I’ve finished my analysis of trade in manufactured goods for 2016 and, as expected once again, the news isn’t good. The overall deficit in manufactured goods soared to yet another new record in 2016 of $680 billion, beating the previous record set one year earlier by $32 billion. A thorough, country-by-country analysis of the data reveals one overriding factor that’s driving this deficit- population density. Since the signing of the Global Agreement on Tariffs and Trade in 1947, the U.S. has systematically lowered barriers to its market for all countries, as required by that treaty and by the World Trade Organization that it spawned. But that policy has yielded vastly different results. While the U.S. enjoyed a surplus in manufactured goods of $34 billion with the half of nations with population densities below the world median, it was clobbered with a deficit of $704 billion with the other half of nations – those with population densities above the median. Same number of nations. Starkly different results.
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 165 nations and separated out those product codes that represent manufactured products. That’s no easy task. There are hundreds of product codes. While the Bureau of Economic Analysis makes it easy to track what’s happening with “goods” in general, that includes such things as oil, gas and agricultural products – goods that aren’t manufactured. You’d think that they’d be interested in tracking manufactured products, given the level of political rancor on that subject, but they don’t. The only way to arrive at that data is to sift it out, product code by product code. 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 165 nations evenly into two groups: those 83 nations with a population density greater than the median (which, in 2016, was 191 people per square mile, up from 184 in 2015) and those 82 nations with a population density below the median. I then totaled our balance of trade for each group.
As you can see, in 2016, 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 $34 billion. This is down from $74 billion in 2015, is the third consecutive decline, and has fallen by almost 80% from the record high of $153 billion in 2011. Why? As the manufacturing sector of our economy is steadily eroded by huge trade deficits, we simply have fewer products to offer for sale to other nations. Exports fell by $44 billion in 2016. (Remember Obama’s pledge to double exports? What a laugh.)
Conversely, our balance of trade in manufactured goods with the more densely populated half of nations was a huge deficit of $704 billion, down slightly from the record level of $722 billion in 2015.
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 $34 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 $704 billion deficit! Population density is the determining factor. It’s not low wages. The average purchasing power parity (or “PPP,” a factor roughly analogous to wages) of the densely populated half of nations – those with whom we have the huge deficit – is almost $20,000. The average PPP of the less densely populated nations with whom we enjoy a trade surplus was about $18,000. Wealthy nations were just as likely to appear among the deficit nations as among the surplus nations.
Nor is the other popular scapegoat – “currency manipulation” – a factor. Nearly every currency in the world weakened against the dollar in 2016. (Only 19 nations experienced an increase in the value of their currency.) Among the 19 nations whose currencies rose, we had a deficit in manufactured goods with 8, and a surplus with 11. On average, the deficits worsened by 115%, driven by a huge increase with Madagascar. Remove that anomaly and the deficits actually declined by an average of 8.4% – in line with the currency theory. Among the 11 nations with whom we had a surplus, the surpluses improved on average by 14% – again, in line with the currency theory.
However, among the 85 nations who experienced a decline in their currency vs the dollar, we had deficits with 27 of them. On average, those deficits fell by 13.4% – exactly the opposite of what the currency theory would predict. Among the remaining nations with whom we had a surplus, the surplus rose by an average of 33% – again, exactly the opposite of what currency theory predicts.
Therefore, we can conclude that our trade deficit in manufactured goods behaved exactly the opposite of what the “currency theory” would predict 80% of the time. Why? As noted earlier, most currencies fell vs the dollar last year. This happened because the U.S. economy was in better shape than the rest of the world, at least in the minds of investors. That’s what determines currency valuations. Not manipulation. Currency valuation has almost nothing to do with trade imbalances. It affects the profitability of companies operating in different countries, but rarely makes any difference in the balance of trade.
This is absolute proof positive that trade imbalances in manufactured goods are driven by population density and almost nothing else. Any trade policies that don’t take this factor into account are doomed to failure as evidenced by the destruction of the manufacturing sector of America’s economy. The only remedy that offers any hope of turning this situation around is tariffs (or a “border tax,” as the Trump administration likes to call it). Preferably, such tariffs would target only high population density nations like Japan, Germany, China, South Korea and a host of others. Why apply tariffs to low density countries with whom we enjoy surpluses and anger them unnecessarily?
Trump was elected due in large part to his promises to tear up NAFTA and withdraw from the World Trade Organization and begin imposing a “border tax.” It’s time to follow through on those promises while we still have a shred of a manufacturing sector left to build upon.