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:
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.