Trade Deficits Not Caused by Low Wages

In my previous posts, we’ve seen that trade imbalances are caused by disparities in population density, and that low wages don’t appear to be a factor at all.  To prove the point, let’s now look at America’s trade with the 20 poorest nations on earth and contrast that with it’s trade with the 20 wealthiest nations.  Surely, if low wages cause trade imbalances, we’ll have big trade deficits with the poorest nations where wages are the lowest.  Here’s the list:  trade with 20 poorest nations, 2019.

As you can see, if anything, the U.S. tends to have a very tiny surplus of trade with such nations, not a deficit.  The reason for the surplus is foreign aid.  All aid is booked as exports.  The fact is that the U.S. essentially engages in no trade whatsoever with these poor nations.

Now look at U.S. trade with the 20 wealthiest nations:  trade with 20 richest nations, 2019.  Now we do see some trade deficits – some big ones – with Ireland, Switzerland, Denmark, Taiwan, Sweden, Germany and Austria, in that order.  Ireland and Switzerland – the two nations on this list with whom the U.S. has the biggest trade deficits per capita – are actually wealthier than the U.S.  The others aren’t far behind.

How can this be?  If companies move manufacturing offshore in search of the lowest cost of labor, why do we have virtually no trade at all with the poorest nations, and have massive trade deficits with some of the richest?  Look again at the list of the wealthiest nations.  The average population density of those nations with whom we have deficits is 565 people/square mile – six times more densely populated than the U.S.  The rest of the list is a mish-mash of oil exporters, low population density countries, and a couple – the Netherlands and Belgium – that, as we previously established, are anomalies because of how imports and exports are booked for those countries.

If anything, these two lists prove that there is a relationship between wages and trade imbalance, but the cause and effect is exactly the opposite of what you’ve been told.  Low wages don’t cause trade deficits.  Trade deficits cause high wages.  It only makes sense.  Manufacturing creates a high demand for labor which drives wages up.  Any nation whose economy has a strong manufacturing sector is going to be a wealthy nation.  It may start out as a poor nation, but quickly grows in wealth as its manufacturing sector grows.

Trade imbalances are determined by whether or not a nation’s manufacturing output is absorbed by its domestic economy, or whether it is dependent on growing its manufacturing sector beyond that point in order to gainfully employ its labor force.  We’ll more fully explore what causes that situation in an upcoming post.

 

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