Why Population Density Drives America’s Trade Imbalance

November 21, 2019

The Problem:

In my last few posts, we’ve seen a powerful correlation between America’s trade imbalances and the population density of its trading partners.  But how does that work?  It seems odd – something that seems highly unlikely to be a factor.  And you’ve likely never heard of it before.  What you have heard about are a host of other “factors,” things like low wages, trade barriers, intellectual property theft, lax labor and environmental standards, just to name a few.  All of them seem like more plausible explanations for trade imbalances than something like “population density.”

The reason population density has such a powerful effect on trade is what it does to the per capita consumption of products.  Beyond a certain critical population density, over-crowding begins to rapidly erode people’s need for and ability to use (or “consume”) virtually every product you can think of, with the exception of food.  At first glance, you might think that’s a good thing.  Everyone lives more efficiently, reducing their environmental footprint and their demand for natural resources.  However, the real problem is that per capita employment is tied directly to per capita consumption.  Every product not bought is another worker that is out of work.  As population density continues to grow beyond that critical level, an economy is rapidly transformed from one that is self-sufficient and enjoys full employment to one with a labor force that is bloated out of proportion to its market, making it dependent on other nations to sop up its excess labor or, put another way, making it dependent on manufacturing products for export to rescue it from what would otherwise be an unemployment crisis.

Let’s consider an example.  The dwelling space of the average citizen of Japan, a nation ten times as densely populated as the U.S., is less than one third that of the average American.  It’s not hard to imagine why.  In such crowded conditions, it’s only natural that people will find it impractical to live in single-family homes in the suburbs and will instead opt for smaller apartments.  Now think of all the products that go into the construction of dwellings – lumber, concrete, steel, drywall, wiring, plumbing, carpeting – literally thousands of products.  And think of furnishings and appliances.  A person living in a dwelling that is less than one third the size of another consumes less than a third of all of those products compared to someone living in less crowded conditions.  And what about the products used to maintain the lawns and gardens of single-family homes?  Consumption of those products doesn’t just reduce – it vanishes altogether.

Consequently, per capita employment in those industries involved in building, furnishing and maintaining dwellings in Japan is less than a third of that in America.  So what are all of those unemployed Japanese to do?  Will they be put to work building cars for domestic consumption?  Hardly.  As you can imagine, the per capita consumption of vehicles by people living in such crowded conditions is impacted dramatically as most opt for mass transit.  So emaciated is the Japanese auto market that even Japanese automakers have trouble selling cars there.  So now add to the workers who aren’t employed in the home industry those workers who also aren’t employed building cars for their domestic market.

And so it goes with virtually every product you can think of.  Japan is an island nation surrounded by water.  Yet their per capita consumption of products for the boating industry is virtually zero compared to other nations, simply because it’s so crowded.  There’s only so much marina space to go around.  Put a town of 100 families next to a marina with 100 slips and it’s likely that every single family will own a boat with a motor and fishing gear.  Put a city of a million families next to that same marina and, though the marina is still full, on a “per capita” basis boat ownership has effectively fallen to zero.

Japan’s only hope for employing its badly under-utilized labor force is to use them to manufacture products for export.  This is exactly why America’s second largest trade deficit in manufactured goods is with Japan.  It’s not so much that we buy too much stuff from Japan.  The problem is that Japan buys so little from us in return.  It’s not that they don’t want to.  They can’t.  Their market is so emaciated by over-crowding that they can’t even consume their own domestic production.  Why would they buy more from us?  The same is true of nearly every major U.S. trading “partner” that is badly over-crowded.  Attempting to trade freely – without tariffs or other barriers – is tantamount to economic suicide.  It’s virtually certain to yield a huge trade deficit.

Why have I never heard of this before?

Few, aside from those who follow this blog or have read my book, have ever heard of this before.  Even if you have a degree in economics, you’ve never heard of it.  In fact, you were likely taught the opposite.  If you studied economics, at some point you were surely introduced to the late-18th century economist Malthus, and were warned to never give any credence to any theories that revolved around over-population, lest you be derided as a “Malthusian,” which would surely doom your career as an economist.

In 1798, Thomas Robert Malthus published his essay titled “Essay on Population” in which he warned that a growing population would outstrip our ability to meet the need for food, effectively dooming mankind to a fate of “misery and vice.”  This led to the field of economics being dubbed “the dismal science,” something that really rankled other economists.  Yet, the idea gained some traction until, that is, as years passed and improvements in farming productivity exceeded the requirements of a growing population.  The other sciences mocked the field of economics unmercifully, proclaiming that mankind is ingenious enough to overcome any and all obstacles to growth.  Economists acquiesced and vowed to never, ever again give any consideration to any concerns about overpopulation.

And so it is today that economists have a huge blind spot when it comes to the subject of population growth.  You can’t discover something that you’re not even willing to look at.  It’s not unlike the medieval Catholic Church labeling Galileo a heretic for theorizing that the earth revolved around the sun instead of vice versa.  Where would we be today if the study of astronomy ended at that point?  Where would we be if Newton was mocked for his theory of gravity and the field of physics ended at that point?  That’s what economists have done.  They’ve turned their backs on what is arguably the most dominant variable in economics.

What does this mean for trade policy?

In the wake of the Great Depression, soon followed by World War II, economists disingenuously laid blame for what had transpired on U.S. tariffs and, eager to put to the test the theory of free trade, promised that it would put an end to such wars and depressions.  So, in 1947, the U.S. signed the Global Agreement on Tariffs and Trade, taking the first step to implement the concept of free trade on a global basis.  Within three decades, the trade surplus the U.S. had enjoyed was wiped out.  In 2018, the U.S. ran its 44th consecutive annual trade deficit which, by the way, set a record in 2018 and continues to worsen.

The problem is that the concept of free trade doesn’t take into consideration the role of population density in making over-crowded nations absolutely dependent on running trade surpluses in manufactured goods, and simultaneously sapping the life from the manufacturing sector of other nations.  No amount of trade negotiations can correct this imbalance.  No nation that is dependent on manufacturing for export would ever agree to anything that would slow their exports and it’s impossible for them to increase their imports because, after all, it’s their emaciated market that has caused the trade imbalance in the first place.  The only way to restore a balance of trade is to force the issue through the use of either tariffs or import quotas.  Any trade policy that doesn’t employ those tactics when trading with badly over-crowded nations is doomed to failure and puts our overall economy at risk.

Since World War II, other presidents have tinkered with tariffs in those rare instances when the World Trade Organization has green-lighted their use to correct for some other nations’ trade transgressions.  But President Trump is the first president in seven decades to implement a significant tariff program aimed at reducing our trade imbalance with China.  But much, much more needs to be done.  There are many other nations whose trade imbalances on a per capita basis are much worse, nations like Germany, Japan, Mexico, Ireland, South Korea, Taiwan and a host of others.  While many are allies, none of them are “allies” when it comes to trade.  All are eager to sustain and even grow their trade imbalances at the expense of American workers and families.  All want the U.S. economy to bear the cost for their overpopulation.  None want to face their own problems.  The U.S. needs to put an end to pointless – even counterproductive – trade negotiations, and do the things that are within our power to force the restoration of a balance of trade.

 


Population Density Effect on Trade Imbalance Intensified in 2018

November 18, 2019

In previous posts, we’ve noted the apparent role of population density at both ends of the spectrum of our trade imbalances – the top deficits and surpluses in manufactured goods.  Now let’s look at the world as a whole.  Let’s include all 165 nations in the study and let’s divide those nations equally around the median population density (which is 192 people per square mile), such that there are 82 nations with densities above the median and 83 nations below the median.  Look at this chart:  Deficits Above & Below Median Pop Density.

With the half of nations with population densities above the median we had a deficit of $815 billion in manufactured goods in 2018.  With the other half of nations we had a deficit of only $0.5 billion (the first deficit with that group of nations since 2005).  $815 billion vs. $0.5 billion.  Same number of nations.  How much more obvious can it be that population density is, by far and away, the single biggest force in driving trade imbalances?  How much more evidence do you need?

More?  “That’s not a fair comparison,” you might say.  “The half of nations that are more densely populated have a lot more people than the other half.  There needs to be the same number of people included in each group.”  OK, fair enough.  Let’s divide the world in half by population.  Half of the world’s population lives in more densely populated conditions, and half lives in less densely populated conditions.  In order to divide the world that way, however, the dividing line falls on China.  Not surprising since that country has one fifth of the world’s population.  So to make the populations of the two halves equal, almost 40% of China’s population – a nation with a population density four times that of the U.S. – must be included with the half of people living in “less densely populated” conditions.  Nevertheless, if we do that, and if we allocate 40% of our trade deficit with China to the less densely populated half, the result is that we still have a trade deficit (in manufactured goods) of $557 billion with the half of people living in more densely populated conditions and a trade deficit of $259 billion with the less densely populated half of the world’s population.  The trade imbalance is still more than double with the more densely populated half.

If we include all of China in the more densely populated half of people, then the split of people is 4.15 billion vs. 3 billion.  If we do that, the deficit with the more densely populated “half” of people is $730 billion vs. $86 billion for the less densely populated “half” – 8-1/2 time bigger.

I would argue that an even better comparison is to divide the world in half by land area:  the half of the world that is more densely populated vs. the half that is less densely populated.  If we factor out Antarctica and the United States (because we are evaluating our trade partners), the world’s land surface area is 47.3 million square miles.  If we divide that in half by population density, we find that 6.66 of the 7.15 billion people occupy the more densely-populated half of the world’s surface area while the other half of the world holds only 0.49 billion people.  With that more densely-populated half of the word we have a trade deficit in manufactured goods of $923 billion and a trade surplus of $107 billion with the less densely populated half.  That’s a difference of over one trillion dollars in trade with the more densely populated half of the world vs. the less densely populated half.

Finally, let’s look at one more split – probably the most relevant:  the nations more densely populated than the U.S. vs. the less densely populated nations.  The U.S. has a population density of approximately 92 people per square mile.  114 of our trading partners are more densely populated and 41 are less densely populated.  With those more densely populated we have a trade deficit in manufactured goods of $934 billion vs. a surplus of $119 billion with those less densely populated.  Again, that’s a difference of over one trillion dollars!

Clearly, any trade policy that doesn’t take population density into account is virtually guaranteed to yield absolutely horrible results, yet that’s exactly what the U.S. does.  It completely ignores population density and attempts to trade freely with everyone regardless of population density.  And in a few decades it’s transformed the U.S. from the world’s preeminent industrial power and the wealthiest nation on earth into a virtual skid row bum, plunging us into $20 trillion of debt.

But why is population density such a factor?  I could write a book on the subject.  Actually I already did.  It’s what this blog is all about.  But I’ll summarize it for you in the next post.  Stay tuned!


America’s Best Trading Partners

November 12, 2019

In my last post, we looked at a list of America’s worst per capita trade deficits (in manufactured goods) in 2018 and found a strong correlation with population density.  Nearly every nation on the list was much more densely populated than the U.S.  Conversely, there was virtually no correlation with low wages, as measured by those nations’ “PPP” or Purchasing Power Parity.

Now it’s time to look at the other end of the spectrum – America’s best per capita trade surpluses in manufactured goods.  If population density is a factor in driving trade imbalances, then this list should be populated with more sparsely populated nations.  Here’s the list:  Top 20 Per Capita Surpluses, 2018.

Well, we do indeed see many nations that are more sparsely populated, but there are some very densely populated nations on this list too.  Many of them can be explained by the fact that they’re net oil exporters and, as we established in my post from October 23rd about our largest trade surpluses, oil exporters use their “petro-dollars” to buy American-made goods.  In that same post, we also noted that The Netherlands and Belgium appear on this list because they take advantage of their location to make themselves into European trading hubs and, as such, are a destination for American goods that will ultimately be distributed throughout Europe.

Still, there is solid evidence that population density plays a major role in driving trade imbalances on this list, just as it did on the list of our worse deficits, but this time driving surpluses in our favor.  Here are more observations that support that:

  • The average population density on this list is 216 people per square mile, compared to an average of 540 people per square mile for the nations on the list of our largest per capita trade deficits.  The population density of the nations on the list as a whole – total population divided by total land mass – is only 22 people per square mile.  Compare that to the population density of the twenty nations on the list of our biggest per capita deficits, which is 377 people per square mile.
  • The average PPP for the nations on this list is $45,995.  Factor Qatar out of this list and the average drops to $41,842 – nearly the same as the average PPP of $39,040 for the nations on the list of our biggest per capita deficits.  So which seems more likely to be driving trade imbalances – the 1600% disparity in population density or the 18% disparity (leaving Qatar in the average) in PPP?
  • Over the past ten years, our per capita surplus in manufactured goods with the top twenty nations has grown by 84%.  Meanwhile, our per capita deficit with our worst trading partners has grown 114%.  Our trade deficit is eroding the manufacturing sector of our economy, leaving us with fewer and fewer products to export.

That’s the two ends of the trading spectrum, a total of forty countries with whom we have the biggest per capita deficits and per capita surpluses in manufactured goods.  It’s already pretty strong evidence that trade imbalances are driven almost entirely by population density and by very little else.  But what about the other 124 nations that are included in the study?  Will the correlation look as strong when we throw them all together?  Stay tuned, that’s coming up next.


America’s Worst Trading “Partners”

November 7, 2019

In one of my most recent posts, we examined a list of America’s worst trade deficits.  China was at the top of the list.  No surprise.  China is a very large country with one fifth of the world’s population.  It only makes sense that our biggest trade deficit would be with one of the world’s biggest countries.  But anybody can make a list of our biggest deficits with little effort.  My purpose is to ferret out the root cause of America’s massive trade deficit.  Is it really low wages that attracts companies to shift production offshore, like economists say, or is there something else at work?  For decades the U.S. has focused its efforts to address our trade imbalance on things like intellectual property, working conditions and environmental standards.  Yet our deficit continues to explode.  Are we working on the right things?  Are we missing something?

I pointed out that the list of our biggest deficits did have one factor in common.  Nineteen of the twenty nations on that list had a high population density – very high in most cases.  If population density is a factor in driving trade imbalances, then it stands to reason that a list of our worst deficits in per capita terms, factoring the sheer size of nations out of the equation, would be dominated by nations with a high population density.  Such a list would essentially constitute a list of our worst trading partners, on a “man-for-man” basis.  Will that list be dominated by people earning low wages, as economists would suggest, or will it be dominated by people living in highly congested, densely populated conditions?  Let’s take a look.  Here’s the list:  Top 20 Per Capita Deficits, 2018.

Observations about this list:

  1. Seventeen of these twenty nations are more densely populated than the U.S.  The average population density is 540 people per square mile, which is 5-1/2 times more densely populated than the U.S.  The aggregate population density – the total population of the countries on this list divided by the total land surface area – is 377 people per square mile – almost four times the population density of the U.S.
  2. Three nations less densely populated than the U.S. are on the list:  Finland, Sweden and Estonia.  Estonia is new to the list and is likely a one-year fluke.  The U.S. had a trade surplus with Estonia until 2010.  Since then, the deficit with Estonia has swung up and down dramatically.  Sixty percent of our imports of manufactured goods from Estonia are telecommunications equipment.  Finland’s economy is heavily dependent on exports, which make up one third of its gross domestic product (GDP).  As is the case with our deficit with all European nations, imports of autos account for a big share of the trade deficit – 27% in the case of Finland.  Sweden is even more heavily dependent on exports, which account for 44% of its GDP.  To put those figures in perspective, the U.S. derives less than 8% of its GDP from exports.
  3. The average “purchasing power parity,” or “PPP,” is just over $39,000 per capita per year vs. U.S. PPP of $59,000.  While that figure seems to lend a little support to the “low wage” theory about trade imbalances, it’s a fairly weak correlation.  It’s especially weak when you see that the top two nations on the list – Ireland and Switzerland – are actually more wealthy than the U.S.  The average PPP of the top ten nations on the list is $47,190.  Only Vietnam has a PPP below $10,000.  China and Mexico are the only other two nations on the list with a PPP less than $20,000.
  4. Our per capita deficit with Ireland – not the highest population density on the list but still more than twice as densely populated as the U.S. – leads the list with a huge per capita surplus with the U.S. of almost $8,600, which accounts for nearly 12% of its PPP.  But population density alone doesn’t explain Ireland’s position at the top of this list.  Ireland is a tax haven for corporations, a situation that the U.S. government has inexplicably done nothing to address.
  5. China, at the top of the list of our trade deficits, barely makes this list at all, coming in at no. 20.  Given that the tariffs imposed on Chinese imports this year have begun to shrink our deficit with China, it’s likely that it won’t make the list at all for 2019.  But, make no mistake, although expressed in per capita terms the deficit with China is unremarkable, when multiplied by its population – one fifth of the entire world – the result is an enormous trade deficit for the U.S.
  6. The deficit with this group of nations has nearly tripled over the past ten years (when Estonia is factored out of the calculation due to its flip-flop from surplus to deficit).  Whatever the factor that drives trade imbalances – and from the data we’ve looked at so far it certainly appears to be population density – it has a very powerful effect.

The real take-away from this list is that population density appears to be a powerful factor in driving trade imbalances, while low wages appear to have little or no influence.  But that’s just one end of the spectrum – our trade deficits.  We’ll next take a look at our trade surpluses to see what effect population density may have at that end of the spectrum.  If high population densities cause trade deficits, we should see the list of our top per capita trade surpluses dominated by nations with low population density.  Stay tuned.