The word “trade” implies a mutually beneficial exchange of goods and services. I buy stuff from you and, in return, you buy stuff from me. A good trading partner is a nation that buys (imports) as much as it sells (exports). A bad trade relationship is one in which a nation sells (or exports) while buying little in return. Such a relationship isn’t mutually beneficial. In such a relationship, one nation creates jobs at the other’s expense and drains funds away from the other’s economy.
America’s free trade policy has resulted in both good and bad trade relationships. On balance, its many beneficial trade relationships have been more than offset by a minority of really bad ones. But what’s the best way to judge? Some differences in trade imbalances are due to a huge disparity in the size of nations. Is a big nation that maintains a large trade surplus with the U.S. any better than a tiny nation with a proportionately large imbalance? The only way to judge such imbalances fairly is to express them in per capita terms. That is, how much does each person in that nation buy from the U.S. vs. how much they manufacture and sell to us?
When expressed in per capita terms, the results are surprising. Here’s the list: Top 20 Deficits, 2012. The key take-aways from this list are as follows:
- Note the population density of the nations on this list. By comparison, the population density of the U.S. is approximately 86 people per square mile. Eighteen of these twenty nations are more densely populated than the U.S. Eight are more than five times as densely populated. In fact, the average population density of the nations on this list is 493 people per square mile – more than five times the density of the U.S. Only two are less densely populated – Sweden and Finland. When I first published this list in 2006 in Five Short Blasts, Sweden ranked number two. By 2012, they have fallen to number eleven. And their surplus with the U.S. has been reduced by half.
- Note the “per capita purchasing power parity (PPP)” of the nations on this list. By comparison, U.S. PPP is approximately $48,500. Most of the nations on this list are relatively wealthy nations, debunking the myth that trade deficits are caused by low wages. If low wages are to blame, how do you explain the presence of Ireland, Switzerland, Taiwan, Denmark, Germany, Japan and Austria (among others) in the top ten of this list? Also, the PPP of this list has risen dramatically in the past six years. (More on this topic in a later post.)
- Though China gets all of the attention for its massive trade deficit with the U.S., it barely makes the top 20 list, coming in at number 18. It has risen only one place on this list since 2006. In per capita terms, its trade imbalance with the U.S. is rather unremarkable relative to the other nations on this list. In fact, when you understand the role that population density plays in driving trade imbalances, the huge trade deficit with China, given its sheer size and enormous population, is exactly what should have been expected.
People who live in overcrowded conditions buy fewer products because they have no room to utilize them. They buy or rent smaller homes because there is no room for larger homes. They own fewer cars because their roads are choked with traffic and they choose mass transit instead. Because their homes are smaller, they buy less furniture, far less lawn and gardening equipment and smaller appliances. They buy less sporting equipment like boats, golf equipment, tennis equipment – you name it – simply because of the scarcity of resources for using such.
When two nations grossly disparate in population density atttempt to trade freely with each other, the work of manufacturing is spread evenly across the combined labor force, but the disparity in per capita consumption remains. They buy less from us than we buy from them. The result is inescapable – a trade deficit and loss of jobs for the less densely populated nation. In effect, a host-parasite relationship is established in which the more densely populated nation feeds on the market of the other nation. The less densely populated nation pays the price for the other nation’s overpopulation. It hardly seems fair, does it?