Continuing my series of examining the effect of exchange rate (or lack thereof) on trade imbalances, I’ll now examine Taiwan, America’s 9th largest trading partner (year-to-date in 2010). This study of exchange rates vs. the effect on balance of trade couldn’t be more timely, given the escalating currency war that now dominates economic news.
Taiwan is a nation almost twenty times as densely populated as the U.S. Therefore, my theory of the effect of population density on per capita consumption predicts that we’d have a trade deficit with Taiwan. We do, and it’s a whopper. When expressed in per capita terms, our trade deficit in manufactured goods with Taiwan is four times worse than our deficit with China.
But how has the deficit responded to changes in the currency exchange rate? Here’s a chart of the data:
As you can see, in the 16 years covered by this data, the U.S. trade deficit responded to changes in the currency exchange rate as predicted by economists (improving with a falling dollar and vice versa) only 7 times, or 44% of the time. In other words, the trade deficit in this case was more likely to do just the opposite of what economists predict. And, when this 16-year period is taken as a whole, we see that in spite of the dollar strengthening over that period, the balance of trade with Taiwan actually improved instead of worsening, exactly the opposite of what one would expect.
So here’s an update of the theory correlation chart with Taiwan included:
Again, the population density theory continues to be a far better predictor of balance of trade than the exchange rate theory. So far, of the 12 countries examined, there has been a strong correlation between exchange rate and balance of trade in only two cases – Australia and Colombia, both nations either less densely populated than the U.S. or about the same.
There are still five nations to go to round out this study of America’s top 15 trading partners and the effect of currency valuation on balance of trade: The Netherlands, India, Singapore, Venezuela and Saudi Arabia. In the interest of wrapping up this study, I’ll include all five in the next installment.
Exchange rate data provided by www.oanda.com.