Trade Deficit with Japan Grows 22% in 2012

We now turn our attention to Japan, America’s 4th largest trade partner (by total imports and exports), accounting for 5.7% of all U.S. trade in 2012.  In 2012, the U.S. imported $141 billion in manufactured goods from Japan, an increase of $16.7 billion, while our manufactured exports to Japan rose by only $6.3 billion.  The result was that our deficit in manufactured goods with Japan worsened by 12.6%, contributing the lion’s share to an overall worsening of our trade balance with Japan of 22%.  If you’re president Obama, with his myopic focus on exports, the $6.3 billion increase can be ballyhooed as great news – as long as you’re dumb enough to turn a blind eye to the much worse increase in imports. 

It should come as no surprise that automobiles account for $37 billion of the imports from Japan, dwarfing the next biggest category of products – motor vehicle transmission and power train parts, at $6.2 billion.  That’s a $7 billion increase in imports of Japanese vehicles over 2011.   In comparison, the U.S. exported less than $1 billion worth of automobiles to Japan in 2012.  No suprise.  The Japanese auto market is so badly stunted by overcrowding that even Japanese auto companies have trouble selling vehicles there. 

Here’s a chart of our overall balance of trade with Japan, dating back to 2001:  Japan Trade

In response to my suggestion that the U.S. needs to change its trade policy and return to the use of tariffs to assure a balance of trade, people sometimes reply that “tariffs don’t work; they’ll just raise their tariffs too and we’ll lose all our exports.”  Or I hear that “you can’t do that; it’ll start a war.”  Well, here’s a link to an article that appeared on Reuters just a couple of days ago, reporting on Democratic lawmakers’ alarm that Japan might be included in Obama’s trade talks:

http://www.reuters.com/article/2013/03/15/us-usa-japan-autos-idUSBRE92D14A20130315

“In an industry with razor-thin profit margins, the elimination of the 2.5 percent car tariff (as well as the 25 percent truck tariff) would be a major benefit to Japan without any gain for a vital American industry, leading to more Japanese imports, less American production and fewer American jobs,” the lawmakers said in a letter to Obama.

… Levin (Michigan senator Carl Levin) … played a major role in persuading the Obama administration to renegotiate auto provisions of a free trade pact with South Korea.

The revised pact, which took force one year ago, allowed the United States to keep its 2.5 percent tariff on South Korean autos until the fifth year and to keep its 25 percent tariff on South Korean light trucks until the eighth year, when it will begin to be phased out.

Has anyone noticed that you don’t see any Japanese or Korean trucks on American roads (aside from Japanese-brand pickup trucks that are built in the U.S.)?  That’s because 25% tariffs have been extremely effective in keeping them out, preserving market share for American truck manufacturers.  And have you heard any Americans complaining about that?  Has anyone complained that shipping costs are too high because we don’t have enough cheap Japanese and Korean trucks in our trucking fleets?  Of course not.  People do complain about shipping costs, but that’s because of the high price of fuel.  Virtually no one in America even knows that we maintain high tariffs on Japanese and Korean trucks, with the exception of people employed in the truck-manufacturing industry – people who owe their jobs to those tariffs.

Why don’t we take the same approach with automobiles?  Since the Japanese and Koreans won’t buy our cars, why don’t we raise our tariffs on theirs?  Why don’t we take this same approach to all of our trade imbalances with other nations? 

As I’ve done in my previous articles on our top three trade partners – Canada, China and Mexico, let’s now take a look at how our trade balance with Japan has responded to changes in Japan’s currency and Japan’s purchasing power parity – or PPP – analagous to Japanese wages.  Economists are fond of blaming trade deficits on artificially low currency values and on low wages.  Here’s a chart of our trade deficit in manufactured goods with Japan vs. the yen-dollar exchange rate:  Japan Trade vs Exchange Rate

As you can see, while the yen held steady in value in 2012, our trade imbalance with Japan worsened dramatically.  In fact, over the past eleven years, while the yen has appreciated in value by 37% – rising in value from 124.4 yen per dollar to only 79.22 yen – our trade deficit worsened by 14%, rising from $80 billion in 2001 to $91 billion in 2012.  This is exactly the opposite of what economists say should happen.

In the meantime, Japan’s PPP has increased by almost 40%, rising from $25,900 in 2001 to $36,200 in 2012.  Of course it’s gone up.  The Japanese are getting richer from their growing trade surplus.  In the meantime, Americans’ median income has actually declined.  Here’s a chart of our trade deficit in manufactured goods with Japan vs. the rise in their PPP:  Japan Trade vs PPP

Once again, we see that the “low wages” theory doesn’t hold water.  Our trade deficit with Japan gets worse as their wages have risen.  And, in terms of PPP, Japan ranks among the top 16% of the wealthiest nations on earth.  They’re not a “low wage” nation at all.  In fact, our trade deficit in manufactured goods with Japan, expressed in per capita terms,  is three times worse than our deficit with China, in spite of the fact that wages in Japan are four times higher than Chinese wages.  How do you explain that? 

The explanation is that low wages and currency valuations have almost nothing to do with trade imbalances, while they have everything to do with disparities in population density between the U.S. and its trading partners.  So far, with America’s top 4 trading partners, accounting for 48.7% of all of our trade, population density accurately predicts the balance of trade with all four, while the currency valuation theory is batting only .500 and the low wages theory is batting .250.

In my next two articles, we’ll focus next on our 5th largest trading partner – Germany, followed by an overall assessment of trade with our top 15 trading partners.  Stay tuned.

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