America’s Best Trade Partners, 2015

In my previous post, we examined the list of America’s worst trading partners in 2015 and found that it was heavily dominated by nations that are much more densely populated than the U.S.  Additionally, we saw that low wages, often blamed by the ill-informed for our trade deficit, played no role whatsoever.  In fact, the very top of the list was populated with wealthy nations – some even wealthier than the U.S.

If, in fact, population density is what really drives global trade imbalances, then we should see the same effect at the opposite end of the spectrum.  That is, we should find a list of nations with whom we have the largest surpluses dominated by low population densities.  Let’s take a look.  Here is the list of America’s twenty largest trade surpluses in manufactured goods in 2015:  Top 20 Surpluses, 2015.

At the very top of the list is Canada, by far and away America’s best trading partner.  At $50.2 billion, our surplus with Canada is more than 2-1/2 times larger than the next biggest surplus on the list.  In the past ten years, our surplus with Canada has exploded by 245%.  With a population density of only ten people per square mile, Canada is one of the least densely populated nations on earth.

But as you scan down the list, you see a mix of nations with both low and high population densities.  At first glance, this would seem to cast doubt on the whole population density theory, until you realize the role that oil plays in landing some of these nations on this list.  Oil is universally priced in American dollars, regardless of the nation that is exporting the oil.  American dollars are legal tender only in the United States so, ultimately, all of those dollars must be returned to the U.S.  This happens predominately through either the purchase of American goods or through the purchase of American debt – bonds issued by the government or by American corporations.  So it’s almost automatic that net oil exporters like Qatar, Kuwait and Nigeria, among others, appear on this list in spite of their high population densities.

Actually, Canada is America’s biggest source of imported oil, which helps to explain their position on the list.  That, coupled with their low population density, is what has driven them so far to the top.

If we discount the seven nations on the list who are net oil exporters, of the remaining thirteen only three have population densities that are above the world median:  the Netherlands, Belgium and Egypt.  Seven of the thirteen are less densely populated than the U.S. (at 87 people per square mile).  Regarding the Netherlands and Belgium, these tiny nations share the only deep-water port on the Atlantic coast of Europe and use that to build their economies around trade, importing American goods and redistributing throughout Europe.  Egypt appears on the list because they are a big recipient of foreign aid.  All foreign aid is booked as exports at face value even though it is given away.

The average population density of these twenty nations is 240 people per square mile, in contrast to the average population density of 737 people per square mile on the list of our worst trade partners.  But it’s a little misleading to average the figures in this way, since the population density of a few tiny nations can skew the data.  If we calculate the population density of the list by dividing their total population by their total land mass, the population density drops to 45 people per square mile – half that of the U.S.  For the list of our twenty worst trading partners, that figure is 503 people per square mile – more than ten times as densely populated.

Look at the purchasing power parity of this list of nations.  Take away tiny, inordinately rich Qatar, and the average wealth of the remaining nineteen nations is $32, 268 – almost identical to the average wealth of the nations on the list of our twenty worst trading partners.  So wealth – roughly analogous to wages – plays no role on these two lists whatsoever.

Now let’s look at this from another perspective.  If we factor out the sheer size of nations, which nations’ citizens, man-for-man (in per capita terms), are our best trading partners?  If population density is a factor in determining trade imbalances, we should once again see a list that is dominated by less densely populated nations and, probably, net oil exporters.  So here’s the list:  Top 20 Per Capita Surpluses, 2015.

Though the list is a little different now, we see the same thing.  There are seven net oil exporters on the list.  Of the remaining thirteen, all but three – the Netherlands and Belgium again, and Costa Rica – have population densities less than the global median.  Of the remaining ten, all but one – Panama – is less densely populated than the U.S.  The average density for these twenty nations is 206 people per square mile.  But the population density of the group as a whole – the total population divided by their land mass – is down to 20 people per square mile.  For our worst trade partners, that figure is 372 people per square mile.  It bears repeating.  The population density of our twenty worst trade partners is more than 18 times that of our best trade partners.

The data that I’ve presented here in my last few posts is absolute, undeniable proof that population density is what drives global trade imbalances.  Not wages.  Trade policy that fails to recognize this relationship and fails to employ some mechanism (like tariffs) to maintain a balance of trade is doomed to yield the huge trade imbalances that have been growing and eroding our economy for decades.

 

America’s Worst Trading Partners in 2015

It’s time for my annual ranking and analysis of America’s best and worst trading partners for 2015.  No surprise, it was another dismal year for American manufacturers, racking up the 40th consecutive year of trade deficits and setting a new record in the process – a deficit of $648 billion.  That surpasses last year’s record deficit by a whopping $109 billion.

Since the surpluses of trade with our best trade partners is overwhelmingly swamped by the deficits with our worst partners, let’s begin there.  This year I’m going to first present the list in the most basic terms – a list ranked in order of the sheer size of the deficits. Check out this list of America’s twenty worst trade partners in terms of our deficit in manufactured products:  Top 20 Deficits, 2015.

The nations at the top of this list should come as no surprise to anyone.  Trade with China dwarfs them all with a deficit of $367.5 billion – more than four times larger than our second largest deficit with Japan.  That’s not surprising when you realize that China has ten times as many people as Japan.  China actually accounts for about one fifth of the entire world’s population.  The following are some other key observations about this list:

• Look at the population density of these nations.  The average population density is 737 people per square mile.  That’s eight times the density of the United States.  With only one exception – Sweden – every nation on this list is more densely populated than the U.S.  Most are much, much more densely populated.
• Eight of these nations are wealthy European nations.
• Over the past ten years, our trade deficit has worsened with 17 of these nations.  Most have worsened dramatically.  The nation with whom our balance of trade has improved the most (that is, with whom the deficit has declined the most in the past ten years) is Sweden – the only nation on the list less densely populated than the U.S.
• Our trade deficit with Japan has actually declined by 18% over the past ten years.  Why?  Simple.  South Korea is “eating their lunch.”  Imports of South Korean cars – Hyundais and Kias, along with imports of South Korean appliances like those made by LG, Samsung and others – has cut into Japan’s market share.  Remember when President Obama signed a new trade deal with South Korea in 2012, proclaiming it a “big win for American workers?”  In three short years our trade deficit with South Korea jumped 50%.
• Our fastest growing trade deficit is with Vietnam, growing by 440% in the last ten years.  Some may point to the fact that at $6100 per person, Vietnam has the lowest purchasing power parity of any nation on this list – only slightly better than India – and that this is the reason for the explosive growth in our trade deficit with them.  However, our second-fastest growing trade deficit is with Switzerland, a nation that is actually more wealthy (with higher wages) than the U.S.  What Vietnam and Switzerland do have in common is a high population density.  It’s the one thing that (nearly) all of these diverse nations have in common.

Many people will look at this list and quickly conclude that, when it comes to our trade deficit, the problem is China and so that’s where we should focus.  Somehow, some way, they’re obviously not playing fair with us.  They’re manipulating their currency, they’re ignoring workers’ rights.  They’re trashing the environment.  And so on.  So let’s get tough with China.

The problem is that China can legitimately complain that of course our deficit with them is big, simply because they are a big nation.  Person-for-person, our trade deficit with Japan is worse.  OK, so in an effort to be fair, let’s broaden our efforts to include Japan.  “Not so fast!” the Japanese will complain.  “What about Germany?  Their surplus with you is nearly as large and they have only half as many people as we do!”

The point is that in determining the root cause of these enormous deficits in order to formulate an effective trade policy, we need to factor out of the equation the sheer size of these nations.  Let’s determine who are really our worst trade partners on a person-for-person basis.  So here’s a list of our worst trade partners in terms of the per capita trade deficits:  Top 20 Per Capita Deficits, 2015.

Now we can see what a mistake it would be to simply conclude that China is the problem.  In per capita terms, they barely make the list of the top twenty worst deficits.  In fact, there are now ten European nations on this list and, in per capita terms, our trade deficit in manufactured products is worse with all ten of them than it is with China.  Here are some more key observations about this list:

• Once again, all but two of the nations on this list – Sweden and Finland – are more densely populated than the U.S.  Most are far more densely populated.  Only three have population densities less than the median population density of the world, which is 184 people per square mile.  One – Ireland – is right on the median.  The other 80% of the nations on this list are much more densely populated.
• Most of these are wealthy nations, with an average purchasing power parity of $44,370 per person.  In fact, the top of the list is dominated by the wealthiest.  Clearly, the argument that low wages cause trade deficits doesn’t hold water.  If anything, the cause and effect is exactly the opposite.  Running large trade surpluses makes nations wealthier.
• There is one nation on this list that is a net oil exporter – Mexico.  I point this out because oil is priced in U.S. dollars, and every dollar spent on oil produced by foreign countries must be repatriated to the U.S., since that is ultimately the only place where they are legal tender.  Those dollars are repatriated in several ways, primarily through the purchase of American bonds or through the purchase of American goods.  The latter tends to make net oil exporters strong buyers of American products, which usually means that the U.S. enjoys a surplus of trade in manufactured products with such nations.  But not Mexico.  What this means is that the large trade deficit in manufactured goods that we have with Mexico is actually even worse than it appears.  For a nation whose population density is one of the lowest on the list – less than twice that of the U.S. – it means that something beyond population density – such as some unfair trade practice – is at work here.  Ditto for Ireland, which has fashioned itself into a tax haven for manufacturers, virtually bankrupting itself during the “Great Recession” of a few years ago.

If you are seeing such data for the first time, it may be a little early, based on this data alone, to conclude that population density is the driving force behind trade imbalances.  More proof is needed.  If such a relationship exists, then we should see exactly the opposite at the other end of the spectrum.  We should see a list of America’s best trade partners – those with whom we have trade surpluses – loaded with nations with low population densities.  We’ll take a look at that list in my next post.

If you’re already acquainted, however, with the relationship between population density and trade imbalances, which I explored thoroughly in Five Short Blasts, then this data is just further proof that population density is, in fact, the driving force behind these trade imbalances.  Such deficits are inescapable when applying free trade theory, which fails to account for large disparities in population density, to such nations.  It will only get worse with each passing year, exactly as we have seen.

 

Overpopulated Nations Sucking the Life out of American Manufacturing

I’ve finished my analysis of trade in manufactured goods for 2015 and the news isn’t good.  The effect of attempting to trade freely with nations that are much more densely populated than our own intensified yet again in 2015, dragging our deficit with those nations to a new record.

Check out this chart:  Deficits Above & Below Median Pop Density.  First, some explanation of the data is in order.  I studied our trade data for 166 nations and separated out those product codes that represent manufactured products.  Subtracting imports from exports, I was able to determine the balance of trade in manufactured goods for each.  I then sorted the data by the population density of each nation and divided these 166 nations evenly into two groups:  those 83 nations with a population density greater than the median (which, in 2015, was 184 people per square mile) and those 83 nations with a population density below the median.  I then totaled our balance of trade for each group.

As you can see, in 2015, our balance of trade in manufactured goods with the less densely populated half of nations was once again a surplus, but a smaller surplus of $74 billion.  This is down from $132 billion in 2014 and is less than half of the record high of $153 billion in 2011.

Conversely, our balance of trade in manufactured goods with the more densely populated half of nations was a huge deficit, plunging to a new record deficit of $722 billion, beating last year’s record by $53 billion.

Some observations about these two groups of nations are in order.  Though these nations are divided evenly around the median population density, the division is quite uneven with respect to population and land surface area.  The more densely populated nations represent almost 77% of the world’s population (not including the U.S.), but only about 24% of the world’s land mass (again, not including the U.S.).

Think about that.  With the people living in 76% of the world’s land mass, the U.S. enjoyed a surplus of trade of $74 billion in manufactured products.  But with the rest of the world – an area less than a third in size – the U.S. was clobbered with a $722 billion deficit!  Population density is the determining factor.  Not wages or wealth.  Wealthy nations were just as likely to appear among the deficit nations as among the surplus nations.  Not currency valuations.  Virtually ever currency in the world weakened against the dollar in 2015.  Population density is the key factor that drove these trade imbalances.

Some may point to the increase in the trade deficit as proof that currency values and manipulation are driving the imbalance.  But the data from previous years has shown that no such relationship exists.  A much more likely explanation is that American exports are declining and imports are rising because as more and more manufacturers lose ground to foreign competition, there are fewer and fewer products available for export or for purchase by domestic consumers.  Like a horde of mosquitoes, the overpopulated nations of the world are literally sucking the life out of American manufacturing and, with it, the American economy in general.

So what’s to be done?  “Give free trade enough time to work,” free trade advocates say, “and these imbalances will even themselves out.”  Wrong.  Free trade policy has had decades to work, beginning with the signing of the Global Agreement on Tariffs and Trade (GATT) in 1947 and the result has been that the trade deficit with densely populated nations just gets worse and worse.  This happens because free trade theory doesn’t account for the inverse relationship between population density and per capita consumption.

The only remedy that would restore a balance of trade is the same trade policy that the U.S. employed until 1947 to maintain such a balance – tariffs.  The use of tariffs to compensate the U.S. for nations’ inability to provide us access to equivalent markets – markets that have been emaciated by overcrowding – would restore a balance of trade and breathe life back into the American economy.

 

Labor Market Tanking along with The Economy

As economic growth completely stagnated in the first quarter – so much so that per capita GDP growth was actually negative – the monthly employment reports inexplicably continued to paint a picture of a robust labor market that was adding hundreds of thousands of jobs a month.  Those reports didn’t mesh with other reports that showed the economy slowing, including corporate profits which have been slowing for the past year and worsened further in the first quarter.

It seems, too, that someone forgot to tell workers just how well the labor market was doing, since anger over the sorry state of the labor market has featured prominently in the races for both parties’ presidential nomination.

Finally, the employment report for the month of April, released yesterday by the Bureau of Labor Statistics, has begun showing cracks in its facade.  It seems that the economy added “only” 160,000 jobs in April, well off expectations for another gain of over 200,000.  And unemployment held steady in spite of the employment level falling by 316,000 jobs, thanks once again to 362,000 people vanishing from the potential labor force.

If it were an honest assessment of the condition of the labor market, the addition of 160,000 jobs to the economy would actually be pretty darned good news in light of the fact that it’s nearly twice the rate needed to keep pace with growth in the population.  But it’s not an honest assessment and, for that reason, is a warning sign that the labor market is, in fact, not in good condition.

I’ve come to the conclusion that the monthly employment report may be one of the lousiest measures of how our economy is performing, thanks to decades of constant tinkering with the methodology that each administration does to put a good face on how the economy has performed.  For example, if a company eliminates one full-time job and replaces it with two part-time jobs (a common tactic for eliminating benefits and cutting pay), that actually counts as the creation of one job, since two jobs were added while one was eliminated.  Or, if you take a second part-time job in order to keep your head above water, you’ve just “created” a new job, even though no new work is being performed in the economy.  So, as the economy has transitioned from full-time jobs to part-time jobs and temp jobs over the past few decades, employment appears to have grown while reality is exactly the opposite.

That’s the establishment survey portion of the report.  Things are just as bad on the household survey side where it’s almost impossible not to be counted as employed.  You don’t even have to earn money to be counted as “employed.”  If you lose your job and, in order to make productive use of your time, you now help out someone in the family who’s trying to scratch out a living running a small business, you help them out for free, you’re counted as “employed.”

Another economic indicator that has become just as worthless is the weekly tally of first-time unemployment claims.  Of course claims keep falling.  Fewer people are eligible for unemployment as the economy has made this transition from actual, paid employment to one where people do things to scratch out a living that don’t fit that report’s definition of “employment.”

It’s all a big show where great employment numbers probably reflect a so-so economy and good numbers (like April’s) are actually a warning sign that things are beginning to tank.

Pace of Growth in U.S. Trade Deficit with China Unabated in 2015

America’s trade deficit in manufactured goods with China continued to worsen in 2015 at the same pace that it has since China was granted MFN (most favorable nation) status by President Bill Clinton back in 2000.  This is in spite of the fact that wages in China have nearly quadrupled and the yuan has risen in value by 36% during that same time frame.

Here’s a chart that shows how the deficit has worsened by 367% since 2001:  China.  On average, our deficit with China has worsened at a rate of nearly 10% per year.  In 2015, it grew by yet another 6%, now reaching a staggering total of almost $388 billion.  Assuming that 2/3 of the cost to manufacture products is labor, and assuming that those jobs would pay an average of $50,000 per year, that’s a loss of 5.2 million manufacturing jobs from the U.S. economy.  It also accounts for most of the federal budget deficit in 2015, since the federal government is forced to run a budget deficit to make up the money that is drained from the economy by the trade deficit.

In fact, going back to 2001, the cumulative trade deficit in manufactured goods with China now totals $3.77 trillion.  That’s about 20% of our total national debt.

Free trade advocates would have you believe that such trade deficits are the result of a couple of factors:  low wages and/or currency manipulation – the practice of keeping a nation’s currency valued artificially low in order to make its exports cheaper and to make the exports of other nations more expensive for their own citizens.  Why do they want you to believe these things?  Because it leads one to believe that, over time, as wages rise in that country, the trade deficit will correct itself and, if we just shame that country into ending their manipulation of their currency, free trade will work as it should.  Either way, they want you to believe that free trade will work if we just give it enough time.

But the data speaks otherwise.  First of all, regarding the “low wage” argument, here’s a chart that shows how the Purchasing Power Parity (or “PPP” – analogous to wages paid) for Chinese citizens has grown since 2001 vs. the trade deficit:  China PPP vs deficit.  As you can see, the wealth of the Chinese has grown from $2,616 per person in 2001 to $14,300 in 2015.  That latter figure is now greater than the income of Americans who earn minimum wage.  In other words, the Chinese are rapidly catching up to wages in America.  But that hasn’t reversed the course of our trade deficit with China.  It hasn’t even slowed down its growth.  If there was any validity at all to a relationship between low wages and trade deficits, we should at least have seen some effect by this point.  There is none.

What about the effect of currency valuation?  Check out this chart:  China Xch rate vs deficit.  In 2005, the Chinese agreed to begin to let their currency rise in value.  By 2015, it had risen from 8.27 yuan/dollar to 6.09.  But there’s been absolutely no impact on the worsening pace of our trade deficit.  Even these two factors -rising wages and a rising Chinese currency – working together have had absolutely no impact on the pace at which our deficit with China continues to worsen!

There is no impact because neither of these factors play any role in determining the balance of trade.  Currency values don’t determine the balance of trade.  Instead, the opposite is true:  the value of China’s currency is rising because of China’s huge trade surplus.  And wages are soaring in China for the same reason.

The trade imbalance exists because of the huge disparity in population density between the U.S. and China.  China’s severe over-crowding limits their potential for personal consumption, emaciating their potential as a market place for U.S. exports.  But they are every bit as productive as American workers.  The result of attempting to trade freely under such circumstances is inescapable – an enormous trade deficit.

The only possiblity for restoring a balance of trade with a nation like China is to abandon free trade theory – a theory that doesn’t take into account the role of population density in driving trade imbalances – and adopt the use of tariffs to compensate the U.S. for China’s inability to provide access to a market that is equivalent to our own.  Nothing short of that has any chance to restore a balance of trade and avoid the U.S. being driven further toward bankruptcy.