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

July 29, 2010

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

$US-JPY Rate vs Balance of Trade

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

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

Here’s an update of the theory score sheet:

Theory Correlation Score

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


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

Dems Make Show of Helping Manufacturing

July 25, 2010


Though this Reuters article (link above) is a few days old, I couldn’t let it pass without comment. Reading the headline, I anxiously clicked the link in the hope of learning about a sea change in our approach to trade policy. Not surprisingly, I was disappointed. There is no new “push” for manufacturing here, only a “push” to create the appearance of doing something to help manufacturing. It isn’t until the end of the article that you cut through all the hype to find out what’s really going on here:

…. the House could vote as early as Wednesday on a bill that one study has estimated would increase U.S. production by $4.6 billion and support almost 90,000 jobs.

The U.S. Manufacturing Enhancement Act, more commonly known as the Miscellaneous Tariff Bill, temporarily suspends import duties on a long list of materials used by U.S. manufacturers.

House Ways and Means Committee Chairman Sander Levin urged Republicans to support the bill, which Congress typically passes every few years on a bipartisan basis.

In other words, the only “help” for manufacturing planned here is to reduce import duties on some basic materials and intermediates – actually increasing imports. Our approach to trade policy just gets dumber and dumber. Now we’ve moved beyond putting all of our focus on trying to export our way out of an import-driven trade deficit to boosting imports in an effort to help our exporters.

Regarding the first sentence in the above excerpt, two observations are in order:

  1. A boost to U.S. production of $4.6 billion represents exactly 1% of our annual trade deficit in manufactured products and only 0.03% of our GDP. And we’re supposed to get excited about House Democrats doing something to help manufacturing?
  2. If an improvement in our manufacturing trade deficit of only 1% brings home 90,000 jobs, it’s easy to calculate that restoring a balance of trade in manufactured products would bring home 9 million jobs – and likely a lot more when you throw in the service and construction jobs in support of all of that additional manufacturing.

One other excerpt merits comment. This “push”

… follows a poll last month done for the Alliance for American Manufacturing that showed 86 percent of Americans wanted Washington to pay more attention to manufacturing.

The vast majority of Americans know very well that the loss of the manufacturing sector lies at the root of our economic problems. Now all we need is leaders in Washington who are truly interested in restoring our economy, instead of politicians interested only in creating the appearance of doing something to help in the hope of suckering enough voters to swing their support from 49% to a 51% majority.

Effect of Exchange Rates on Trade with Brazil and Colombia

July 25, 2010

Continuing our series examining the relationship between currency exchange rates and balance of trade, we now take a look at trade between the U.S. and two South American countries:  Brazil and Colombia.  In 2009, Brazil was America’s 11th largest trading partner.  And, given Colombia’s small size, they’re no slouch either.  So how has the balance of trade between the U.S. and these two countries been affected by the exchange rate between the dollar, the Brazilian real and the Colombian peso?  Has a stronger dollar led to declining trade balances, or a falling dollar resulted in improved trade balances for the U.S., as economists would predict?

Here are the charts.

$US-BRL Rate vs Balance of Trade $US-COP Rate vs Balance of Trade

We’re starting to see a pattern here.  These charts are virtually identical, and both are virtually the same as the charts for Australia and Canada that we looked at earlier.  There’s a good correlation between exchange rate and trade balance.  When the dollar rises, our trade balance gets worse and when it falls, the trade balance improves.

So much for my claim that population density disparities is what drives trade imbalances and not exchange rates, right?  Not so fast.  Once again, although the value of the dollar vs. the real has affected the balance of trade with Brazil, the balance has consistently been in favor of the U.S., as the population density disparity theory would predict.

In the case of Colombia, a nation slightly more densely populated than the U.S., they’re an oil exporter, leaving them flush with American dollars to spend on American manufactured products.  (Not to mention their illicit drug trade dollars.)

What we need here is a method for keeping score, so I devised the following spreadsheet:

Theory Correlation Score

For each country we’ve examined so far, I went year-by-year to see if the balance of trade followed the exchange rate theory.  That is, did our balance of trade improve in those years in which the dollar fell from the previous year, and did it worsen in those years in which the dollar rose?  I then totaled the number of years in which the trade balance behaved as predicted by the exchange rate, and divided by the total number of years.  For example, in the case of Canada, the trade balance behaved as predicted in 12 years out of 19, a 64% correlation.  (See the notes below the spreadsheet explaining the methodology.)

As you can see, for each of the less densely populated nations we’ve examined so far – Australia, Canada, Brazil and Colombia (where the population density ratio is less than or close to 1.0), there has been either a positive or strongly positive correlation between the balance of trade with the U.S. and the rise and fall of the exchange rate.  But in the case of China, more than four times as densely populated as the U.S., there is a strongly negative correlation.  That is, the U.S. balance of trade worsens as the dollar weakens.

In every case except Colombia, America’s balance of trade has been exactly as predicted by the population density disparity theory.  In the case of Colombia, where their population density is nearly identical to that of the U.S., the population density disparity theory barely applies at all, since there is very little disparity.  Nevertheless, since the U.S. is slightly less densely populated than Colombia but enjoys a surplus of trade in manufactured goods, I’ve scored it as not correlating with my theory.

All in all, this has been pretty inconclusive so far.  But stay tuned.  Next up is Japan.


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

$US-AUD Exchange Rate vs Balance of Trade

July 21, 2010

So far, in recent posts, we’ve examined the effect (or lack of effect) of currency exchange rates between the U.S. and two major trading partners – Canada and China.  So far, the data’s been inconclusive.  In the case of Canada, during the past decade, it seemed possible that there might be some effect.  A falling dollar has coincided with an increase in the surplus of trade (in manufactured goods) for the U.S.  But the U.S. is also ten times as densely populated as Canada.  My theory predicts that the U.S. would experience a surplus of trade in manufactured goods based on this disparity in population density.

With China, there actually seemed to be an inverse effect.  A falling dollar coincided with a worsening of the U.S. balance of trade with China instead of the improvement that economists would predict.  Here, it’s important to note that China is more than four times as densely populated as the U.S. My theory predicts a very large trade deficit for the U.S.

So, so far, the theorized effect of currency exchange rate on the balance of trade is only one for two, while my theory of population density disparity is two for two.

Today we’ll examine the effect of currency exchange rate on our balance of trade with Australia, another major trading partner of the U.S.  Here’s the chart:

$US-AUD Rate vs. Balance of Trade

Here we seem to see some real effect.  From 1993 to 1996, the dollar fell and our balance of trade improved.  From 1997 to 2001, the dollar soared and our balance of trade worsened a little.  From 2002 to 2008, the dollar plunged and both our total balance of trade and the balance of trade in manufactured goods improved dramatically.

But, let’s remember that, once again, the U.S. is ten times as densely populated as Australia.  My theory would predict a trade surplus for the U.S.  Also, at this point, we might need to consider the possibility that, although economists’ theory that currency exchange rates have a direct impact on the balance of trade, that theory may break down when one of the nations involved has a population density far beyond the critical density at which per capita consumption begins to decline.  It may be safe to say that Australia and Canada have not yet reached that density.  The U.S. may have breached it, but perhaps not by much – no more than a factor of two.  However, it’s also safe to say that China is far beyond that point, perhaps by a factor of eight or ten.  So, in the case of trade between the U.S. and Canada and Australia, it may be that currency exchange rate dominates, while in the case of trade between the U.S. and China, the exchange rate effect is dwarfed by the effect of the population density disparity and the fact that China is has, in all likelihood, exceeded the critical population density by a factor of ten.

In future posts we’ll consider the currency exchange rate effect vs. the population density disparity effect with more of the U.S.’s major trading partners.


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

Clinton to the Rescue? Yikes.

July 15, 2010


President Obama, apparently having emptied his bag of economic tricks with the stimulus package and now bereft of ideas for what to try next, is soliciting advice from former President Bill Clinton who, according to the above-linked article:

… presided over the 1990s economic boom …

and was the last president to turn a budget surplus since Richard Nixon had a miniscule surplus ($3 billion) in 1969.  Never mind the fact that a chimp could have done the same thing in the late ’90s, in light of the stock market bubble, the dot com bubble and the explosion in PC, internet and cell phone technology and manufacturing (all of which has since been out-sourced to China and others).  Clinton was too busy enjoying a fine cigar with his intern to have even known what was going on. 

So what’s Clinton likely to advise Obama to do? Provide more stimulus money for alternative energy?  Give more tax breaks to industry?  Implement more free trade deals?  Yeah, granting China MFN (most-favored-nation) status worked out real well, didn’t it, Bill? 

What’s worrisome here is that this is a thinly-veiled admission by the Obama administration that their economic strategy, having run its course, leaves the economy heading back into a slump, and they’ve got nothing left.  The stimulus halted the slide temporarily, but stimulated nothing.  Now we’re back in the same boat. 

No, actually, it’s worse.  At least before the financial melt-down, we had a housing bubble and easy credit to make us think things were OK.  Now we don’t even have that.  Nothing’s been done about our broken trade policy.  No manufacturing jobs have come back home and global trade imbalances are returning to their pre-crisis levels.  And deficit spending is about as popular as a turd in a punch bowl.

I’m sure we’ll soon see a shake-up in Obama’s economic team.  Summers and Romer will probably be replaced by a couple of other ivy-league economists serving up the same platitudes about economic growth and free trade.  Not that it will make any difference.

I suppose we should be thankful for one thing:  if Clinton weren’t here, Obama would have to turn to Jimmy Carter for advice.

May Exports Drowned in Tidal Wave of Chinese Imports

July 13, 2010


As reported by the Census Bureau this morning (see above link), a nice increase in exports in May was swamped by a tidal wave of imports.  While total exports rose by $3.5 billion in May, the growth in imports from China alone nearly matched that figure.  Add in the growth of imports from Mexico and the EU, and total imports of $5.5 billion resulted in a dramatic worsening of the U.S. trade deficit. 

Balance of Trade

Actually, the news is even worse when you consider that the price of oil dropped a little in May, resulting in a $2.6 billion improvement in the petroleum trade deficit.  The deficit in non-petroleum goods actually worsened by a whopping $4.6 billion, one of the worst monthly increases on record.  Non-petroleum goods imports jumped an incredible $7.6 billion. 

The huge increase in Chinese imports, the third monthly increase in a row, was a slap in the face for Obama, who has constantly prodded the Chinese to grow their domestic economy and rely less on exports.  Obama’s sole focus has been on export growth, setting a goal in January to double exports in five years, naively hoping that we can export our way back to a balance of trade.  The following chart shows that while his goal for exports is on track, we’re paying the price for his neglect of the import side of the equation. 

Obamas Goal to Double Exports, 1st year

The result is that, after falling by 33% in the first five months after Obama took office, our trade deficit has since exploded by 52% and is now worse than when he was inaugurated.  If he’s looking for a reason why his economic stimulus plan has fizzled, he need look no further than his failure to follow through with trade policy that assured continued progress on improving our balance of trade.

$US-$Can Exchange Rate vs Balance of Trade

July 8, 2010

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

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

$US-$Can Rate vs Balance of Trade

Some observations:

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

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


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