America’s Best Trading Partners

A few days ago, we looked at the list of America’s worst trading partners – the countries with whom, on a per capita basis, we rack up the worst trade deficits in manufactured goods – and saw that the list was dominated by nations that are much more densely populated than the U.S.  Clearly, population density is the dominant force in driving trade deficits with overpopulated nations.

But what about the other end of the spectrum?  If there is truly a relationship between balance of trade and population density, then we should see exactly the opposite effect in trade with nations less densely populated than the U.S.  A list of our top trade surplus nations (again, on a per capita basis) should be dominated by nations with a lower population density.

Here’s the list:  Top 20 Surpluses, 2014.  Thirteen of these twenty nations are, in fact, less densely populated than the U.S.  But there are seven that aren’t.  In fact, some are much more densely populated than the U.S.  What’s special about these nations?  First of all, I’ve marked with an asterisk and high-lighted in yellow those nations that are net oil exporters.  Whether or not they are more densely populated than the U.S. (four are, three aren’t), there’s a solid explanation as to why we have a trade surplus in manufactured products with them.  It’s because all oil is priced in U.S. dollars.  As a result, they are flush with dollars that, ultimately, can only be spent in the U.S. on either U.S. products or U.S. investments.  You may argue that lots of places in the world accept U.S. dollars.  That’s true but, ultimately, all U.S. currency must eventually return to the U.S.  So it’s inescapable, really, that net oil exporters will be net consumers of American products.

Consider Canada.  They are a net oil exporter to the U.S.  In fact, they’re our largest source of imported oil.  But they’re also a large country with a very low population density.  As a result, we have a big surplus of trade in manufactured products with Canada.  How much is due to which factor?  Well, since 2005, our trade deficit in oil with Canada has grown by 44%.  But our trade surplus in manufactured goods with Canada has grown almost 30-fold.  Clearly, it’s their low population density that is the driving force.

We see the same thing with Norway.  Although they’re an oil exporter, our trade deficit in oil with Norway has actually shrunk by 91% in the past ten years.  In spite of that, our surplus in manufactured goods has grown by 611% over the same time frame.  Again, it’s clearly Norway’s low population density that is driving the surplus.

Of the 20 countries on the list, there are really only two that seem to defy both the oil and population density explanations:  Belgium and The Netherlands.  They are the only European nations on the list (except Norway).  Both are tiny, neighboring nations and both are very densely populated.  Neither is an oil exporter.  But the Netherlands has the only deep water port on the Atlantic side of the European continent and is a major transportation hub for Europe.  Belgium has river access to the same port and is also a major transportation hub.  It seems that both have used their strategic location to build their economies around trade.

A couple of other observations are in order.  The average population density of the nations on this list is 202 people per square mile.  Compare that to 539 per square mile for the nations with whom we have the worst per capita trade deficits in manufactured goods.  Secondly, note that America’s surplus grew in the last ten years with 18 of the 20 nations on this list – many quite dramatically.  Conversely, our trade deficit worsened over the past ten years with 19 of the nations on the list of our 20 worst deficits.  So, not only does population density determine whether we’ll have a trade surplus or deficit in manufactured goods with any particular nation, but the effect of population density is intensifying dramatically over time.

Still not enough proof for you that it’s population density that drives trade imbalances?  Stay tuned.  The best stuff is yet to come.

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