U.S. Trade with The E.U.

In his State of the Union address in February, President Obama called for a new free trade deal between the U.S. and the European Union, or EU.  (See this article for more information:  http://www.nytimes.com/2012/11/26/business/global/trade-deal-between-us-europe-may-pick-up-steam.html?pagewanted=all&_r=0.)

It’d be a huge deal, no doubt.  But would it be a good deal for the U.S.?  Since the signing of the Global Agreement on Tariffs and Trade in 1947 and since the inception in 1995 of its offspring, the World Trade Organization, the U.S. has been steadily moving toward freer trade with the rest of the world, including the 27 member states of the Euroean Union.  It only makes sense to examine the results of free trade with the EU thus far before deciding whether or not a further move toward freer trade would be a good deal for the U.S.

But first, a few facts about the EU are in order.  The European Union was established in 1993 and includes 27 members:  Austria, Belgium, Bulgaria, Cyprus, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and the United Kingdom.  In other words, most of Europe, with a couple of noteworthy exceptions:  Norway and Switzerland. 

If the EU were a nation, it would be the 7th largest in the world in terms of suface area with over 1.6 million square miles and would be the 3rd most populous, with just over a half billion people, exceeded only by China and India. 

So how have we fared in trade with the EU, particularly in the all-important, job-creating category of manufactured goods?  Here’s a chart of our balance of trade with the EU since 2001:  EU.  As you can see, the U.S. suffers a large trade deficit with the EU.  Though it began to shrink beginning in 2006 – a process helped along no doubt by the overall decline in global trade that accompanied the onset of the “Great Recession” in late 2007, it began to deteriorate rapidly again in 2010.  In only three years since 2009, our trade deficit with the EU in manufactured goods has more than doubled. 

Now, let’s consider the factors involved:

Population Density:

With 503 million people, the population density of the EU, at 309 people per square mile, is only slightly less than that of China (359 per square mile).  It is approximately 3.6 times as densely populated as the U.S. (85 per square mile).  In per capita terms, our trade deficit with the EU in manufactured goods is $223, remarkably similar to our per capita trade deficit with China ($210).  Once again, we see that population density is a consistent predictor of whether we will have a surplus or deficit with any particular country and what the size of that imbalance might be expected to be. 

Currency Exchange Rate:

Economists are fond of blaming trade deficits on exchange rates that are kept artificially low by “currency manipulation,” accomplished by tactics such as currency printing by central banks.  The theory is that a currency that is kept artificially low makes that nation’s exports cheaper for American consumers while making American exports more expensive for that nation’s consumers. 

In 2012, the Euro weakened against the U.S. dollar by 14.3%.  And, in fact, as economists would predict, our trade imbalance with the EU worsened by 14%.  But that’s just one year in which the Euro took an uncharacteristic dip.  Since 2001, the Euro has risen by 31% against the dollar.  But, instead of improving, our trade imbalance with the EU worsened by 104%. 

Wealth:

Economists also blame trade deficits on low wages in other nations.  We have no data on average or median wages, but what’s known as purchasing power parity (“PPP”) – roughly a nation’s GDP (gross domestic product) per capita – is pretty analogous.  By that measure, the EU has a PPP of $34,500 and, if it were a nation, would rank in the top 20% of the world’s 229 nations.  The EU is not poor and wages are not low.  Since 2001, of the 26 EU member nations, 14 have experienced a PPP that has grown faster than the U.S.; that is, they have grown wealthier vs. the U.S.  In spite of that, our trade imbalance has actually worsened with 10 of these 14 nations. 

That leaves twelve EU nations whose wealth deterioriated vs. the U.S.  since 2001.  Of these 12 nations, our trade imbalance worsened with 9 of them. 

So, of these 26 member nations, our trade imbalance responded as economists would predict (based on the “low wage” theory) in 13 cases – exactly half.  In other words, there’s no relationship between low wages (or wealth) and trade imbalance whatsoever.   Falling wealth and wages are no more likely to worsen our trade imbalance than they are to improve it. 

Exports to the EU:

Well, OK, maybe our trade imbalance with the EU has worsened because we’ve imported more from the EU.  Maybe a new trade deal can make that up by boosting our exports to them, right?  Not likely.  In the past year, exports of manufactured goods to the EU actually declined by 1%.  This is in spite of President Obama’s goal of doubling exports within five years.  If the EU had any capacity for absorbing more American exports, shouldn’t we have seen some evidence of that in 2012 in light of the president’s push? 

Given the results of steadily liberalizing trade with the EU – results that were quite predictable given the relationship between population density and trade imbalances – further liberalization of trade with the EU makes absolutely no sense whatsoever.  It makes no more sense than liberalizing trade with China.  The result if the same.  It only makes sense to those vested in 19th century trade policy, economists too afraid of pondering the ramifications of population growth out of fear of being exposed as frauds.

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