How Do You Explain Our Trade Deficit with Denmark?

Here’s one that always raises eyebrows whenever I bring it up:  on a per capita basis, our trade deficit in manufactured products with Denmark is three times worse than the deficit with China.  Though our trade deficit in manufactured goods with China (at $294 billion) is 83 times worse than the deficit with Denmark ($3.53 billion), China is 242 times larger.  Here’s a chart of our trade results with Denmark:

Denmark Trade

Pretty similar to the chart of our trade with China, except that the numbers on the y-axis are smaller due to the smaller size of the country in question. 

What do we import from Denmark?  The biggest category of products is pharmaceuticals.  The next biggest category is “generators, transformers and accessories,” made up largely of wind turbine equipment.  (Remember the president’s promise that green jobs would stay in America?  What a joke!)  Beyond that there’s household goods, medical and hospital equipment, industrial machinery and telecommunications equipment.  In return, we export to them a little of this and a little of that.  Nothing much.

So how do you explain this trade deficit?   If you blame low wages for our trade deficit with China, how do you explain a deficit that’s three times worse (in per capita terms) with a wealthy nation like Denmark where GDP per capita is $37,000 per person?  If you blame Chinese currency manipulation for our deficit with China, how do you explain the deficit with Denmark?

The fact is that both low wages and currency manipulation have virtually nothing to do with determining the balance of trade.  The explanation for our deficit with Denmark is the same as the explanation for China:  both are very densely populated.  At 331 people per square mile, Denmark is only slightly less densely populated than China at 360 people per square mile.  By comparison, the U.S. has only 85 people per square mile.  The disparity in population density between the U.S. and these “trading partners” is the explanation.  The markets of both Denmark and China are emaciated by over-crowding that causes low per capita consumption.  Attempt to trade freely with such a country, long on labor and short on market, and you’ll end up with a trade deficit virtually every time. 

The question then becomes why we focus all of our attention on China’s trade deficit when it’s exactly what we should have expected based upon trade results with other nations like Denmark.  How much sense does that make?  U.S. trade policy will remain a disastrous mess until population density is factored into efforts to restore a balance of trade.

2 Responses to How Do You Explain Our Trade Deficit with Denmark?

  1. thomas says:

    Denmark, Germany, Austria, Switzerland,Finland, Sweden, Norway, Belgium,Czech Republic, Hungary, Northern Italy, Eastern France including Paris, Northern Spain, Ireland and the Netherlands all have Trade Surpluses…Population Density maybe a Factor but why does Finland, Austria, Sweden, Norway, Czech Republic have a Trade Surplus? Ireland? Canada had a Trade Surplus until the 2008 Crash. These Surplus Countries either have a Well Developed/Technology Driven Manufacturing base or they sell Natural resources such as Canada does. The Danish have a Very high standard of living, many own nice homes, nice Cars, Social European Benefits are available, They vacation around the world, etc….Because the Dainish like Germany and some others have a very highly Trained and educated populace, Policies that developed their high end economies(high end Manfucturing),great infrastructure, inclusion of the citizens in power…co-determination, etc.,High Environmental Standards and Sustainable Development, etc is more likely the cause of their ‘SUCCESS”!

    • Pete Murphy says:

      Thomas, first of all, it’s important to distinguish manufactured goods from other goods and services included in the balance of trade calculation, since there’s nothing wrong with free trade in natural resources. It’s in manufactured products where the jobs lie and where economies are made and ruined by the inappropriate application of free trade theory that doesn’t take into account the role of population density. In your first two lines you mentioned fifteen different countries. All but three of these are more densely populated – some, much more so – than the U.S. Those three are Finland, Sweden and Norway. Norway’s trade surplus is in oil. They’re a major exporter of oil. That leaves Sweden and Finland. Their trade surpluses are shrinking and will likely disappear as both Volvo and Saab are unlikely to survive much longer.

      Regarding Ireland, they are indeed an anomaly but don’t forget that they’re twice as densely populated as the U.S. Secondly, it’s their lax tax policy that has attracted manufacturers like U.S. pharmaceutical makers, and those same policies now leave them virtually bankrupt.

      Austria? Like nearly all of Europe south of the Baltic Sea, which is nearly as densely populated as China, Austria is also a very densely populated country.

      Canada’s trade surplus, like Norway’s, is driven by oil exports (primarily to the U.S.) and not by manufactured goods.

      Regarding all of the factors that you mentioned in the 2nd half of your response – things like “highly trained and educated populace … great infrastructure … inclusion of the citizens in power … high environmental standards and sustainable development,” nowhere are these things found more in abundance than in the U.S., yet the U.S. has the largest trade deficit in manufactured products in the entire world. Nowhere are they found less than in places like China, yet they have the largest trade surplus in the world.

      I’m not saying that population density is the only determining factor. You mentioned some others, but also neglected the biggest: trade barriers, including those enforced by the World Trade Organization. However, when you do a nation-by-nation analysis of the balance of trade in manufactured products, population density dwarfs all others as the most consistent predictor of trade balance. In addition, per capita consumption data gathered from across the globe for a wide range of products proves the relationship between high population density and low per capita consumption, the driving force behind the trade imbalances.

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