The Problem with TPP

June 14, 2015

On Friday, the House of Representatives dealt a major blow to what would have been a crown jewel in President Obama’s economic plan – the “Trans Pacific Partnership” (TPP) trade deal that he has worked for his entire presidency.  It’s a good thing.  Had he gotten the fast track trade authority he was seeking in order to steamroll this trade deal through Congress, it may well have sounded the death knell for the American auto industry, and perhaps even American manufacturing in general.

The problem with TPP can be summed up in two words – population density – and its failure to take this factor into account.  The TPP is a deal that has been negotiated between the U.S. and eleven other countries:  Australia, Brunei , Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.  Of these eleven nations, five are less densely populated than the U.S. – Australia, Canada, Chile, New Zealand and Peru.  The United States enjoys a surplus of trade in manufactured goods with every one of them – a surplus totaling almost $103 billion.

Of the remaining six nations, one – Brunei – is a net oil exporter.  The U.S. enjoys a surplus of trade in manufactured goods with all net oil exporters since oil is priced in dollars, and dollars can only be spent in the U.S.  Another – Singapore – is a tiny city-state and the U.S. enjoys a surplus of trade with nearly all such city-states.  Why?  Because manufacturing requires some serious real estate, something that city-states lack.  Their dense populations necessitate an economy built around services, like banking, for example.  That leaves four nations more densely populated than the U.S. – Japan, Malaysia, Mexico and Vietnam.  The U.S. suffers a trade deficit in manufactured goods with all four nations – a deficit totaling almost $155 billion.

A surplus with all five less densely populated nations of $103 billion vs. a deficit with all four more densely populated nations of $155 billion.  This is no coincidence.  It’s yet another demonstration of the power of population density in driving global trade imbalances.  It dwarfs all other factors in international trade.  Low wages, currency manipulation, lax labor and environmental standards – none of these things amount to a hill of beans in comparison to the effect of population density.  Compared to the citizens of less densely populated nations, those living in intensely crowded conditions such as you find in these four nations consume comparatively nothing, but are every bit as productive.  The result is that these nations come to the trade table with massive labor forces desperate for work, but offer nothing in return except puny markets emaciated by low per capita consumption.  Huge trade deficits with such nations are inescapable without the use of tariffs.

Many believe that globalization and free trade has already wiped out tariffs.  It has eliminated and reduced many, but consider this:  the American truck market, unlike the automobile market, is still protected by a 25% tariff.  Because of this, virtually every pickup truck and every larger truck, up to and including semis, are built in the U.S.  Take away that tariff, as TPP has vowed to do, and you can kiss the U.S. truck industry goodbye.  One might argue that that isn’t so – that the U.S. auto industry still thrives without the tariffs.  However, it thrives not because of tariffs but because of quotas, something else that will vanish under TPP.  If the American truck-building industry and what’s left of the auto industry vanishes, there’s a good possibility that a domino effect may very well lead to the collapse of virtually all of American manufacturing.

Trade policy that fails to account for the effect of population density has proven to be an unmitigated disaster for the U.S. economy for decades.  President Obama seems hell-bent to make matters worse, just as he did with the deal with South Korea that, in only a couple of years, has cost thousands of Americans their jobs.  Let’s pray that our congressmen will continue to stand fast against any further such hare-brained deals.

America’s Best Trading Partners

June 7, 2015

In my previous post, we examined a list of America’s twenty worst per capita trade deficits in manufactured goods in 2013.  We saw that the list was heavily dominated by very densely populated nations.  Eighteen of those twenty nations were more densely populated than the U.S. (most being far more densely populated) and the average population density was 504 people per square mile – almost six times the population density of the U.S.  And we also saw that low wages had nothing to do with these deficits.  Most of these nations were among the wealthiest in the world.  We concluded that population density was clearly the driving force behind these trade deficits.

If that’s true – that population density affects our balance of trade – then we should see the opposite effect at the other end of the scale.  The list of America’s largest per capita trade surpluses in manufactured goods should be dominated by nations with lower population densities.  Here’s the list:  Top 20 Surpluses, 2013.  There are far fewer densely populated nations on this list, but there are seven that are more densely populated than the U.S.:  United Arab Emirates, Qatar, Belgium, Brunei, Panama, the Netherlands and Kuwait.  Of these seven, it’s important to note that four are oil exporters.  (Net oil exporters are highlighted in yellow.)  Since oil is priced in dollars, which can only be spent on U.S. products and services, it’s inevitable that these nations appear on the list, regardless of their population density.

That leaves only three of the twenty nations on this list that seem to defy the population density effect – Belgium, the Netherlands and Panama.  Belgium and The Netherlands are tiny, neighboring European nations whose economies are heavily dependent on trade and who take advantage of a unique asset –  they share the only European seaport on the non-Baltic Atlantic coast.  Both import and then re-sell American-made goods.

The average population density of the nations on this list is 197 people per square mile.  However, the weighted population density – the total population of the nations on this list divided by their total land mass – is only 17 people per square mile.  Compare that to 358 people per square mile – the weighted population density of the nations that account for our twenty worst per capita trade deficits.  17 vs. 358.  Could the role of population density in driving trade imbalances be any more clear?

It’s also interesting to note that the nations on the list of our best surpluses represent nine million square miles of the earth’s surface.  The nations that account for our worse deficits – deficits that total far more than our surpluses, represent only 5.4 million square miles.

Finally, it’s important to note that the average purchasing power parity (PPP) of the nations on our list of our best surpluses is $38,725.  That’s little different than the average PPP of the nations on the list of our worst deficits – $35,330.  In other words, wealth (analogous to wages) plays no role whatsoever in determining trade imbalances.

And yet we go on pretending that population density doesn’t matter, applying free trade policy to all of them, just as we have for well over a half century.