance

November 21, 2019

The Problem:

In my last few posts, we’ve seen a powerful correlation between America’s trade imbalances and the population density of its trading partners.  But how does that work?  It seems odd – something that seems highly unlikely to be a factor.  And you’ve likely never heard of it before.  What you have heard about are a host of other “factors,” things like low wages, trade barriers, intellectual property theft, lax labor and environmental standards, just to name a few.  All of them seem like more plausible explanations for trade imbalances than something like “population density.”

The reason population density has such a powerful effect on trade is what it does to the per capita consumption of products.  Beyond a certain critical population density, over-crowding begins to rapidly erode people’s need for and ability to use (or “consume”) virtually every product you can think of, with the exception of food.  At first glance, you might think that’s a good thing.  Everyone lives more efficiently, reducing their environmental footprint and their demand for natural resources.  However, the real problem is that per capita employment is tied directly to per capita consumption.  Every product not bought is another worker that is out of work.  As population density continues to grow beyond that critical level, an economy is rapidly transformed from one that is self-sufficient and enjoys full employment to one with a labor force that is bloated out of proportion to its market, making it dependent on other nations to sop up its excess labor or, put another way, making it dependent on manufacturing products for export to rescue it from what would otherwise be an unemployment crisis.

Let’s consider an example.  The dwelling space of the average citizen of Japan, a nation ten times as densely populated as the U.S., is less than one third that of the average American.  It’s not hard to imagine why.  In such crowded conditions, it’s only natural that people will find it impractical to live in single-family homes in the suburbs and will instead opt for smaller apartments.  Now think of all the products that go into the construction of dwellings – lumber, concrete, steel, drywall, wiring, plumbing, carpeting – literally thousands of products.  And think of furnishings and appliances.  A person living in a dwelling that is less than one third the size of another consumes less than a third of all of those products compared to someone living in less crowded conditions.  And what about the products used to maintain the lawns and gardens of single-family homes?  Consumption of those products doesn’t just reduce – it vanishes altogether.

Consequently, per capita employment in those industries involved in building, furnishing and maintaining dwellings in Japan is less than a third of that in America.  So what are all of those unemployed Japanese to do?  Will they be put to work building cars for domestic consumption?  Hardly.  As you can imagine, the per capita consumption of vehicles by people living in such crowded conditions is impacted dramatically as most opt for mass transit.  So emaciated is the Japanese auto market that even Japanese automakers have trouble selling cars there.  So now add to the workers who aren’t employed in the home industry those workers who also aren’t employed building cars for their domestic market.

And so it goes with virtually every product you can think of.  Japan is an island nation surrounded by water.  Yet their per capita consumption of products for the boating industry is virtually zero compared to other nations, simply because it’s so crowded.  There’s only so much marina space to go around.  Put a town of 100 families next to a marina with 100 slips and it’s likely that every single family will own a boat with a motor and fishing gear.  Put a city of a million families next to that same marina and, though the marina is still full, on a “per capita” basis boat ownership has effectively fallen to zero.

Japan’s only hope for employing its badly under-utilized labor force is to use them to manufacture products for export.  This is exactly why America’s second largest trade deficit in manufactured goods is with Japan.  It’s not so much that we buy too much stuff from Japan.  The problem is that Japan buys so little from us in return.  It’s not that they don’t want to.  They can’t.  Their market is so emaciated by over-crowding that they can’t even consume their own domestic production.  Why would they buy more from us?  The same is true of nearly every major U.S. trading “partner” that is badly over-crowded.  Attempting to trade freely – without tariffs or other barriers – is tantamount to economic suicide.  It’s virtually certain to yield a huge trade deficit.

Why have I never heard of this before?

Few, aside from those who follow this blog or have read my book, have ever heard of this before.  Even if you have a degree in economics, you’ve never heard of it.  In fact, you were likely taught the opposite.  If you studied economics, at some point you were surely introduced to the late-18th century economist Malthus, and were warned to never give any credence to any theories that revolved around over-population, lest you be derided as a “Malthusian,” which would surely doom your career as an economist.

In 1798, Thomas Robert Malthus published his essay titled “Essay on Population” in which he warned that a growing population would outstrip our ability to meet the need for food, effectively dooming mankind to a fate of “misery and vice.”  This led to the field of economics being dubbed “the dismal science,” something that really rankled other economists.  Yet, the idea gained some traction until, that is, as years passed and improvements in farming productivity exceeded the requirements of a growing population.  The other sciences mocked the field of economics unmercifully, proclaiming that mankind is ingenious enough to overcome any and all obstacles to growth.  Economists acquiesced and vowed to never, ever again give any consideration to any concerns about overpopulation.

And so it is today that economists have a huge blind spot when it comes to the subject of population growth.  You can’t discover something that you’re not even willing to look at.  It’s not unlike the medieval Catholic Church labeling Galileo a heretic for theorizing that the earth revolved around the sun instead of vice versa.  Where would we be today if the study of astronomy ended at that point?  Where would we be if Newton was mocked for his theory of gravity and the field of physics ended at that point?  That’s what economists have done.  They’ve turned their backs on what is arguably the most dominant variable in economics.

What does this mean for trade policy?

In the wake of the Great Depression, soon followed by World War II, economists disingenuously laid blame for what had transpired on U.S. tariffs and, eager to put to the test the theory of free trade, promised that it would put an end to such wars and depressions.  So, in 1947, the U.S. signed the Global Agreement on Tariffs and Trade, taking the first step to implement the concept of free trade on a global basis.  Within three decades, the trade surplus the U.S. had enjoyed was wiped out.  In 2018, the U.S. ran its 44th consecutive annual trade deficit which, by the way, set a record in 2018 and continues to worsen.

The problem is that the concept of free trade doesn’t take into consideration the role of population density in making over-crowded nations absolutely dependent on running trade surpluses in manufactured goods, and simultaneously sapping the life from the manufacturing sector of other nations.  No amount of trade negotiations can correct this imbalance.  No nation that is dependent on manufacturing for export would ever agree to anything that would slow their exports and it’s impossible for them to increase their imports because, after all, it’s their emaciated market that has caused the trade imbalance in the first place.  The only way to restore a balance of trade is to force the issue through the use of either tariffs or import quotas.  Any trade policy that doesn’t employ those tactics when trading with badly over-crowded nations is doomed to failure and puts our overall economy at risk.

Since World War II, other presidents have tinkered with tariffs in those rare instances when the World Trade Organization has green-lighted their use to correct for some other nations’ trade transgressions.  But President Trump is the first president in seven decades to implement a significant tariff program aimed at reducing our trade imbalance with China.  But much, much more needs to be done.  There are many other nations whose trade imbalances on a per capita basis are much worse, nations like Germany, Japan, Mexico, Ireland, South Korea, Taiwan and a host of others.  While many are allies, none of them are “allies” when it comes to trade.  All are eager to sustain and even grow their trade imbalances at the expense of American workers and families.  All want the U.S. economy to bear the cost for their overpopulation.  None want to face their own problems.  The U.S. needs to put an end to pointless – even counterproductive – trade negotiations, and do the things that are within our power to force the restoration of a balance of trade.

 


Population Density Effect on Trade Imbalance Intensified in 2018

November 18, 2019

In previous posts, we’ve noted the apparent role of population density at both ends of the spectrum of our trade imbalances – the top deficits and surpluses in manufactured goods.  Now let’s look at the world as a whole.  Let’s include all 165 nations in the study and let’s divide those nations equally around the median population density (which is 192 people per square mile), such that there are 82 nations with densities above the median and 83 nations below the median.  Look at this chart:  Deficits Above & Below Median Pop Density.

With the half of nations with population densities above the median we had a deficit of $815 billion in manufactured goods in 2018.  With the other half of nations we had a deficit of only $0.5 billion (the first deficit with that group of nations since 2005).  $815 billion vs. $0.5 billion.  Same number of nations.  How much more obvious can it be that population density is, by far and away, the single biggest force in driving trade imbalances?  How much more evidence do you need?

More?  “That’s not a fair comparison,” you might say.  “The half of nations that are more densely populated have a lot more people than the other half.  There needs to be the same number of people included in each group.”  OK, fair enough.  Let’s divide the world in half by population.  Half of the world’s population lives in more densely populated conditions, and half lives in less densely populated conditions.  In order to divide the world that way, however, the dividing line falls on China.  Not surprising since that country has one fifth of the world’s population.  So to make the populations of the two halves equal, almost 40% of China’s population – a nation with a population density four times that of the U.S. – must be included with the half of people living in “less densely populated” conditions.  Nevertheless, if we do that, and if we allocate 40% of our trade deficit with China to the less densely populated half, the result is that we still have a trade deficit (in manufactured goods) of $557 billion with the half of people living in more densely populated conditions and a trade deficit of $259 billion with the less densely populated half of the world’s population.  The trade imbalance is still more than double with the more densely populated half.

If we include all of China in the more densely populated half of people, then the split of people is 4.15 billion vs. 3 billion.  If we do that, the deficit with the more densely populated “half” of people is $730 billion vs. $86 billion for the less densely populated “half” – 8-1/2 time bigger.

I would argue that an even better comparison is to divide the world in half by land area:  the half of the world that is more densely populated vs. the half that is less densely populated.  If we factor out Antarctica and the United States (because we are evaluating our trade partners), the world’s land surface area is 47.3 million square miles.  If we divide that in half by population density, we find that 6.66 of the 7.15 billion people occupy the more densely-populated half of the world’s surface area while the other half of the world holds only 0.49 billion people.  With that more densely-populated half of the word we have a trade deficit in manufactured goods of $923 billion and a trade surplus of $107 billion with the less densely populated half.  That’s a difference of over one trillion dollars in trade with the more densely populated half of the world vs. the less densely populated half.

Finally, let’s look at one more split – probably the most relevant:  the nations more densely populated than the U.S. vs. the less densely populated nations.  The U.S. has a population density of approximately 92 people per square mile.  114 of our trading partners are more densely populated and 41 are less densely populated.  With those more densely populated we have a trade deficit in manufactured goods of $934 billion vs. a surplus of $119 billion with those less densely populated.  Again, that’s a difference of over one trillion dollars!

Clearly, any trade policy that doesn’t take population density into account is virtually guaranteed to yield absolutely horrible results, yet that’s exactly what the U.S. does.  It completely ignores population density and attempts to trade freely with everyone regardless of population density.  And in a few decades it’s transformed the U.S. from the world’s preeminent industrial power and the wealthiest nation on earth into a virtual skid row bum, plunging us into $20 trillion of debt.

But why is population density such a factor?  I could write a book on the subject.  Actually I already did.  It’s what this blog is all about.  But I’ll summarize it for you in the next post.  Stay tuned!


America’s Best Trading Partners

November 12, 2019

In my last post, we looked at a list of America’s worst per capita trade deficits (in manufactured goods) in 2018 and found a strong correlation with population density.  Nearly every nation on the list was much more densely populated than the U.S.  Conversely, there was virtually no correlation with low wages, as measured by those nations’ “PPP” or Purchasing Power Parity.

Now it’s time to look at the other end of the spectrum – America’s best per capita trade surpluses in manufactured goods.  If population density is a factor in driving trade imbalances, then this list should be populated with more sparsely populated nations.  Here’s the list:  Top 20 Per Capita Surpluses, 2018.

Well, we do indeed see many nations that are more sparsely populated, but there are some very densely populated nations on this list too.  Many of them can be explained by the fact that they’re net oil exporters and, as we established in my post from October 23rd about our largest trade surpluses, oil exporters use their “petro-dollars” to buy American-made goods.  In that same post, we also noted that The Netherlands and Belgium appear on this list because they take advantage of their location to make themselves into European trading hubs and, as such, are a destination for American goods that will ultimately be distributed throughout Europe.

Still, there is solid evidence that population density plays a major role in driving trade imbalances on this list, just as it did on the list of our worse deficits, but this time driving surpluses in our favor.  Here are more observations that support that:

  • The average population density on this list is 216 people per square mile, compared to an average of 540 people per square mile for the nations on the list of our largest per capita trade deficits.  The population density of the nations on the list as a whole – total population divided by total land mass – is only 22 people per square mile.  Compare that to the population density of the twenty nations on the list of our biggest per capita deficits, which is 377 people per square mile.
  • The average PPP for the nations on this list is $45,995.  Factor Qatar out of this list and the average drops to $41,842 – nearly the same as the average PPP of $39,040 for the nations on the list of our biggest per capita deficits.  So which seems more likely to be driving trade imbalances – the 1600% disparity in population density or the 18% disparity (leaving Qatar in the average) in PPP?
  • Over the past ten years, our per capita surplus in manufactured goods with the top twenty nations has grown by 84%.  Meanwhile, our per capita deficit with our worst trading partners has grown 114%.  Our trade deficit is eroding the manufacturing sector of our economy, leaving us with fewer and fewer products to export.

That’s the two ends of the trading spectrum, a total of forty countries with whom we have the biggest per capita deficits and per capita surpluses in manufactured goods.  It’s already pretty strong evidence that trade imbalances are driven almost entirely by population density and by very little else.  But what about the other 124 nations that are included in the study?  Will the correlation look as strong when we throw them all together?  Stay tuned, that’s coming up next.


America’s Worst Trading “Partners”

November 7, 2019

In one of my most recent posts, we examined a list of America’s worst trade deficits.  China was at the top of the list.  No surprise.  China is a very large country with one fifth of the world’s population.  It only makes sense that our biggest trade deficit would be with one of the world’s biggest countries.  But anybody can make a list of our biggest deficits with little effort.  My purpose is to ferret out the root cause of America’s massive trade deficit.  Is it really low wages that attracts companies to shift production offshore, like economists say, or is there something else at work?  For decades the U.S. has focused its efforts to address our trade imbalance on things like intellectual property, working conditions and environmental standards.  Yet our deficit continues to explode.  Are we working on the right things?  Are we missing something?

I pointed out that the list of our biggest deficits did have one factor in common.  Nineteen of the twenty nations on that list had a high population density – very high in most cases.  If population density is a factor in driving trade imbalances, then it stands to reason that a list of our worst deficits in per capita terms, factoring the sheer size of nations out of the equation, would be dominated by nations with a high population density.  Such a list would essentially constitute a list of our worst trading partners, on a “man-for-man” basis.  Will that list be dominated by people earning low wages, as economists would suggest, or will it be dominated by people living in highly congested, densely populated conditions?  Let’s take a look.  Here’s the list:  Top 20 Per Capita Deficits, 2018.

Observations about this list:

  1. Seventeen of these twenty nations are more densely populated than the U.S.  The average population density is 540 people per square mile, which is 5-1/2 times more densely populated than the U.S.  The aggregate population density – the total population of the countries on this list divided by the total land surface area – is 377 people per square mile – almost four times the population density of the U.S.
  2. Three nations less densely populated than the U.S. are on the list:  Finland, Sweden and Estonia.  Estonia is new to the list and is likely a one-year fluke.  The U.S. had a trade surplus with Estonia until 2010.  Since then, the deficit with Estonia has swung up and down dramatically.  Sixty percent of our imports of manufactured goods from Estonia are telecommunications equipment.  Finland’s economy is heavily dependent on exports, which make up one third of its gross domestic product (GDP).  As is the case with our deficit with all European nations, imports of autos account for a big share of the trade deficit – 27% in the case of Finland.  Sweden is even more heavily dependent on exports, which account for 44% of its GDP.  To put those figures in perspective, the U.S. derives less than 8% of its GDP from exports.
  3. The average “purchasing power parity,” or “PPP,” is just over $39,000 per capita per year vs. U.S. PPP of $59,000.  While that figure seems to lend a little support to the “low wage” theory about trade imbalances, it’s a fairly weak correlation.  It’s especially weak when you see that the top two nations on the list – Ireland and Switzerland – are actually more wealthy than the U.S.  The average PPP of the top ten nations on the list is $47,190.  Only Vietnam has a PPP below $10,000.  China and Mexico are the only other two nations on the list with a PPP less than $20,000.
  4. Our per capita deficit with Ireland – not the highest population density on the list but still more than twice as densely populated as the U.S. – leads the list with a huge per capita surplus with the U.S. of almost $8,600, which accounts for nearly 12% of its PPP.  But population density alone doesn’t explain Ireland’s position at the top of this list.  Ireland is a tax haven for corporations, a situation that the U.S. government has inexplicably done nothing to address.
  5. China, at the top of the list of our trade deficits, barely makes this list at all, coming in at no. 20.  Given that the tariffs imposed on Chinese imports this year have begun to shrink our deficit with China, it’s likely that it won’t make the list at all for 2019.  But, make no mistake, although expressed in per capita terms the deficit with China is unremarkable, when multiplied by its population – one fifth of the entire world – the result is an enormous trade deficit for the U.S.
  6. The deficit with this group of nations has nearly tripled over the past ten years (when Estonia is factored out of the calculation due to its flip-flop from surplus to deficit).  Whatever the factor that drives trade imbalances – and from the data we’ve looked at so far it certainly appears to be population density – it has a very powerful effect.

The real take-away from this list is that population density appears to be a powerful factor in driving trade imbalances, while low wages appear to have little or no influence.  But that’s just one end of the spectrum – our trade deficits.  We’ll next take a look at our trade surpluses to see what effect population density may have at that end of the spectrum.  If high population densities cause trade deficits, we should see the list of our top per capita trade surpluses dominated by nations with low population density.  Stay tuned.


America’s Biggest Trade Surpluses in 2018

October 23, 2019

In my previous post, we examined the list of America’s biggest trade deficits.  Of the top 20 trade deficits, all but one were with nations more (usually much more) densely populated than the U.S.  It appears that population density may be a factor in driving these deficits.  But what will we find at the other end of the spectrum?  Will a list of our top 20 trade surpluses be dominated by more sparsely populated countries?  Well, let’s see.  Here’s the list:  Top 20 Surpluses, 2018.

We do see more sparsely populated nations on the list, but we also see a half dozen very densely populated nations.  At first glance, there doesn’t appear to be much correlation with population density.  But let’s take a closer look at those densely populated nations.  Do they all have something in common?  Indeed they do.  Most of them, but not all, are net oil exporters.  Canada, United Arab Emirates (UAE), Saudi Arabia, Qatar, Kuwait, Norway and Nigeria are all net oil exporters.  Why is that significant?  Because all oil is priced and sold in U.S. dollars.  And, ultimately, there is only one place where those U.S. dollars can be spent as legal tender – in the United States itself.  So those oil exporters use their “petro dollars” to buy products from the U.S.

Consider an example.  If China buys oil from Saudi Arabia, they have to pay for it with U.S. dollars.  No problem for China.  They’re rolling in dollars that Americans spent on their exported manufactured goods.  So now Saudi Arabia has a bunch of dollars.  They have no choice but to use it to buy American goods or American investments, like U.S. bonds.  But their economy is built around oil.  They don’t manufacture anything else to speak of.  So they have dollars to spend on manufactured goods and the only place they can spend those dollars is in the U.S.  Thus, the U.S. has a trade surplus in manufactured goods with Saudi Arabia and, for the same reason, with virtually every nation that is a net oil exporter.

That leaves two other very densely populated nations on the list that are thus far unexplained – Belgium and The Netherlands.  They’re tiny, adjoining nations who together enjoy the only deep water sea port on the Atlantic coast of Europe.  They use this to their advantage, making themselves into major points of entry for imports from America and for their distribution to the rest of Europe.  So their presence on the list is more of a geographic anomaly than anything else.

Now, back to the subject of population density.  With all of the above said, the list of our top 20 trade surpluses is still dominated by eleven nations that are less densely populated than the U.S., and three more that are only slightly more densely populated.  The average population density of these twenty nations is 239 people per square mile, compared to the average population density of 629 for the nations that represent our biggest trade deficits.  The combined population density of all twenty nations on the surplus list (total population divided by total land surface area) is  43 people per square mile, compared to 502 for the deficit list.  It certainly appears that population density is a real factor in driving trade imbalances.

A few more observations about this list of our biggest trade surpluses is in order:

  1. At number one on the list, Canada is both very sparsely populated while also being a huge oil exporter.  In fact, they are America’s biggest source of imported oil.  This is why the surplus with Canada is more than three times the size of our next largest surplus.  The U.S. has no better trade partner than Canada – hands down.
  2. Are you surprised to see Russia on the list?  It’s less surprising when you look at their population density.
  3. Also, take a look at the Purchasing Power Parity (PPP, roughly analogous to wages) of the nations on this list.  The average PPP is just under $40,000 per capita.  The average of the nations on the list of our biggest deficits was $35,000 – a difference of only 15%.  The difference in population density between these two lists is almost 1200%.  Which do you think is more likely to be the real driver of trade imbalances – wages or population density?

When it comes to the sheer size of trade imbalances, of course our deficit with China is bigger than our deficit with other, much smaller nations.  And of course our trade surplus with Canada is much larger than, say, our surplus with New Zealand.  Does that mean that Canada should enjoy more favorable trade terms than New Zealand, or that China should be punished with harsher trade terms than, say, Japan or Germany?  Hardly seems fair.  Trade policy should be formulated to address the factor that actually drives trade imbalances, regardless of the size of the nation in question.  That factor is population density.  In order to factor sheer size out of the equation, let’s now look at our trade deficits and surpluses in per capita terms, starting with our biggest per capita trade deficits.  The results are fascinating.  Stay tuned.