Analysis of Trade Data Exposes Flaw in U.S. Trade Policy

No nation on earth is more devoted to the concept of “free trade” than the United States.  And no nation on earth pays more dearly for that misguided policy.  America’s trade deficit is the worst in the world – six times worse than the 2nd ranked nation – India.  Because of that trade deficit and the need to draw dollars back into the economy through the issuance of debt, its external debt is also the worst in the world – 50% worse than the next most indebted country – the U.K.

China accounts for the lion’s share of the U.S. trade deficit.  Economists and political leaders would like you to believe that our deficit with China is the result of low wages, currency manipulation and unfair trade practices because, if you believe this, then you believe that a “level playing field” can be achieved with China by addressing those issues, thus restoring a balance of trade and bringing manufacturing jobs back to the U.S.  What they don’t want you to believe is that the entire concept of “free trade,” at least in many situations, may be fatally flawed. 

For those of you who are new to this site and who haven’t read my book, the data that I present below will come as a surprise, for no economist has ever made the linkage between balance of trade and population density.  For those of you familiar with this site, the chart below is a new, concise way of presenting an analysis of U.S. trade data that exposes the real flaw in our trade policy.

I’ve just completed an analysis of our trade results with America’s top 15 trade partners, breaking down the balance of trade in goods into several categories of natural resources and manufactured products.  The following chart tracks the balance of trade in manufactured products for those 15 nations, from 2001 through 2011.  But the trade data is presented in per capita terms instead of in raw dollars in order to factor out the sheer size of nations like China.  Of course China dominates our balance of trade.  They account for one fifth of the entire world’s population.  Would the results be any different if China was actually a cluster of smaller nations?  Probably not.  So how can we tell whether our trade policy with China is any less effective than the same policy applied to a much smaller nation?  The way to do it is by dividing the balance of trade by the population of that nation and expressing it in per capita terms.

On this chart you’ll find each nation identified on the right axis, next to its 2011 data point.  Below each nation, you’ll see two numbers.  The first number is the ratio of that nation’s population density compared to the U.S.  For example, the top nation on the chart – Canada – is 0.11 times as densely populated as the U.S.  The second number is that nation’s “purchasing power parity,” a figure that approximates each nation’s GDP (gross domestic product), divided by its population.  It’s a good measure of the wealth of each nation and a good indication of wages paid there. 

The list of America’s top 15 trade partners was taken directly from the Census Bureau’s “Foreign Trade” web site.  They are determined by the total of both imports from and exports to each country and account for 96% of all U.S. trade.  Those top 15 trading partners are:

  1. Canada
  2. China
  3. Mexico
  4. Japan
  5. Germany
  6. U.K.
  7. South Korea
  8. Brazil
  9. France
  10. Taiwan
  11. Netherlands
  12. Saudi Arabia
  13. India
  14. Venezuela
  15. Singapore

With that explanation, here’s the chart:  Trade in Manfd Goods with Top 15 Partners

Some observations are in order:

  • Of these 15 nations, the U.S. has a trade deficit in manufactured goods with eight of them:  India, France, China, Mexico, South Korea, Germany, Japan and Taiwan.  Every one of these eight nations is more densely populated than the U.S.  Mexico is almost twice as densely populated.  France is more than 3 times as densely populated.  China is more than four times as densely populated.  The rest are much more so.
  • In per capita terms, our trade deficit with China is rather unremarkable.  In 2011, the deficit with Taiwan was four times worse.  The deficits with Germany and Japan were three times worse. 
  • These deficits are not one-year anomalies.  In every case, they have been consistent or worsening over this 11-year span. 
  • The worst per capita trade deficits are with wealthy nations.  Among our four worst per capita trade deficits, all of those nations rank among the top 20% of the world’s wealthiest nations.  This debunks the myth that large trade deficits are caused by low wages.  As I’ve reported before, the cause and effect is exactly the opposite of what economists claim.  High wages among these trade partners are the result of their trade surplus with the U.S. Wages in China are rising fast as their trade surplus with the U.S. expands.  The trade deficits are caused by the disparity in population density.  Wages are the result of the trade imbalance, not the cause.
  • It’s often said that a lack of competitiveness is also a cause of our trade deficit.  Yet, in per capita terms, we have a trade deficit with France, arguably the least competitive nation in the developed world, that’s nearly as large as our per capita deficit with China.  It has nothing to do with competitiveness.  It has everything to do with population density.
  • Our deficit with India, in per capita terms, is very small; yet, they’re nearly three times more densely populated than China.  Why?  It’s difficult to explain.  There was never the rush of manufacturers into India like we saw with China.  Perhaps India’s hyper-population density and accompanying poverty made corporations skeptical of India’s ability to develop into western style consumers.  Perhaps there’s a limit to the conditions that wealthy corporate executives are willing to endure in their quest to grow profits.  And now that China has cannibalized virtually all of the world’s manufacturing capacity, especially America’s, there’s little left for India. 
  • Now, turning our attention to the positive, surplus side of the chart, we find that of these seven nations – Canada, Singapore, the Netherlands, Saudi Arabia, Venezuela, Brazil and the U.K. – four are less densely populated than the U.S.:  Canada, Saudi Arabia, Venezuela and Brazil. 
  • Of the three more densely populated nations that appear on the surplus side of the chart, the one with whom we have the highest per capita surplus is also the tiniest:  Singapore.  Singapore is actually a city state, with a population of about 5 million people – smaller than some U.S. cities and metropolitan areas.  Such tiny city states represent only a thin slice of what constitutes a real economy.  In such cases, the relationship between population density and trade imbalances isn’t valid.  However, if the trade results with Singapore were rolled into the surrounding nations of Malaysia and Indonesia, the U.S. would still have a large trade deficit with those nations, just as the population density relationship would predict.
  • The Netherlands is a similar situation – a tiny state consisting of two large cities:  Amsterdam and Rotterdam.  However, with the only seaport on the Atlantic coast of Europe, the Netherlands has develped their economy around trade and financial services and enjoys a unique trade surplus in spite of their extreme population density.  Singapore and the Netherlands combined account for only 0.3% of the world’s population.
  • That leaves the U.K. as the only densely populated country of any significant size with whom the U.S. has a very slight surplus of trade in manufactured goods.  The U.K. has one of the most unique economies in the world in that they are the only nation of any significant size (in terms of population) that still manages to be a net oil exporter.  Most nations with large populations are unable to meet their oil needs from domestic sources.  This oil income, combined with the powerful financial sector of their economy, provides them with a stream of income that can be spent on imports, including imports from the U.S. – primarily civilian aircraft and pharmaceuticals. 

While these 15 nations account for the bulk of U.S. trade, the U.S. engages in robust trade with nearly every nation, and if we expand this analysis to include them, the same pattern is evident.  With most densely populated nations – including most of Asia and Europe – the U.S. suffers trade deficits in manufactured goods.  With most more sparsely populated nations – including all of South America and most nations of Africa – the U.S. enjoys a surplus of trade in manufactured goods.  With poor nations, our trade imbalance (whether a deficit or surplus) tends to be very small.  With wealthy nations, the imbalance (again, whether surplus or deficit) tends to be large.  Whether a nation is poor or wealthy has no effect in determining whether the balance will be a surplus or deficit. 

If you’re new to this site and this concept, I encourage you to read further to learn more about how population density supresses per capita consumption and, consequently, drives global trade imbalances.

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