Low Wages Don’t Cause Trade Deficits!

July 31, 2018

Now that we’ve established (in previous recent posts) that it’s disparities in population density between the U.S. and its trading partners that causes our enormous trade deficit, let’s take a closer look at what role low wages might play.  Judging by the data we saw in the lists of America’s best and worst trade partners, there appeared to be little difference in the “purchasing power parity,”  or “PPP,” between the lists, suggesting that low wages (which track PPP) play no role.

Let’s begin by looking at America’s balance of trade with the twenty poorest nations in the world.  Here’s the list:  20 Poorest Nations.  First of all, you’ll notice that this list is dominated by poor African nations, with a few others like North Korea and Afghanistan thrown in.  The U.S. actually has a small trade surplus of just over a million dollars (an almost perfect balance of trade) with this group.  If low wages cause trade deficits, why doesn’t the U.S. have a huge trade deficit with this group of nations?  In the interest of fairness, I should point out that all foreign aid is booked as exports from the U.S., and the nations on this list are nearly all heavy recipients of U.S. foreign aid.

Let’s move on.  At the other end of the scale we have the twenty richest nations.  Since U.S. PPP is about $50,000, the U.S. would fall somewhere in the middle of this list.  So wages shouldn’t be much of a factor with this group.  Look at the list:  20 Richest Nations.  As you can see, we have a small trade deficit of $9 billion with this group of nations – virtually insignificant when compared to our total trade deficit in manufactured goods of $724 billion.

What we need to do is divide all of the world’s nations in half according to PPP and compare our balance of trade with the poorest half of nations to the richest half.  If we do that, the results are pretty startling.  With the poorest half of nations, the U.S. has a trade deficit in manufactured goods of $60.7 billion.  But with the richest half of nations, the deficit explodes to $663.5 billion!

How can we explain that?  First of all, to be honest, even the richest half of nations is made up almost entirely of nations that are poorer than the U.S.  Only about a dozen nations are richer than the U.S.  So one could argue that the low wage theory still holds.  Not true.  If it did, then it should be the poorest half of nations that we have the biggest trade deficit with, not the opposite.

The real explanation is that there is a relationship between trade and wages, but the cause and effect are quite the opposite of the “low wage theory.”  Low wages don’t cause trade deficits.  Instead, large trade surpluses like China, Germany and Japan have with the U.S., cause higher wages.  Manufacturing for export sops up excess labor supply and drives wages higher.

When the U.S. trades with poor but sparsely populated nations, they become wealthier but soon run out of labor.  Their now-wealthier populace becomes good customers for American products and trade levels off in a state of balance, more or less.

But when the U.S. trades with poor, badly overpopulated nations, wages rise but their overcrowded conditions leave them unable to consume products at anywhere near the rate needed to become customers for imported products.  Their oversupply of labor persists and a trade deficit with such a nation grows steadily worse.

America’s trade imbalance can never be resolved as long as it pursues policies that don’t target the real problem – disparities in population density.

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Population Density Disparities Drive Global Trade Imbalances

July 14, 2018

In recent posts, we looked at lists of America’s best and worst trading partners in terms of the balance of trade in manufactured goods, and found strong evidence of a link to population density.  The lists of our biggest trade deficits, in both absolute and per capita terms, was dominated by densely populated nations like Germany, Japan and China.  The lists of our biggest trade surpluses was dominated by low population density nations, and by net oil exporters (caused by the fact that oil is traded in American dollars).

Now let’s include all nations*, dividing them equally around the global median population density (which is 194 people per square mile).  Look at this chart:  Balance of Trade Above & Below Median Pop Density.  With those half of nations below the median population density, the U.S. enjoyed a small surplus of trade in manufactured goods of $36 billion in 2017.  However, with those half of nations above the median population density, the U.S. suffered an enormous deficit of $761 billion.  Also, note how the disparity has dramatically worsened over the 14-year time period from 2005 to 2018.  The longer the U.S. attempts to engage in free trade indiscriminately, ignoring the role of population density, the worse the effects become.

One may argue that perhaps dividing the nations of the world around the median population density skews the results, since the more densely populated half of nations includes far more people than the less densely populated half.  Fine.  Let’s divide the world in a way that compares the half of people who live in more densely populated conditions vs. the half of people who live in less densely populated conditions.  If we do that, in 2017 the U.S. had a trade deficit in manufactured goods of $510 billion with the half of people living in more densely populated conditions, and a deficit of only $214 billion – less than half – with the half of people living in less densely populated conditions.  Still a strong correlation to population density.

But maybe that’s not the right way to look at it either.  Perhaps we should divide the world in half according to land mass – that is, the half of the world’s surface area that is less densely populated vs. the half that is more densely populated.  (No, Antarctica is not included in this analysis.)  If we do that, the results are even more dramatic.  With the half of the world’s surface that is more densely populated (accounting for 6.6 billion of the world’s 7.1 billion people), we had a trade deficit in manufactured goods in 2017 of $831 billion.  With the less densely populated half of the world, we had a trade surplus of $107 billion.  (It’s worth noting here that the split occurs at a population density of 56 people/square mile.  That is, the less densely populated half of the world has a population density of 56 or less.  The more densely populated half is greater than 56.  The population density of the U.S. is about 90.)

Think about that.  This means that the U.S. economy would fare much better if the population of the more densely populated half of the world were no greater than the less densely populated half – which would yield a world population of about 1 billion people instead of 7.1 billion.  Instead of a net trade deficit in manufactured goods of $724 billion, we’d have a trade surplus of $214 billion (double the trade surplus that we currently have with the less densely populated half of the world).  One can debate what would be an optimum population density in economic terms, but there’s no question that this is a powerful argument for factoring population density into our trade policy.  Beyond that, it also debunks in a strong way the contention of economists that an ever-growing population is essential to sustaining a healthy economy.  It does nothing of the sort.  Instead, the crowded conditions that characterize a dense population stifle consumption – and thus employment – making people dependent on manufacturing for export to escape poverty.

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* Not all nations are included in the study.  Tiny island nations have been omitted since they don’t factor into the trade equation and, while such nations tend to be densely populated, they also enjoy unique economies, based primarily on tourism.


EU Scared to Death by Trump’s Tariff Threat

July 5, 2018

Precisely as I recommended he do in response to EU (European Union) tariffs on Harley-Davidson motorcycles, President Trump has threatened to impose stiff tariffs on European auto imports.  In return, the EU responded much like the cartoon cockroaches in the RAID insect killer commercials – full blown panic.  The end of the world is at hand!  Their world, for sure, but they want you to believe it’ll be the end of yours too.  Prices will rise, they say.  Sales will decline.  So too will GDP (gross domestic product), a measure of the overall U.S. economy.

Perhaps their most interesting warning was in regards to BMW production at their Spartanburg, SC plant that produces their SUV models.  (They call them “SAVs”, or “Sports Activity Vehicles.”)  They claim that most of the cars made there are exported, and it’s true.  As other nations respond with their own tariffs on American cars, they say, exports of those American-made BMW SUVs will decline and production will be cut, costing jobs.

Let’s look at the facts.  That Spartanburg BMW plant does export about 75% of the vehicles it builds, with those exports having a value of about $10 billion.  Is it really the loss of those BMW exports the EU is worried about, or is it something else?

Here are some more facts.  In 2017, Germany exported approximately $30 billion worth of cars and parts to the U.S., while importing only about $10 billion from the U.S., resulting in a $20 billion surplus for Germany.  The EU as a whole enjoyed a surplus of $44.1 billion in cars and parts with the U.S.

So what is the EU worried about most?  The American economy and BMW’s $10 billion in exports, or their $44.1 billion surplus?  The answer is obvious.  They’re making a killing in the U.S. market, and Trump’s tariffs threaten to put an end to it,

And it’s not just the EU.  Other globalist organizations have used similar scare tactics.  General Motors made similar warnings, but are they more worried about domestic auto sales or their China operations?

Every day, the news is filled with stories about how trade war fears are weighing on global markets.

Will car prices go up?  Probably.  But they didn’t mention to you that your wages will rise faster.  Will car sales decline?  No, the opposite will happen.  Sales of American-made models will rise faster than the decline in sales of EU cars as Americans grow more prosperous and opt for the less expensive American cars over the tariff-laden EU imports.

So don’t fall for the Chicken Little scare tactics.  It’s impossible for the U.S. to do anything but win a trade war, since a trade deficit is what defines a loser in global trade and the U.S. has the biggest deficit by far.  Anything that reduces that deficit makes America the winner.

If raising tariffs on imports were going to hurt the U.S. economy, then how do you explain that the economy is on a tear, putting up the best numbers in a long time – especially in the manufacturing sector of the economy?  Investors seem to understand.  While foreign markets – especially in Asia – have been taking a beating in the past few months, American markets are holding just below their record highs.  Like the saying goes – money talks and BS walks.  The big money knows that Trump’s tariff plan is good news for the American economy.

 

https://www.cnbc.com/2018/07/04/eu-considering-international-talks-to-cut-car-tariffs-report-says.html


Harley-Davidson’s Response to EU Tariffs

June 27, 2018

In response to European Union (EU) tariffs on Harley-Davidson motorcycles, Harley-Davidson announced on Monday that it would shift production of its motorcycles for the EU market overseas in order to avoid $90-100 million in tariffs.  (It wasn’t clear if it planned to move production to the EU or somewhere else.)  The tariffs imposed by the EU were in response to the Trump administration’s tariffs on imported steel and aluminum.  In addition to the tariffs on Harley-Davidson motorcycles, the EU also imposed tariffs on Kentucky bourbon and Levi’s jeans.  (Apparently, the EU isn’t aware that Levis are no longer made in the U.S.)

In response to Harley’s announced move, Trump attacked Harley-Davidson on Tuesday:  https://www.reuters.com/article/us-harley-davidson-tariffs/trump-threatens-harley-davidson-over-european-production-move-idUSKBN1JM1AF.

So what does this all mean?  Is this proof that tariffs don’t work, as free-trade advocates claim?  Hardly.  It is proof, however, that in order to be effective, tariffs must be applied across-the-board to all of the manufactured products from the country or region in question.  Rather that attack Harley-Davidson, the president’s next move should be a reciprocal (or larger) tariff on all motorcycle imports from the EU.  No more BMW’s.  No more Triumphs or Nortons or Ducatis.

Harley-Davidson has a right to move production overseas, just like the above-mentioned EU motorcycle manufacturers would then have a right to move production to the U.S. to avoid its tariffs.  Better yet, Harley-Davidson would suddenly find itself in a better position to begin manufacturing motorcycles in the U.S. to compete in those segments of the market.  Harley-Davidson would come out the winner, and EU motorcycle manufacturers would be the losers.  Net employment in motorcycle manufacturing would actually rise in the U.S.

No doubt, the EU would respond with more tariffs on U.S. products, though it’d be hard-pressed to find ones that it imports from the U.S. in greater measure than it exports.  But why wait for that?  Let’s hit them where it really hurts and put a 25% tariff on EU auto exports.  No more VW’s.  No more Mercedes Benzes.  No more Audis, Jaguars, Land Rovers, Fiats, Alfa Romeos and Volvos.

The EU will respond with tariffs on U.S. auto imports, you might say.  What imports?  Imports of American cars to the EU are virtually non-existent.  Oh, there are a few, but they’re dwarfed by European imports into the U.S.  The net result would be soaring employment in the U.S. auto industry as American consumers shunned the now-more expensive European imports.

Come on, President Trump.  You’re off to a good start in fixing our trade mess.  It’s time to go “all in” and apply tariffs across-the-board on all European imports.  When you’re done with that, you can have an even bigger impact in Asia.


America’s Best Trading Partners in 2017

June 22, 2018

In my last post, we looked at a list of America’s biggest trade surpluses in 2017 and found the list populated primarily with two groups of nations – primarily those with low population densities and those who are net oil exporters.  It also included nations both large and small.  What we’re studying here is the effect of population density on per capita consumption and its effect on trade.  Does a low population density facilitate high per capita consumption (and a high standard of living), making the people who live in less densely populated conditions better trading partners?  The only way to know is to factor the sheer size of nations out of the equation and look at our trade surpluses expressed in per capita terms.  On that basis, here is a list of the top twenty nations whose people import the most American-manufactured products:  Top 20 Per Capita Surpluses, 2017.

Again, the list is dominated by two groups of countries – those with low population densities and net oil exporters.  Twelve of the twenty nations have population densities less than that of the U.S.  Eight are net oil exporters.  (Canada and Norway share both characteristics.)  That leaves only two nations with high population densities – the Netherlands and Belgium.  As I noted in my previous post, both of those tiny nations share the only deep water sea port on the Atlantic coast of Europe, which they use to their advantage as a distribution hub for American imports.

The average population density of these twenty nations is 210 people per square mile (compared to 551 for the nations with whom we have the worst per capita trade deficits).  The population density of these twenty nations taken as a whole – the total population divided by the total land mass – is only 21 people per square mile.  (The average was skewed by tiny oil exporters with high population densities.)  Compare that to 375 people per square mile for our worst trade partners.

Note too that the average purchasing power parity (PPP, roughly analogous to wages) of the nations on the list of our best trade partners is $46,000 – which is actually slightly less than the PPP of our worst trading partners at $50,700 per person.  Clearly, low wages play absolutely no role in driving trade imbalances.  That’s not to say that low wages don’t attract business to locate in such nations.  But when they do, wages quickly rise where there is a low population density and any trade imbalance soon vanishes.  But where there is a high population density, labor is in such gross over-supply that wages rise little and a trade deficit persists.  It’s the high population density that causes a long-term trade deficit, not the low wages.

Now that we’ve examined the two ends of the spectrum of trade imbalances – our twenty worst per capita trade deficits in manufactured goods vs. our twenty best surpluses – we’ve found a very compelling relationship between trade imbalance and population density.  Next we’ll look at all 165 nations included in my study and see if the relationship still holds.


America’s Biggest Trade Surpluses in Manufactured Goods in 2017

June 9, 2018

In previous posts we examined lists of America’s biggest trade deficits, both in terms of sheer size and on a per capita basis, and found that both lists were dominated by nations with very high population densities.  If population density is a factor in driving trade imbalances, then we should see the same but opposite effect at the other end of the spectrum.  If we look at America’s biggest trade surpluses in manufactured goods, we should find the list dominated by nations with low population densities.  Here’s the list:  Top 20 Surpluses, 2017.

On this list we find that there are actually two factors at play.  First of all, the list is dominated by nations with lower population densities.  Eleven of these twenty nations are less densely populated than the U.S.  (On the list of our biggest deficits, only two nations were less densely populated.)  Only six nations on the list are significantly more densely populated than the U.S.  The average population density of the nations on this list is 209 people per square mile.  Compare that to the average for our biggest deficits – 734 people per square mile.  And if we calculated the population density of this group of twenty nations taken together – the total population divided by the total land mass – we find a population density of only 34 people per square mile, compared to a population density of 509 people per square mile on the list of the biggest deficits.

Still, how do we explain the presence on this list of some nations with some very high population densities?  Of those six nations that are significantly more densely populated than the U.S., three – United Arab Emirates, Kuwait and Qatar – are net oil exporters.  As such, it’s almost automatic that we will have a trade surplus in manufactured goods with such nations, regardless of their population density.  Why?  Because oil is priced in American dollars which can only be used to purchase things from America.  Even if the U.S. itself buys little or no oil from such countries, the countries who do must still pay in American dollars.  Strange, I know, but that’s how it is.  The end result is that oil exporters buy American products, either for their own consumption or for re-export to other nations.

That leaves three nations – the Netherlands, Belgium and Ecuador – unexplained.  The Netherlands and Belgium are tiny, adjoining nations who together enjoy the only deep water sea port on the Atlantic coast of Europe.  They use this to their advantage, making themselves into major points of entry for imports from America and for their distribution to the rest of Europe.  So their presence on the list is more of a geographic anomaly than anything else.

At number one on the list, Canada is both very sparsely populated while also being a huge oil exporter.  In fact, they are America’s biggest source of imported oil.  This is why the surplus with Canada is more than three times the size of our next largest surplus.  The U.S. has no better trade partner than Canada – hands down.  While I give Trump high marks for taking on the trade issue, I wish he’d find a way to exempt Canada from tariffs.  Canada has a legitimate beef regarding these tariffs.  Canada is not the problem.

By the way, does it come as a surprise to see Russia on the list?  It’s less surprising when you look at their population density.

Also, take a look at the Purchasing Power Parity (PPP, roughly analogous to wages) of the nations on this list.  The average PPP is just under $40,000 per capita.  The average of the nations on the list of our biggest deficits was $35,000 – a difference of only 15%.  The difference in population density between these two lists is 1400%.  Which do you think is more likely to be the real driver of trade imbalances – wages or population density?

As was the case with our list of the biggest trade deficits, the list of our biggest trade surpluses is also populated with very large and very tiny nations.  In order to factor sheer size out of the picture, let’s next take a look at our biggest trade surpluses expressed in per capita terms.  Stay tuned for the next post.


America’s Worst Trading Partners

May 17, 2018

Earlier this month, I posted a list of America’s twenty biggest trade deficits in manufactured goods in 2017, and noted that the list was dominated by nations with very dense populations.  But it also included some very large nations, like China, and some very small ones as well.  It’s only natural that any trade imbalance will be exaggerated by the sheer size of a country.  In order to determine which countries are our best and worst trading partners, it’s only fair to express the trade imbalance in per capita terms.  Which countries, on a man-for-man basis, are the worst and best trading partners for the U.S.?  Will these lists also be affected by population density?

In this post, we’ll take a look at the twenty worst trade partners in manufactured goods for 2017.  Why the emphasis on manufactured goods?  Because that’s where the jobs are, and trade in natural resources (food, oil, minerals, lumber products, etc.) has more to do with nations’ geography than anything else.  With that said, here’s the list:  Top 20 Per Capita Deficits, 2017.

With only two exceptions – Finland and Sweden, every other nation on this list is more densely populated than the U.S.  With one exception – Mexico – the remaining eighteen nations are at least twice as densely populated.  Of the remaining seventeen nations, all but Ireland are at least three times as densely populated.  The average population density on this list is 551 people/square mile – more than five times the U.S. population density.

In most cases, our trade deficits with these nations are rapidly getting worse, nearly doubling in ten years.  It’s also very important to note that the average “purchasing power parity” (or “PPP”), a measure of wealth that’s roughly analogous to wages, is $50,700, compare to the U.S. PPP of $59,000.  In other words, for the most part, these are not poor nations with low wages.  In fact, our two worst per capita deficits are with wealthier nations – Ireland and Switzerland.

Speaking of Ireland, with one of the lower population densities on the list, there’s clearly more at play here than population density.  Ireland is essentially a tax haven for companies – creating an unfair trade situation.

Note that China barely makes this list, ranked at 19th.  Our deficit with China is so huge because it holds one fifth of the entire world’s population.  But it’s a big country and so, in terms of the average population density on this list, its population density is fairly unremarkable.  The density of many others who rank higher on the list is much worse.

The fastest growing deficit is with Finland, the least densely populated nation on the list.  It’s an anomaly I can’t explain, except to note that the import of cars from Finland – a nation where there is little to no auto production – has exploded in the past ten years, while the export of American cars to Finland – once robust – has completely collapsed.  Can it be that Germany is funneling exports through Finland’s seaports?  I don’t know.  It’s worth noting that Germany has actually dropped one position on this list in the past year.

The next fastest growing deficit is with Vietnam, a nation more than eight times as densely populated as the U.S., but also the poorest nation on this list.  It’s possible that low wages are playing a role there.  Low wages do play a role in attracting manufacturing but, as wages rise, the trade imbalance levels off and then disappears in nations with low population densities, as they quickly exhaust their labor supply.  But that doesn’t happen with nations that are very densely populated.  China is a good example.  In spite of its wages rising dramatically, our trade deficit with them has only worsened.

Trinidad and Tobago is another anomaly on this list.  It reappeared on this list after a couple of years of not making the list, in spite of the fact that our deficit with them has declined by 81% over the past ten years.  That’s because in spite of the fact that our deficit with them spiked in 2017, putting them back on the list, it’s still far lower than it was ten years ago.

The take-away from this list is that population density is clearly a factor, while low wages aren’t.  Low per capita consumption, fostered by an extreme population density, turns a nation into one that comes to the trade table with a bloated labor force desperate for work, and with nothing but a stunted market to offer in return.  Trade policy that fails to account for this effect by using tariffs to maintain a balance of trade is doomed to failure and virtually guarantees massive job-killing trade deficits.

Next we’ll look at the other end of the spectrum – our twenty biggest per capita trade surpluses.