As judged by the balance of trade expressed in per capita terms, thus adjusting for the sheer size of each nation, the effectiveness of the United States’ trade policies ranks near the very bottom of the nations of the world. (See U.S. Trade Policy Ranks Among World’s Worst.) Since the near-total collapse of the global economy last year, most economists who once shrugged off the effects of global trade imbalances now admit that these imbalances were the root cause of the collapse and can’t be sustained.
The biggest trade imbalance has been between the U.S. and the rest of the world. In spite of the best efforts of American manufacturers to get leaner and become more competitive, the trade deficit has been worsening for decades. It begs the question whether there are factors at work that make these trade imbalances inevitable in a free trade environment.
In Five Short Blasts, I used U.S. trade data to argue that disparities in population density are a major (if not dominant) factor behind the U.S. trade deficit in manufactured goods. But if population density is a factor, then the same impact on trade should be evident in the trade data for all nations of the world. Densely populated nations should tend to have trade surpluses in manufactured goods while more sparsely populated nations should tend to have trade deficits. To test my theory on such a global scale, I’ve completed a study of trade data for all nations of the world, using trade data provided by the CIA in its World Fact Book. I began by breaking down the trade balance into exports and imports. The following spreadsheets rank the exports and imports of all nations* in per capita terms:
You can see that the U.S. ranks 46th out of 154 nations in terms of exports per capita, and 118th in terms of imports. But I soon realized that the top of the exports chart and the bottom of the imports chart were dominated by wealthy, developed nations. That’s why I included the per capita Purchasing Power Parity (PPP, roughly equivalent to per capita GDP) for each nation in the charts. To determine whether wealth was a factor, as logic would seem to suggest, I plotted x-y scatter charts for each:
As you can see, the wealth of a nation has a powerful influence on the volume of its exports and imports. It makes sense. A wealthy oil-producing nation, for example, may export oil in exchange for imports of manufactured goods. A poor nation, on the other hand, has little to sell and, thus, has little money to buy. That’s why this effect wasn’t evident when we looked only at the overall trade balance. A poor nation is just as likely to have a balance of trade because it has nothing to sell or buy as a wealthy nation that exports and imports a great deal while maintaining an overall balance.
Therefore, it becomes necessary to confine our analysis of trade to developed, wealthy nations in order to avoid having other influencing factors muted by the wealth effect. So I chose to confine my analysis to those nations with purchasing power parity (PPP) per capita (roughly a measure of GDP per capita) of $25,000 or greater. (For reference, the U.S. had PPP in 2008 of $47,500.)
The following spreadsheet ranks the balance of trade of the 31 nations with a per capita PPP greater than $25,000.
I included a column with each nation’s balance of trade in oil and natural gas because I noticed what seemed to be a strong correlation. High-lighting the net oil-exporting nations in yellow, it becomes easy to see the effect. Like the effect of wealth, the effect of oil isn’t surprising either. Naturally, those nations that export huge volumes of oil and gas are going to have favorable trade balances. (As an aside, I found it interesting that, among developed nations with a deficit in oil and gas, America’s deficit, when expressed in per capita terms, is rather mundane – about the same as other nations.)
Since natural resources tend to be distributed unevenly around the world, trade in resources is vital and beneficial to all. What’s really important is how nations use trade in manufactured products to offset deficiencies in natural resources and to maintain an overall balance of trade. Unfortunately, no data for manufactured goods is available. (If it is, I haven’t found it.) However, I know from my experience in analyzing U.S. trade data that oil and gas tend to dominate trade in natural resources. Subtracting them from the overall trade balance usually yields a pretty good approximation of trade in manufactured products. So, using the CIA’s data and subtracting oil and gas from the overall trade balance, the following is a ranking of developed nations’ balance of trade in manufactured goods:
Because my goal in analyzing this global trade data for manufactured goods was to determine whether or not there is any evidence of population density having an effect, it was here that I included the population density data. And a relationship seems to jump out at you when you compare the population density of the nations at the top of the list (those with the most favorable balance of trade in manufactured products) to those at the bottom of the list. (Here I should note that the overall population density for this group of 31 nations combined is 30.4 people per square kilometer. The United States is almost right on this figure, at 31.3. But the only proper way to determine whether a relationship exists is to plot the data on an x-y scatter chart and then have the computer generate a trend line. A flat line indicates no relationship while a sloping line indicates the presence of a relationship. Here’s the chart:
There is a fairly strong relationship evident. But the slope of the line is somewhat muted by the presence of what is known in statistics as an “outlier” – a data point that is so far out of the range of the other data points that it’s statistically insignificant. In this case it’s Qatar, the world’s champ in oil exports, at least in per capita terms. Qatar exports so much oil that it has no need whatsoever of producing anything else. They simply kick back and enjoy the good life with a PPP that far exceeds that of any other nation, net oil exporters included. So, if we delete that data point, the chart changes as follows:
Now the trend line conforms more to the data. And if we were to eliminate Ireland, the data point at the other extreme end of the scale, but not quite an outlier, it’s easy to see that the trend line would conform to the data even more closely.
It’s also important to note that by confining this analysis to developed nations – those with per capita PPP exceeding $25,000 – I excluded the most dominant player in world trade today: China. If China’s data point were included, it would fall right on the trend line, with a population density of 140 people/sq km and a balance of trade in manufactured goods of $351.
It’s impossible to overstate the significance of this relationship. Because economists adamantly refuse to give any consideration to the role of population growth in economics, they have completely overlooked the relationship between population density and per capita consumption, and its ramifications for trade. (To learn more about the relationship between population density and per capita consumption, see “the theory explained” category on this blog.)
Finally, it’s worth noting here that population density also plays a role in driving trade imbalances in oil. Very densely populated nations tend to be net oil importers, forcing them to export even more manufactured goods in order to maintain a balance of trade, combining with the effect of population density on their low per capita consumption. High oil consumption and low domestic consumption of manufactured products team up to make such nations heavily dependent on exports of manufactured products.
Summary and conclusions:
- The balance of trade of the U.S., a nation with a low population density relative to most other nations, ranks near the bottom of all nations.
- Global trade is dominated by oil and gas. Oil exporting nations use their profits to purchase other natural resources and manufactured goods. Oil importing nations export manufactured goods to fund their purchases of oil and gas.
- How successful a nation will be in using manufactured goods to maintain a balance of trade is heavily influenced by its population density. The effect is real and significant.
- The practice of free trade between two nations grossly disparate in population density is very likely to result in a trade deficit in manufactured goods for the less densely populated nation.
- Failure to account for the population density effect in global trade policies will likely result in sustained trade imbalances.
* Small island nations, whose economies are dominated by tourism, are excluded. Tiny city-states are included in their surrounding or neighboring countries. (Example: Hong Kong is included in the data for China.)