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.