America’s enormous trade deficit in manufactured goods – $423.4 billion in 2011 – is often blamed on low wages in foreign countries. China is the most frequently cited example.
However, this claim isn’t supported by the facts. I recently completed an analysis of U.S. trade with 165 nations, divided into groups by “purchasing power parity,” or “PPP.” PPP (which is pretty close to the gross domestic product of a nation expressed in per capita terms) is an approximate measure of the wealth of each nation and a good measure of relative wages paid there. Here’s what I found:
- With the bottom half of nations in terms of PPP – those with PPP below $7,800 per person per year – the poorest, lowest wage nations – the U.S. had a trade deficit in manufactured goods in 2011 of $22.9 billion.
- With the upper half of nations in terms of PPP, the U.S. had a trade deficit in manufactured goods in 2011 of $400.6 billion. Same number of nations, but a trade deficit 17 times worse than with the lowest-wage nations.
Now, admittedly, even the median PPP is pretty low. So, instead of dividing these 165 nations in half, let’s divide them into five equal-sized groups, with the same number of nations in each group. This means that 33 nations are included in each “quintile” of PPP. The following is the breakdown of PPP of each 20% of nations:
- The top 20% includes nations with PPP ranging from $102,700 (Qatar) to $25,900 (Czech Republic).
- The 2nd 20% includes nations with PPP ranging from $24,000 (Saudi Arabia) to $11,200 (Montenegro).
- The 3rd 20% includes nations with PPP ranging from $11,000 (South Africa) to $5,100 (Morocco), and includes China ($8,400). Speaking of China, only a few years ago they were among the 4th quintile of nations, not the 3rd. Since then, their wealth and wages have soared. Instead of declining as a result of their rising wages, our trade deficit with China has exploded.
- The 4th 20% includes nations with PPP ranging from $5,100 (Syria) to $1,900 (Chad).
- The lowest 20% includes nations with PPP ranging from $1,800 (North Korea) to $300 (Congo, Kinshasa).
Here’s a chart of how our trade deficit in manufactured goods in 2011 breaks down along these five groups of nations: Trade by Quintile of PPP.
Here are the key take-aways from that chart:
- Contrary to the claim that low wages cause trade deficits, the U.S. actually has a small surplus of trade in manufactured goods with the 33 poorest nations.
- With the 33 next poorest nations, the U.S. has only a very small trade deficit in manufactured goods – $28.7 billion.
- The U.S.’s largest trade deficit in manufactured goods – $289.4 billion – is with the middle 33 nations. However, that group includes China. Take away China, and the U.S. actually has a small surplus of trade ($13.0 billion) with the remaining 32 nations in that group as well.
- The U.S. also has a small surplus of $17.6 billion with the second richest group of 33 nations.
- Aside from China (mentioned above), the U.S.’s worst trade deficit – $124.1 billion, is actually with the wealthiest 20% of nations. This list of nations includes Germany, Japan, South Korea and Israel, among others. Of the 33 richest nations, 23 are more densely populated than the U.S.
There is absolutely no correlation between low wages and trade deficits evident in the U.S. trade data. In fact, it is among the wealthiest nations (and with China, where wages are rising fast), that the U.S. has the worst trade deficits in manufactured goods. If you think about it, it makes sense. High wages in those nations are the result of their large trade surplus with the U.S. and the rest of the world. How can a nation remain poor when American dollars are flooding its economy? It can’t. It’s impossible to have a large trade deficit with a poor, low wage country, at least for any length of time.
The next time you hear that low wages in foreign countries drain manufacturing jobs away from the U.S., tell the person making that claim to check the facts.