EU vs. China: America’s Worst Trading Partner?

February 8, 2016

In terms of our total trade deficit, China is without question America’s worst trading partner, draining $370 billion from our economy and robbing us of five million manufacturing jobs.  Just look at how bad it is and how fast it’s getting worse:  China.

But China is an enormous country with one fifth of the world’s population, so naturally our trade deficit with them is huge.  But how do they stack up if we put that trade deficit into per capita terms?  That is, how much do Chinese citizens drain from our economy compared to, say, the citizens of the European Union?

The European Union, or EU, is is made up of 26 European nations.  It’s analogous to the United States, where each European country is a “state” in the EU.  Combined, they are a “nation” of 1. 7 million square miles – about half the size of China, with a population of over 550 million people – about 40% that of China.

So here’s the chart of our trade with the EU in manufactured goods:  EU.  Wow, it looks remarkably the same as the above chart of our trade with China, doesn’t it?  In fact, when expressed in per capita terms, our trade deficit in manufactured goods with the EU is $247 per person.  Our deficit with China is $271 per person.  So, in per capita terms, just as it is in terms of the total trade deficit, China is America’s worst trading partner, but I’ll be that this is much closer than you’d have thought.

Why is this?  The two couldn’t be more different.  China occupies most of Asia while the EU, of course, covers most of the European continent.  The EU is significantly wealthier than China, with a purchasing power parity of over $40,000 per person compared to about $12,000 per Chinese citizen.  Aren’t we told that the reason we have such a large trade deficit with China is because of low wages?  So why is our trade deficit with the EU, in per capita terms, almost the same?

It’s because there’s one thing the two have in common.  Both are very densely populated – almost to the same extent.  The EU’s population density of 325 people per square mile is only about 14% less than the population density of China, at 380 people per square mile.  So it’s not just a coincidence that our trade deficit with the EU, in per capita terms, is only 9% less than our deficit with China.

The point of all of this is that, when it comes to America’s trade deficit, all of the focus is on China, their low wages and their (supposed) currency manipulation.  But the fact is that our deficit with China is big merely because China is big.  When size is factored out, our deficit with China is absolutely no different than our deficit with other nations that are comparably overpopulated compared to the U.S. (where our population density is about 87 people per square mile).  The deficit is driven almost solely by the disparity in population density, and other scapegoats like low wages and currency valuations have absolutely nothing to do with it.

No progress toward restoring a balance of trade can ever be made as long as we continue to focus on irrelevant factors.  When dealing with such overpopulated nations, the only way to assure a balance of trade is by using tariffs to offset the inherent bias toward a trade deficit that their population density makes unavoidable.  The middle class in the U.S. is threatened because our trade policy fails to account for the role of population density in driving trade imbalances.

 


What’s That Smell?!? The January Jobs Report

February 5, 2016

http://www.bls.gov/news.release/empsit.nr0.htm

This is perhaps the fishiest, most suspicious jobs report I’ve seen yet.  Nothing about it makes sense or is believable.  This morning, the Bureau of Labor Statistics (BLS) announced that, in January, the economy added 151,000 non-farm jobs.  (See the above link to the report.)  That’s well below economists’ expectations, but not mine.  What’s fishy about this number is the breakdown, which makes you wonder if the real number isn’t much worse.

The BLS would have us believe that, of the 151,000 jobs added in January, 58,000 were in retail and 29,000 were in manufacturing.  Regarding the retail sector, all the data we’ve seen to date indicates that business was strong in November but slowed dramatically in December with sub-par holiday spending.  It dragged GDP growth down to 0.7% in the fourth quarter – a number that will likely be revised even lower.  Since then, the economy has slowed even further.  Before the holidays, you couldn’t shop in a retail establishment without being pestered by aggressive sales people.  After the holidays, you can’t find one to help you.  It’s always been that way.  Seasonal workers are hired for the holidays and let go once it’s over.  The claim that retail added 58,000 jobs in January is just too unbelievable.

Even more difficult to swallow is the claim that manufacturing added 29,000 jobs.  Manufacturing has been in a deep recession, thanks to a virtual shut-down of oil exploration and falling exports.  There’s just no way that manufacturing, which has barely added any jobs in the last twelve months, went on a hiring binge in January in the face of such a dramatic slow-down.  It makes no sense whatsoever.

But the implausibility of these numbers from the establishment survey portion of the report pales in comparison to what we got from the household survey where, it was reported, the employment level exploded by 615,000 jobs while the labor force grew by over 500,000.  Isn’t it interesting how the two numbers jump all over the place month-to-month, but always seem to converge to prevent destroying the credibility of headline unemployment figure?  These are numbers that are completely out-of-line with what’s happening in the real economy for the past two months.

I have my suspicions about what’s behind this.

  • The Federal Reserve is desperate to break the equity markets’ dependence on monetary easing, and to fend off the growing belief that it’s become irrelevant in influencing the overall economy.  Is it possible that they’ve asked the government to generate data that supports its mission to get interest rates back to “normal?”
  • The president is in his final year and wants to keep his job “creation” record intact, in spite of evidence that, as he leaves office, the economy is sinking into recession, just as it did for Presidents Bush (W.), Clinton and Bush (G.W.) before him.  Pulling the economy out of the near-depression of 2008 is a big part of his legacy, which would be tarnished if he leaves office with the data showing an economy that’s right back in recession where he found it when he took office.
  • I don’t know if other states are enacting similar programs, but Michigan has recently begun advertising a new program called “Work Share” whereby employers can cut workers’ hours (up to 45%, if I remember correctly) and the affected workers can collect a proportional share of unemployment benefits without being counted as “layoffs.”

OK, so maybe the first two items above are just speculation from my cynical side, but can anyone blame me when we get numbers like these?

 

 


The Effect of Currency Valuation on Trade? None!

January 30, 2016

Whenever some senator or congressman wants to appear tough on trade – usually during a campaign for re-election – they call on the president label a country like China or Japan a “currency manipulator.”  They do this because under the rules of the World Trade Organization a country that’s guilty of manipulating its currency can have tariffs levied against it.  Of course, it never happens.

The reasoning is that a nation that takes actions designed to weaken its own currency gives them an unfair trade advantage, making its own domestically-produced products cheaper for its citizens and for foreign buyers while making imports more expensive.  It all sounds perfectly logical.  But is it really valid?

In my recent posts, we found that there is a very powerful relationship between population density and trade imbalances in manufactured products.  Free trade with nations much more densely populated than our own is almost assured to produce a trade deficit, while free trade with nations less densely populated usually results in a trade surplus.  So strong is this relationship that it seems to be the dominant driving force in determining the balance of trade.  However, that then calls into question just how much of a role currency valuations have, if any.

I have done an exhaustive study of the subject, plotting the change in currency valuations for 159 nations vs. the U.S. dollar against the change in America’s trade imbalance with those nations over a ten-year period ending in 2014.  What I have found is that there is absolutely no correlation between the two whatsoever.

If there were some correlation, what we should see is that a strengthening of a nation’s currency vs. the dollar should yield an improvement in our balance of trade with that nation, since our exports become more affordable to the people of that nation while their exports are more expensive for our citizens.

Here’s what actually happened.  During the ten-year period from 2005 to 2014, the currencies of 80 nations rose vs. the dollar.  The currencies of 67 nations fell vs. the dollar.  And the currencies of 12 nations remained unchanged against the dollar.  Of the 80 nations whose currencies rose vs. the dollar, our trade imbalance improved with 44 of them.  That shows that the currency valuation theory is valid?  Not so fast.  Of the 67 nations whose currencies weakened vs. the dollar, our trade imbalance worsened with only 16 of them.  Add these together and our trade imbalance changed as the currency theory would have predicted with only 60 of the 147 nations, or 41% of the time.  (With the twelve nations where their currencies were unchanged, our trade imbalance improved with ten of them.)

In fact, if we plot the data for these 159 nations on a scatter chart, here’s what we see:  Currency Valuation vs. Balance of Trade2.  On a scatter chart such as this, if there is a correlation between the two variables – change in currency valuation vs. change in trade imbalance – the data points would tend to fall along a line.  As you can see, they don’t – not at all.  When I had Excel calculated a trend line with a “determination coefficient,” the coefficient (“R-squared”) came out to 0.002.  A perfect correlation would yield a coefficient of 1.0 and the data points would fall into a perfectly straight line.  Here, the coefficient is about as close to zero as you can get, meaning no correlation whatsoever.

Let’s take a closer look at our ten largest trade partners in 2014 and see how their currencies and our trade imbalances have fared over the past ten years.  Check this table:  Currency Valuation vs. Balance of Trade.  These ten nations accounted for nearly 73% of all U.S. trade in manufactured goods in 2014.  Their currencies increased in value vs. the dollar for seven of them, and fell for the other three.  But of these ten, our balance of trade changed as currency valuation would predict in only four cases.

Look at China.  In spite of the yuan appreciating in value vs. the dollar by 33%, our trade imbalance actually worsened by 82%.  Look at France and Germany.  In spite of the Euro rising by 12%, our balance of trade with these two nations worsened by 56% and 97% respectively.  (By the way, the next time you hear someone say that America needs to improve its productivity in order to be more competitive, ask them to explain why it is that the U.S. has a large trade deficit with France, arguably the least productive nation in the developed world.)

For anyone who bothers to actually study the matter, the real world data on currency valuation and trade imbalances proves beyond a shadow of a doubt that there is absolutely no correlation between the two.  It’s disparities in population densities that drives trade imbalances and currency valuation has nothing to do with it.


U.S. Trade: A Tale of Two Worlds

January 21, 2016

Divide the world in half by population density and the results couldn’t be more different.  In 2014, it grew worse again.  The half of nations with a population density above the world’s median – 184 people per square mile – left the U.S. with a trade deficit in manufactured goods of $669 billion in 2014.  That’s up by $35 billion from the record set in 2013.  It has worsened every year since 2009.

The other half of nations – those with a population density less than the median – yielded starkly different results.  The U.S. enjoyed a trade surplus in manufactured goods of $132 billion with those nations.  That’s down from $147 billion in 2013 and down from the record of $153 billion set in 2011.

Here’s the chart:  Deficits Above and Below Median Pop Density.  If this isn’t proof of the relationship between population density and trade imbalances, I don’t know what is.  The number of nations is the same, but the less densely populated nations give us a $132 billion surplus, while the more densely populated nations leave us with a $669 billion deficit.  Still the U.S. applies the same free trade policy to all nations without any consideration to population density.  Doesn’t make much sense, does it?

One may counter that the results are skewed by the fact that the more densely populated half of nations includes more people than the other half, and that it includes China, which accounts for more than half of the above deficit.  Fine, so let’s analyze the data in some other ways:

  • Dividing the world in half by population is a little awkward, because China falls right in the middle.  It requires including some of China’s people in the more densely populated half, and some in the less densely populated half, and dividing our deficit with China proportionately.  If we do that, we find that the U.S. has a trade deficit in manufactured goods of $464 billion with the half of people living in more densely populated conditions.  By contrast, we have a trade deficit of $72.8 billion with the half of people living in less densely populated conditions.  The trade deficit with the more densely populated half of people is more than six times worse than our deficit with the half of people in less crowded conditions.
  • Let’s look at it another way.  Let’s divide the world’s land mass (not including Antarctica) exactly in half and compare the more densely populated half to the less densely populated half.  Then we have a trade deficit in manufactured goods of $666.8 billion with the people living in the more crowded half of the world, and a trade surplus of $130 billion with the less crowded half of the world.
  • Instead of dividing the world in half, let’s divide it around the U.S. population density – those nations more densely populated vs. those less densely populated.  Of the 165 nations studied, 112 are more densely populated than the U.S. and 53 nations are less densely populated.  The U.S. has a trade deficit in manufactured goods of $701.2 billion with nations that are more densely populated, and a surplus of $164.5 billion with those that are less densely populated.  That’s a difference of $865.7 billion.
  • The U.S. has a trade deficit in manufactured goods with 56 nations.  Of these 56 nations, only four are less densely populated than the U.S.:  Sweden, Finland, Estonia and Laos.

Any way that you look at it, the relationship between population density and trade imbalance just absolutely screams out at you.  But economists don’t see it.  They don’t see it because they won’t look.  They won’t look because of their adamant refusal to give any credence to the notion that population growth has any economic consequences.

Trade deficits, they say, are the result of other factors:  low wages, currency manipulation, lax environmental and labor standards, etc.  Or they say that trade imbalances are merely transitory, that such imbalances will correct themselves as the economies of underdeveloped nations grow.

Proving that trade imbalances are caused by disparities in population density also requires disproving the above pet theories of economists.  We’ll tackle that in my next posts.


America’s Best Trading Partners

January 16, 2016

A few days ago, we looked at the list of America’s worst trading partners – the countries with whom, on a per capita basis, we rack up the worst trade deficits in manufactured goods – and saw that the list was dominated by nations that are much more densely populated than the U.S.  Clearly, population density is the dominant force in driving trade deficits with overpopulated nations.

But what about the other end of the spectrum?  If there is truly a relationship between balance of trade and population density, then we should see exactly the opposite effect in trade with nations less densely populated than the U.S.  A list of our top trade surplus nations (again, on a per capita basis) should be dominated by nations with a lower population density.

Here’s the list:  Top 20 Surpluses, 2014.  Thirteen of these twenty nations are, in fact, less densely populated than the U.S.  But there are seven that aren’t.  In fact, some are much more densely populated than the U.S.  What’s special about these nations?  First of all, I’ve marked with an asterisk and high-lighted in yellow those nations that are net oil exporters.  Whether or not they are more densely populated than the U.S. (four are, three aren’t), there’s a solid explanation as to why we have a trade surplus in manufactured products with them.  It’s because all oil is priced in U.S. dollars.  As a result, they are flush with dollars that, ultimately, can only be spent in the U.S. on either U.S. products or U.S. investments.  You may argue that lots of places in the world accept U.S. dollars.  That’s true but, ultimately, all U.S. currency must eventually return to the U.S.  So it’s inescapable, really, that net oil exporters will be net consumers of American products.

Consider Canada.  They are a net oil exporter to the U.S.  In fact, they’re our largest source of imported oil.  But they’re also a large country with a very low population density.  As a result, we have a big surplus of trade in manufactured products with Canada.  How much is due to which factor?  Well, since 2005, our trade deficit in oil with Canada has grown by 44%.  But our trade surplus in manufactured goods with Canada has grown almost 30-fold.  Clearly, it’s their low population density that is the driving force.

We see the same thing with Norway.  Although they’re an oil exporter, our trade deficit in oil with Norway has actually shrunk by 91% in the past ten years.  In spite of that, our surplus in manufactured goods has grown by 611% over the same time frame.  Again, it’s clearly Norway’s low population density that is driving the surplus.

Of the 20 countries on the list, there are really only two that seem to defy both the oil and population density explanations:  Belgium and The Netherlands.  They are the only European nations on the list (except Norway).  Both are tiny, neighboring nations and both are very densely populated.  Neither is an oil exporter.  But the Netherlands has the only deep water port on the Atlantic side of the European continent and is a major transportation hub for Europe.  Belgium has river access to the same port and is also a major transportation hub.  It seems that both have used their strategic location to build their economies around trade.

A couple of other observations are in order.  The average population density of the nations on this list is 202 people per square mile.  Compare that to 539 per square mile for the nations with whom we have the worst per capita trade deficits in manufactured goods.  Secondly, note that America’s surplus grew in the last ten years with 18 of the 20 nations on this list – many quite dramatically.  Conversely, our trade deficit worsened over the past ten years with 19 of the nations on the list of our 20 worst deficits.  So, not only does population density determine whether we’ll have a trade surplus or deficit in manufactured goods with any particular nation, but the effect of population density is intensifying dramatically over time.

Still not enough proof for you that it’s population density that drives trade imbalances?  Stay tuned.  The best stuff is yet to come.


Mr. President: Who’s really peddling fiction?

January 13, 2016

President Obama repeated a claim last night several times in his State of the Union address about the state of America’s economy:

“… the United States of America, right now, has the strongest, most durable economy in the world.”

“Anyone claiming that America’s economy is in decline is peddling fiction.”

“… all the talk of America’s economic decline is political hot air.”

Just to set the record straight, here are some facts about America’s economy:

  • In the past ten years, America’s “purchasing power parity” (or “PPP”) – a rough measure of the wealth of the citizens of each nation – has grown by 30%.  Sounds good until you realize that most of the world has actually fared much better.  The U.S. actually ranks 106th out of 165 nations studied, and is tied with Eritrea in terms of its growth in PPP over the past ten years.
  • To be fair, many 3rd world nations are starting from such a low PPP that it’s easy for them to experience rapid growth.  So let’s look at it in terms of actual PPP.  In 2014, the most recent year for which the data is available, the U.S. ranks 19th in terms of PPP.
  • Of the 23 nations with PPP of at least $40,000, the U.S. ranks 20th in terms of growth in PPP over the last 10 years.
  • In terms of its growth in GDP, the U.S. ranked 131st in 2014.
  • The U.S. ranks 98th in terms of gross national savings.
  • 67 nations had lower unemployment rates in 2014
  • The U.S. ranks 43rd in the world in terms of its “Gini index,” a measure of income disparity.
  • As a percentage of GDP, the U.S. ranks 32nd in terms of public debt.
  • In terms of current account balance – essentially, the trade deficit – the U.S. ranks 195th.

These are the facts, as published in the CIA World Fact Book.   (10-year data is from Index Mundi.)  Interpreting the above facts to mean that we have the “strongest, most durable economy in the world” is analogous to concluding that the last creature left barely alive among a group of creatures that has been infested with some parasite (which is an apt analogy for the effect of free trade on America’s economy) was the strongest and most durable.  It’ll soon be no less dead than the others.


America’s Worst Trading Partners

January 12, 2016

I have finally finished tabulating the trade data for each country for 2014.  (2015 data won’t be released by the Bureau of Economic Analysis until sometime in March.)  What took me so long?  This is no small task.  Since the BEA doesn’t track “manufactured products” as a category, I have to take the data for hundreds of product codes for each of 165 nations and subtract out the categories of raw materials in order to arrive at a figure for manufactured products.  I maintain a massive spreadsheet for each nation and then compile the results for all on an even bigger spreadsheet.

Anyway, the results are in and over the next couple of weeks or so, beginning with this post, we’ll break down and analyze the results.  I like to begin by listing America’s 20 worst per capita trade deficits in manufactured goods.  In essence, this is a list of America’s 20 worst trade partners.  These trade deficits are expressed in per capita terms in order to put the citizens of all nations on an equal footing.  For example, our trade deficit with China, when expressed in dollars, dwarfs that of every other nation because they represent one fifth of the world’s entire population.  But when it comes to trade, borders are meaningless and China could just as easily be 100 smaller nations instead of one.  It would have no effect on our total trade deficit whether we draw a line on a map around 1.3 billion people, or draw 100 lines around clusters of 13 million people each.  Expressing the deficits in per capita terms eliminates the sheer size of nations as a factor.

If you’re new to this web site, you probably expect to see this list populated with poor nations.  You’d be wrong and, by the end of this post, you’ll understand why.  So let’s take a look at the list for 2014:  Top 20 Deficits, 2014.  Some observations are in order:

  1. The key take-away from this list is that 18 of these 20 nations are more densely populated than the U.S.  Most are much more densely populated.  The average population density of this list is 539 people per square mile.  This compares with the U.S. population density of about 87 people per square mile.  This average is up from the average population density of 504 people per square mile on the 2013 list.
  2. Instead of poor, low wage nations, this list is populated by rather wealthy, high wage nations.  The average purchasing power parity (PPP) of the nations on this list is $40,700 per person, up from $35,330 in 2013.  Only one nation on this list has a PPP of less than $10,000 – Vietnam, at $5700 per person.  Only three other nations have a PPP of less than $20,000 – Costa Rica, Mexico and China.  By comparison, U.S. PPP was $54,400 in 2014.
  3. Though our trade deficit with China has exploded since they were first granted “Most Favored Nation” status in 2000, their position on this list has barely budged since I published Five Short Blasts in 2007.  They were 19th on the list in 2006 and have risen only one point to 18th in 2014.  That’s because our trade deficit with nearly all of these nations has grown just as rapidly.  To illustrate this, I’ve included a column on the chart that shows the percent change in our balance of trade with each nation over the past ten years.  Our deficit with China has grown by 82%.  But the results with some other nations have been even worse.  In 2006, Costa Rica didn’t even appear on this list.  In fact, in 2005, we had a trade surplus with Costa Rica.  That has now reversed into a large trade deficit, big enough to move them to number 8 on this list.  The same is true for Vietnam.  In 2005 they were nowhere close to being on this list but, in the past ten years, our deficit with Vietnam has worsened by almost 500%.  Our deficit with Switzerland has worsened by over 200% in the last ten years, moving them to 2nd on the list.  It’s worth noting here that Switzerland is the one nation on the list that is even wealthier than the U.S.  But the one thing all of these nations have in common is a high population density.
  4. In case you’re tempted to conclude that Costa Rica, Vietnam, Mexico and China are on this list because of low wages (low PPP), consider this.  In the past ten years, their PPPs have risen by 41%, 136%, 50% and 184% respectively.  If wages are a factor in trade imbalances, then such rapidly rising wages should tend to slow or even reverse our trade deficit with these nations.  Instead, each is accelerating.
  5. It’s also worth noting here than one of the only two nations on the list less densely populated than the U.S. – Sweden – is slowly sliding off of this list.  Our trade deficit with Sweden has actually improved by 44% over the past ten years – the only such improvement on this list.  As a result, they’ve slid from no. 2 on the list in 2006 to no. 12 in 2014.
  6. Another nation that has slid noticeably on this list is Japan.  They were no. 4 on the list in 2006, sliding to no. 10 in 2014.  Why?  Other nations, most notably South Korea and Germany (who have each risen on the list), have cannibalized their auto exports.  This explains why Japan’s economy has been mired in recession for years.

In 2014, the U.S. suffered a total trade deficit in manufactured goods of $539.9 billion.  The trade deficit in manufactured goods with just the twenty nations on this list was $728.3 billion.  In other words, these twenty nations account for our entire trade deficit in manufactured goods, and then some.  It should be clear to anyone that it’s the large disparity in population density between the U.S. and these nations that drives our trade deficit.  It’s just as clear that low wages play no role whatsoever.  Any trade policy that fails to take into account the role of population density in driving trade imbalances is doomed to failure, just as U.S. trade policy has been for decades.

Those who blame trade imbalances on low wages either don’t understand trade or are simply lying.  So too are those who blame currency valuations – something we’ll examine later.  And those who tell you that we simply need to be more competitive are playing you for fools.  The only way to restore a balance of trade is by applying tariffs to counteract the effect of population density.

Not enough proof?  Stay tuned.  In my next post we’ll take a look at the opposite end of the spectrum – America’s twenty best trade partners – and see if population density is a factor there too.

 

 


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