Surprising Facts About 2011 U.S. Trade Data!

I haven’t posted much lately because I’ve been working hard on analyzing the 2011 trade data, which was released by the BEA (Bureau of Economic Analysis) in late February.  My focus, of course, is on manufactured products, since that’s where the jobs are.  Separating the trade in manufactured goods from total trade for each nation is no small undertaking, since nowhere does the BEA report on “manufactured products” as a separate category.  It has to be done nation-by-nation, combing through hundreds of product end-use codes for each.  I’m now ready to begin reporting on what I’ve found, beginning with some interesting, surprising facts.  (More posts will follow.)

For those of you new to this web site and the concepts presented here, my goal is to create an understanding of the forces that drive global trade imbalances, especially America’s very large trade deficit in manufactured products with the rest of the world.  Why manufactured goods?  There are two kinds of “goods”:  natural resources and the products into which those resources are transformed through manufacturing. 

The reason for trade imbalances in natural resources is no mystery.  Nations deficient in a particular natural resource, as is the case with the U.S. and oil, will experience a trade deficit in that resource.  Nations with a surplus of such resources will have a trade surplus.  It’s as simple as that.  But there are also very large imbalances in the trade of manufactured products that aren’t so easily explained.  Economists blame many factors including low wages, currency manipulation, trade barriers and lax labor and environmental standards.  Yet, in spite of decades of efforts to address these issues, imbalances have only grown worse. 

In Five Short Blasts, I presented an entirely new explanation for trade imbalances:  the role of population density.  And, since publication of that book, I’ve also presented on this blog data that debunks the role of the traditional scapegoats – low wages and currency exchange rates.  Now we have a fresh batch of data for 2011.  Let’s examine whether population density still holds up as an explanation and whether wages and exchange rates have played any role at all. 

First, some explanation of my methodology is in order.  In my research prior to publishing Five Short Blasts in 2007, I discovered that the inclusion of tiny island nations and city-states in the data tends to obscure the relationship between population density and trade imbalances.  Almost without exception, tiny island nations have unique economies that are totally dependent on tourism.  Because such nations use tourist dollars to purchase manufactured products, the U.S. has a surplus of trade in manufactured goods with virtually every one of them, regardless of their population density.  And the trade with all of these nations taken together is so minuscule that it has no measurable effect on America’s balance of trade.  For those reasons, those nations are omitted from the study. 

Also, tiny city-states are somewhat similar in that they tend to have economies skewed by their imbalance between urban and rural settings and their nearly total lack of resources.  For this reason, I have rolled the data for such city-states into the data of their much larger, surrounding (or neighboring) nations.  (These city-states are Andorra, Gibraltar, Hong Kong, Macao, San Marino, Vatican City, Liechtenstein, Luxembourg, Monaco and Singapore.)  What’s left is a total of 165 nations. 

With all of that background, let’s begin with some basic facts about America’s balance of trade in 2011:

  • In 2011, the U.S. balance of trade worsened by almost $60 billion, with the trade deficit increasing to $560.0 billion – a 12% increase.  Of this increase in the trade deficit, $46.3 billion was due to an increase in the deficit in manufactured products. 
  • The U.S. had a trade deficit of $423.4 billion in manufactured products in 2011, compared to $377 billion in 2010.
  • It’s natural to expect, then, that our balance of trade worsened (trade deficits grew larger or surpluses grew smaller) with the majority of nations.  But that’s not what happened.  Of the 165 nations examined, our balance of trade in manufactured products worsened with only 76 nations (46%).  It actually improved with 88 nations (54%).  (South Sudan is new to the study and did not exist in 2010.) 

 

Evidence of The Role of Population Density in Trade Imbalances

Now, let’s break this down by population density – or, more precisely, by population density relative to that of the U.S. – to see if some relationship emerges.  Of these 165 nations, 111 are more densely populated than the U.S.; 54 are less densely populated.  If population density is not a factor in trade imbalances, then the number of nations with whom the U.S. experienced a worsening in its trade balance – 76 nations – should be distributed proportionately among these two groups – 51 nations among the more densely populated nations and 25 among the less densely populated nations.  But here’s what actually happened:

  • Of the 76 nations with whom our balance of trade worsened, 62 were nations more densely populated than the U.S.; only 14 were among the less densely populated nations.
  • Although only 33% of nations are less densely populated than the U.S., of the 88 nations with whom our balance of trade improved, 44% (39) were among that group. 
  • Of the 54 nations less densely populated than the U.S., the balance of trade improved with 39. 

That data on the change in our trade imbalance from 2010 to 2011 seems to show a relationship with population density.  But that’s just the change in the imbalance.  What about the imbalances themselves?  Of the 165 nations included in the study, the U.S. had a trade deficit in manufactured products with only 51 of them.  Since 67% of these nations are more densely populated than the U.S., we should find 34 of these trade deficits among the more densely populated nations and 17 of them among the less densely populated ones.  But here’s what actually happened in 2011:

  • Of the 111 nations that are more densely populated than the U.S., the U.S. had a trade deficit with 47.
  • Of the 54 nations less densely populated than the U.S., the U.S. had a trade deficit in manufactured goods with only 4. 
  • Of the 51 nations with whom the U.S. had a trade deficit in manufactured goods, 47 (or 92.2%) were with nations more densely populated than the U.S.  The four less densely populated nations with whom we had a trade deficit in manufactured goods were Estonia, Laos, Sweden and Finland.

That is powerful evidence of a a strong relationship between population density and trade imbalances in manufactured goods. 

 

What about Low Wages as a Cause for Trade Deficits?

Unfortunately, it’s not possible to evaluate the role of wages directly.  This would require knowing the unit labor costs for every product imported and exported, and doing a complicated calculation to determine the average unit labor costs for the sum total of imports and exports.  However, we do know the “purchasing power parity” (“PPP,” roughly the nation’s gross domestic product divided by its population) for each nation, and PPP gives us a pretty good way to compare relative wage rates of one nation vs. another. 

In terms of PPP, the U.S. is one of the wealthiest nations in the world and, therefore, its workers are among the best-paid.  With a PPP of $48,100, the U.S. ranks fifth among the 165 nations included in the study.  Only Qatar, the Falkland Islands, Norway and United Arab Emirates have higher PPP.  So 161 of the 165 nations included in the study have lower-paid workers than the U.S.  But, since we have a trade deficit with only 51 nations, this immediately casts doubt on the claim that low wages cause trade deficits.  If lower wages cause trade deficits, then we should be experiencing trade deficits with 161 nations – not a mere 51. 

OK, maybe much lower wages are required.  So let’s divide these nations around the median PPP of $8,000 – 82 nations above the median and 83 nations below.  Surely we will find our 51 trade deficits concentrated among the low PPP nations.  Right?  That’s the theory.  Now here’s the facts:

  • Of the 82 nations above the median PPP, the U.S. had a trade deficit in manufactured goods with 32. 
  • Of the 83 nations below the median, the U.S. had a trade deficit in manufactured goods with only 19. 

Not only does this data not support the claim that low wages cause trade deficits, it seems to be solid evidence that either exactly the opposite is true or, more likely, that the cause and effect are reversed.  It may be that a large trade deficit with a nation tends to boost wages in that nation by driving up the demand for labor to fill manufacturing jobs.  As an example, consider Germany and Japan – two relatively high wage nations.  When put in per capita terms (thus adjusting for the relative size of a nation), our trade deficit with each is far larger than our trade deficit with lower-wage China.  Why?  Because their high wages are the result of a prolonged, strong demand for manufacturing labor created by our demand for their exports.  Wages in China, much newer to the stage of world trade, are rising fast.  If something besides low wages is the cause of a trade deficit (like population density?), then it’s logical to expect that high wages in the surplus country will follow, as happened in Germany and Japan and as is happening now in China.

 

What about Currency Exchange Rates as a Cause of Trade Imbalances? 

Finally, let’s examine what role, if any, currency exchange rates play in driving trade imbalances.  Economists and political leaders have been blaming “currency manipulation” by China for their enormous trade surplus with the U.S.  By keeping the value of the Chinese yuan artificially low, they claim, China’s exports are cheaper while imports into China are more expensive to Chinese consumers.  On the surface, this argument seems to make sense.  But because it seems to make sense, perhaps too little effort has been made to validate that theory.  If that theory holds water, then an examination of changes in currency exchange rates for all 165 nations should find that our balance of trade has tended to improve with those nations whose currencies rose relative to the dollar, while worsening among those nations whose currencies declined.  Here’s what actually happened in 2011:

  • Of the 165 nations studied, 99 had a stronger currency in 2011 than in 2010.  19 experienced no change in exchange rate with the dollar.  Only 46 had weaker currencies. 

That fact alone already casts doubt on the currency theory since, as noted earlier, our overall balance of trade worsened in 2011.  Since the currencies of 99 nations (60%) – including China – rose in 2011 while only 46 nations (28%) saw a decline in their currencies, the U.S. should have experienced an overall improvement in its balance of trade.  It did not.  More facts: 

  • With the 99 nations who had stronger currencies, the U.S. experienced an improvement in the balance of trade in manufactured goods with 52 of them (52.5%). 
  • With the 19 nations with unchanged currency exchange rates, the U.S. experienced an improvement in the balance of trade with 12 of them.
  • With the 46 nations who had weaker currencies in 2011, the U.S. experienced an improvement in the balance of trade with 24 of them (52%). 

So an increase in a nation’s currency was just as likely to produce a worsening of our trade imbalance as an improvement, and vice versa.  In other words, there’s absolutely no relationship between currency valuation and trade imbalance evident here. 

I’ll be the first to admit that a one-year move in currency exchange rate may not be enough to change the momentum of trade imbalances.  However, I’ve previously conducted a similar study of the effect of 18-year changes in currency exchange rates and found exactly the same thing.  (See https://petemurphy.wordpress.com/2010/11/17/study-finds-no-relationship-between-currency-exchange-rate-and-trade-imbalance/.)

How can this be?  Perhaps looking at it from another angle will shed some light. 

  • Of the 51 nations with whom the U.S. had a trade deficit in manufactured goods in 2011, 40 nations’ currencies rose in value.  Two were unchanged.  Only 9 experienced a decline in their currency.
  • Of the 114 nations with whom the U.S. had a trade surpluse in manufactured goods in 2011, 37 experienced a decline in their currency. 

From this we can conclude that currencies rise relative to the dollar in response to trade surpluses with the U.S.  However, changing exchange rates have absolutely no effect in reversing trade imbalances.  Therefore, those who pin their hopes on a rising Chinese yuan to bring manufacturing jobs home from China are going to be sorely disappointed, just as they have been as the yuan has risen in value for years.  Our trade deficit with China has only grown worse, just as our trade deficit with Japan only grew worse as Japan’s yen rose by over 300% over the past three decades. 

Conclusion:

From the United States’ 2011 trade data we can conclude two things: 

  • it’s population density that drives our trade imbalances.
  • wages and currency exchange rates play absolutely no role in those imbalances. 

I’ll be presenting some even more fascinating facts from the 2011 trade data in upcoming posts.  Unfortunately, those posts will probably have to wait for a couple of weeks.  But stay tuned!  You won’t want to miss them.

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5 Responses to Surprising Facts About 2011 U.S. Trade Data!

  1. Tom T. says:

    Hey, Pete, just a few thoughts—-. I studied many of the type of statistics you use to determine elasticities (the slope of the demand curve of imports/exports) based on known factors that affect goods based on economic theory. One of the quick and obvious conclusions was that in international trade, none of the normal factors, some of which you hit on, are as causal as they may be in a homogeneous economy. The factors of global trade have more to do with whatever policy a country might have and enforce than economic factors, although they can be influenced by them.

    One of the problems in your analysis is coming to conclusions based on the assumption of homogeneous countries, which of course they are not. Neither are your numbers weighted and instead give equal credence to small trading countries with respect to all others.

    It must also be noted that China does not have a floating currency nor a free market economy. The Chinese government is more like a communist totalitarian enterprise where the normal balances of labor, input costs, externalities and other factors are not anything comparable to the U.S,. economy. At any time, a policy by China to capture a market can be done because they capture earned dollars instead of having a free exchange in currency or in goods. Basically, the Chinese government can look at the U.S., see what industries earn profits in its economy, and use a variety of tools at their disposal including cheap labor. The Chinese workers get paid in Yuan which is not really convertible by them into U.S. goods. China can use its dollars earned to buy raw materials from the likes of Iran (at discount rates due to the current sanctions) and at the same time increase their own interests by checking the U.S. interests in relation to countries like Iran.

    In the end, it is what a country allows or does not allow to be sold or bought from other nations. Usually the Free Trade Agreements have corporations wishing to tap into another country’s markets push these trade agreements with their resulting trade.

    Tom T.

    • Pete Murphy says:

      Tom, you’ve hit on a number of issues here, so I’ll try to take them in order. First of all, regarding countries’ trade policies, remember that virtually all trade policy is dictated by the World Trade Organization – at least for its member nations – which is the vast majority. The WTO makes no bones about the fact that it actually enforces protectionist tariffs in favor of two thirds of its member states – developing nations – at the expense of the others, primarily the U.S. So that can explain some of the imbalance. However, it doesn’t explain the huge imbalances that the U.S. has with other developed, but badly overpopulated nations like Japan and Germany, just to name a couple.

      I’m not sure what you mean by “homogenous” nations but, regarding your comment about “giving equal credence” to small nations, two comments are in order. First of all, I completely excluded nearly a third of all nations from the analysis because they are so small. No small island nations are included, not so much because of their size but because they enjoy unique economies based almost solely on tourism, with virtually no manufacturing involved. Secondly, it’s actually critical to the analysis to treat all remaining nations the same by expressing the trade deficit in per capita terms. Otherwise, one comes to the conclusion (as our political and economic leaders do) that China is the big problem. However, once the trade data is expressed in per capita terms, it becomes clear that our trade results with China are very consistent with the results we experience with other densely populated nations and, thus, the real problem is our own trade policy – not some sort of cheating by any one country.

      I know all about the tactics China uses to hold down the value of its currency. They’re no more adept at it than the Japanese have been for decades. But the fact remains that, in spite of the Chinese yuan rising by over 25% in the past few years, our trade deficit with China has actually exploded instead of moderating – exactly the opposite effect of what economists would predict. The same thing has happened with Japan for three decades. I don’t know if you’ve examined my data on changes in currency exchange rates vs. changes in trade balances, but I’ve compiled the data for every nation and can say definitively that there is absolutely no relationship.

      These are all arguments employed by free trade advocates to create the impression that free trade can be made to work if only we are patient with efforts to fix these problems, when the fact is that trade deficits are virtually inescapable when attempting to trade freely with overpopulated nations. The data supports that conclusion.

      • Tom T. says:

        Pete, I totally agree with you on your analysis that the free trade advocates have a lot of things wrong with their theories.

        By homogenous I meant that countries all have different places in development, income differences, legal differences etc.

        We are more homogeneous with nations like Canada and perhaps our European trading countries.

        China has more than a yuan undervaluation. They just simply don’t have a floating exchange rate nor do they have the ability to buy U.S. goods without the Chinese government approval. The Chinese government is approving raw resources or machinery (much from Germany) that would help them manufacture and capture U.S. markets in those goods. The way the Chinese operate, there really are not free market forces as the Chinese government can trump any free market force they want. They make the rules.

        In the case of Japan, the Japanese yen was undervalued on purpose by the Japanese for years. They wanted in on manufacturing for the U.S. They also had non tariff barriers like not inspecting shipments or delaying them to cause a competitive disadvantage towards imports.

        We don’t have to have trade deficits with China. We do because our policy allows it. The politicians want more ties with China instead of fighting them, Bill Clinton wanted to share some of the wealth the U.S. generated and had a policy kind to trade with them. The “investors” wanted to invest in China to capture perceived future markets there and to get goods cheaper than what they could make in the U.S.

        China wanted the economic activity and with their non floating currency system, are able to control all dollars earned through commerce for them to control (the totalitarian thing). Normally a country gaining huge amounts of another country’s reserves would have an increase in the strength of their currency because they would just have too many dollars. The Chinese ended up using their dollar earnings to lend to the more than willing politicians in the U.S. This did two things: One, it allowed politicians to borrow without it affecting U.S. domestic interest rates because of the increased demand (the demand was being supplied with China’s supply of dollars) and two, it allowed China to continue to suppress the value of the yuan. In essence, the U.S. was selling U.S. manufacturing to China in return for getting a great deal on their excessive borrowing and spending. Since the Chinese goods had a deflationary impact (due to the lower cost of their goods and the gradual loss of the buying power of the former U.S. workers) the inflationary impacts of U.S. govt. spending was canceled out.

        When it comes to trade, and especially when a country controls their currency as China does (people earning dollars in China don’t get to keep dollars– the government keeps them and gives them yuan), none of the free trade mantra works because the Chinese govt. controls the trade through their control of the currency.

        There have always been countries that pegged their currency on another larger country. Much of French Africa pegged their currency on the franc. Those small countries you took out of your analysis may have included some of these countries. These countries have little impact on the trade patterns because their economies are so small.

        The added problem we have with the dollar is that due to the U.S. being a superpower, our currency will have a tendency to be overvalued because of the “safety” of the currency based on the U.S.’s stability in the world. Another biggie is that we negotiated for all oil to be sold on the world markets in dollars. Now any country wanting to buy oil has to pay for it in dollars unless they can make another bartering arrangement on the side.

        To sum it up, there is a huge amount of manufacturing leaving this country because the U.S. has allowed it. While other countries have become innovative in taxing policy, like VAT taxes, the U.S. has not been competent on those issues and so has a competitive disadvantage when it comes to tax policy and shipping of goods overseas. We do not collect VAT taxes on imported goods and other countries do but it is one of many, many ways a country can get a hand up in the trade game.

        The “free traders” are willing to allow these things to happen (partly because they are the ones benefiting from these policies or are simply duped) with some mistaken ideological world that simply does not exist in reality. That gets back to the homogeneous argument.

        Without floating markets and an ability to stop countries like China from capturing dollars earned instead of allowing them to go to the private sector where they can be turned into demand the game is rigged. China will continue to undermine the capitalist country’s economies as they capture their employment in manufacturing.

        We are looking at George Orwell’s world, “1984” where we all become pawns of the oligarchs pulling the strings of power. All sovereignty will be sold to these people just as is in China.

      • Pete Murphy says:

        Tom, you seem to be having difficulty buying into the theory that population density plays a critical, dominant role in determining trade imbalances. Have you read my book? If not, I strongly encourage you to do so. It contains data that you can’t find on this web site – data that proves that population density has a dramatic impact on per capita consumption. (I put a great deal of effort into writing and publishing that book and, thus, don’t want to give everything away for free on this web site.) Without that foundation, I can understand why it’s difficult to accept the link between population density and trade.

        One final word about currency exchange rates. What little relationship there is between exchange rates and trade imbalances is exactly the opposite of what most people believe. Exchange rates change in response to trade imbalances, not vice versa. The currency of a country with a large trade surplus will strengthen relative to the currency of the nation with the deficit, but never to the point where it begins to reverse the imbalance. Three decades ago, the Japanese yen traded at 300 to the dollar. Today it is 78. Yet, our trade deficit with Japan is now far worse. The yen rose in response to Japan’s growing trade surplus. Our trade deficit did not decline in response to our weakening dollar. There’s never been a case where a change in exchange rate reversed a trade imbalance.

        Regarding the whole “borrowing from China” thing, you seem to believe that the trade deficit with China is a conspiracy to sell our manufacturing sector to China in exchange for their willingness to finance our deficit spending. There’s no conspiracy. It’s the natural consequence of engaging in free trade with a country with whom, thanks to their serious overpopulation, we never had any chance of avoiding an enormous deficit in manufactured goods. Every dollar spent on foreign goods, whether they are Chinese goods or anyone else’s, must return to the United States. The U.S. is the only place where they are legal tender. (You correctly pointed out that they are also legal tender for oil. That’s true, but that then leaves the oil-producing country with the task of plowing those dollars back into the U.S.) Those dollars can return to the U.S. in several ways: to buy U.S. exports, for direct investment in the U.S. (like when Toyota builds a manufacturing plant in the U.S.), to purchase private equities (stocks and bonds), and to buy government securities.

        Badly overpopulated countries do buy some exports from the U.S., but not nearly as much as they export to us. They’re incapable of consuming their own domestic production, so there’s little market left for American exporters. For the same reason, net direct investment is actually negative. American companies invest far more overseas than foreign companies invest here. Besides, foreign companies and governments already own virtually everything there is to own in the U.S. Climb to the highest mountain and look around. Everything you see – as far as you can see – is probably foreign-owned, either directly or indirectly through the purchase of mortgage-backed securitites and credit default swaps. If you’re a homeowner and have a mortgage, that mortgage was almost surely sold to a foreign investor in the form of a mortgage-backed security.

        Since our trade deficit erodes the profitability of companies, it makes no sense for foreign entities to invest those trade dollars in private equities. If they did (to any great extent), it’d soon produce a bubble in the market, just as it did in the late ’90s.

        That leaves only one place for them to put their trade dollars – in government securities. And there’s no shortage of the government securities (or debt), since the government has to spend more than it takes in in order to plow back into the economy those dollars that were removed by the trade deficit.

        Everyone who wrings their hands over deficit spending and the national debt should be focused more on the trade deficit and less on taxes and spending if they really want to break the debt cycle.

      • Tom T. says:

        Pete, you have many more things right than the simplistic views of many “free traders”. Under the rules of the free traders, the resources of other countries is ready for their grasp. In high population countries this means labor (sophisticated in Japan and less so in China and in Bangladesh). In many of these countries it isn’t the people actually working who are making the money, it is their employer. In China those employers are all members of the communist party. In other countries it is a national or foreign oligarch or both on the rise. The current free trade system does nothing to promote the general welfare of the actual people making the parts but accrues resources to their bosses. Yes, there is pressure put on labor prices to go up because the demand for labor is gong up but it is miniscule. The largest share goes to the oligarchs setting up the systems that undercut all of the production and labor rules in the United States through competition from third world countries or first world in the case of Japan or Germany who see the system as it is.

        I don’t want to throw any water on your theory you are developing. I just want you to get the causality right.

        I think you are totally right in showing that the free trade theory is not working as it was sold. It is only increasing the wealth of average China or Bangladesh marginally so that they are net importers of U.S. goods or services– or even balanced— unless you are talking about capital being accumulated and skimmed off the top.

        In essence, what we are seeing is businesses arbitraging the differences between the standard of living in other countries (many high population countries) with that in the U.S. by producing in other countries and selling into U.S. markets (while taking their profits in that arbitrage).

        Because many of these countries have upper management (in the case of China– the government) or the oligarchs funding these operations to arbitrage these differences capturing the majority of profits. Without profits going to the actual workers, the workers find themselves in the same position more and more Americans find themselves in—smaller and smaller (the low wage countries never get much more than subsistence incomes) incomes that do not even allow them the luxury of buying the goods they produce. The substitution of foreign goods for domestically produced goods has decreased the wages in the United States and increased the bargaining power of the wage demanders (employers) allowing them to make more profits (with what wasn’t leveraged down) even as the economy was eating itself.

        I like your theory and agree with your facts but the causality of that theory must also be in the equation or it is just coincidence. You and I both know that it is the coincidences that are allowed through government policy that allows these things to happen.

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