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.

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America’s Best Trade Partners, 2015

May 25, 2016

In my previous post, we examined the list of America’s worst trading partners in 2015 and found that it was heavily dominated by nations that are much more densely populated than the U.S.  Additionally, we saw that low wages, often blamed by the ill-informed for our trade deficit, played no role whatsoever.  In fact, the very top of the list was populated with wealthy nations – some even wealthier than the U.S.

If, in fact, population density is what really drives global trade imbalances, then we should see the same effect at the opposite end of the spectrum.  That is, we should find a list of nations with whom we have the largest surpluses dominated by low population densities.  Let’s take a look.  Here is the list of America’s twenty largest trade surpluses in manufactured goods in 2015:  Top 20 Surpluses, 2015.

At the very top of the list is Canada, by far and away America’s best trading partner.  At $50.2 billion, our surplus with Canada is more than 2-1/2 times larger than the next biggest surplus on the list.  In the past ten years, our surplus with Canada has exploded by 245%.  With a population density of only ten people per square mile, Canada is one of the least densely populated nations on earth.

But as you scan down the list, you see a mix of nations with both low and high population densities.  At first glance, this would seem to cast doubt on the whole population density theory, until you realize the role that oil plays in landing some of these nations on this list.  Oil is universally priced in American dollars, regardless of the nation that is exporting the oil.  American dollars are legal tender only in the United States so, ultimately, all of those dollars must be returned to the U.S.  This happens predominately through either the purchase of American goods or through the purchase of American debt – bonds issued by the government or by American corporations.  So it’s almost automatic that net oil exporters like Qatar, Kuwait and Nigeria, among others, appear on this list in spite of their high population densities.

Actually, Canada is America’s biggest source of imported oil, which helps to explain their position on the list.  That, coupled with their low population density, is what has driven them so far to the top.

If we discount the seven nations on the list who are net oil exporters, of the remaining thirteen only three have population densities that are above the world median:  the Netherlands, Belgium and Egypt.  Seven of the thirteen are less densely populated than the U.S. (at 87 people per square mile).  Regarding the Netherlands and Belgium, these tiny nations share the only deep-water port on the Atlantic coast of Europe and use that to build their economies around trade, importing American goods and redistributing throughout Europe.  Egypt appears on the list because they are a big recipient of foreign aid.  All foreign aid is booked as exports at face value even though it is given away.

The average population density of these twenty nations is 240 people per square mile, in contrast to the average population density of 737 people per square mile on the list of our worst trade partners.  But it’s a little misleading to average the figures in this way, since the population density of a few tiny nations can skew the data.  If we calculate the population density of the list by dividing their total population by their total land mass, the population density drops to 45 people per square mile – half that of the U.S.  For the list of our twenty worst trading partners, that figure is 503 people per square mile – more than ten times as densely populated.

Look at the purchasing power parity of this list of nations.  Take away tiny, inordinately rich Qatar, and the average wealth of the remaining nineteen nations is $32, 268 – almost identical to the average wealth of the nations on the list of our twenty worst trading partners.  So wealth – roughly analogous to wages – plays no role on these two lists whatsoever.

Now let’s look at this from another perspective.  If we factor out the sheer size of nations, which nations’ citizens, man-for-man (in per capita terms), are our best trading partners?  If population density is a factor in determining trade imbalances, we should once again see a list that is dominated by less densely populated nations and, probably, net oil exporters.  So here’s the list:  Top 20 Per Capita Surpluses, 2015.

Though the list is a little different now, we see the same thing.  There are seven net oil exporters on the list.  Of the remaining thirteen, all but three – the Netherlands and Belgium again, and Costa Rica – have population densities less than the global median.  Of the remaining ten, all but one – Panama – is less densely populated than the U.S.  The average density for these twenty nations is 206 people per square mile.  But the population density of the group as a whole – the total population divided by their land mass – is down to 20 people per square mile.  For our worst trade partners, that figure is 372 people per square mile.  It bears repeating.  The population density of our twenty worst trade partners is more than 18 times that of our best trade partners.

The data that I’ve presented here in my last few posts is absolute, undeniable proof that population density is what drives global trade imbalances.  Not wages.  Trade policy that fails to recognize this relationship and fails to employ some mechanism (like tariffs) to maintain a balance of trade is doomed to yield the huge trade imbalances that have been growing and eroding our economy for decades.

 


Analysis of Trade with America’s Top Partners Exposes Flaws in Trade Theory

April 1, 2013

An analysis of trade with America’s top fifteen trade partners in 2012 once again reveals a powerful relationship between the population density of its trade partners and its balance of trade, and very little relationship between the balance of trade and the usual suspects blamed for imbalances – low wages and currency exchange rates.

Here are America’s top 15 trade partners in 2012, based upon total imports and exports:  Top 15 Trading Partners in 2012.  These fifteen nations (out of 228 nations in the world) account for 72% of all U.S. trade.  The top three nations – Canada, China and Mexico – account for 43% of all U.S. trade.  Saudi Arabia moved from 12th in 2011 to 9th.  Singapore dropped off the list, replaced by Italy.

It should come as no surprise that a few of our major sources of imported oil appear on the list – Canada, Mexico, Saudi Arabia and Venezuela.  It’s trade in manufactured goods that’s of greater interest, since it’s there that jobs are won or lost.  So let’s see how these nations stack up in terms of trade in manufactured goods.  Here’s the list:  Trade in Manfd Goods with Top 15 Partners.  Aside from China now edging out Canada for the top spot, the list doesn’t look terribly different.

Now, let’s test the results of U.S. trade with these nations against economists theories about trade – that trade deficits tend to be the result of low wages or perhaps currencies that are artificially low, and that trade deficits tend to shrink as wages rise in the surplus nation and as their currency grows stronger, making their exports more expensive and our exports more affordable.  And let’s test these results against my own hypothesis – that it’s actually disparities in population density that drive global trade imbalances while the above-mentioned factors so favored by economists actually have little or no impact.

Population Density

Let’s begin with the latter – the effect of population density – and look at a plot of per capita balance of trade in manufactured goods vs. population density.  (It’s important to express the balance of trade in per capita terms in order to remove the sheer size of a nation as a factor.  Here’s the chart:  Per Capita Balance of Trade vs. Pop Density.  (Some of the data points have been labeled with the nation’s name, some not, for the sake of legibility.)

This is a “scatter chart,” the purpose of which is to determine whether or not a correlation exists.  I had the computer generate and insert a “trend line” for the data, including the equation that defines the line and its “coefficient of determination.”  If such a chart yields a shotgun scattering of the data, then no correlation exists, and the coefficient of determination is close to zero.  On the other hand, if the data points tend to fall along a line – the trend line – then a correlation does exist and if all the data points fall perfectly along the line then we’d have a coefficient of determination of “1” – representing a perfect correlation.

As you can see, the data points do indeed tend to fall along a line – a lined defined by a logarithmic equation with a coefficient of determination of 0.51.  That’s a strong correlation.  Taking a closer look, we find the following:

  • There are four data points (nations) with a population density less than the United States, which is about 86 people per square mile.  They are Canada (10), Saudia Arabia (32), Brazil (61) and Venezuela (83).  The United State enjoys a surplus of trade in manufactured goods with all four of them.
  • There are eleven data points (nations) with a population denisty greater than the United States, and we have a trade deficit with all but one – by far the smallest – the Netherlands.  This isn’t surprising since the Netherlands is barely larger than the tiny city states which fall outside the boundaries of my theory (based on a rather arbitrary cut-off of 1,000 square miles).  They are excluded because cities represent incomplete economies.  They thrive primarily on services and are dependent on the surrounding countryside to complete their economies with resource production and manufacturing.  People who live in cities manufacture relatively little, since they lack the space required for manuacturing facilities.  The U.S. almost uniformly has a surplus of trade with city-states, regardless of their population density.
  • Our biggest surplus of trade in manufactured goods is with the least densely populated nation – Canada.
  • Our worse deficit (in per capita terms) is with Taiwan, which is also the most densely populated nation on the list.
  • Notice that, when expressed in per capita terms, our deficit with China no longer looks so abnormally large.  In fact, it falls right in line where you’d expect to find it.

It’s impossible to overstate the importance of this relationship between trade imbalance and population density.  Accurately predicting a surplus or deficit in 14 out of 15 cases is a very powerful correlation.  It puts into persepctive our very large trade deficit with China.  Of course it’s large; China is a very large country – one fifth of the world’s population.  It’s no wonder that we have a big deficit with China when we applied to them the same trade policy that produced the results we see with Germany, Japan, S. Korea, Taiwan, Mexico and other densely populated countries.  It’s exactly what we should have expected.

Low Wages

It’s impossible to gauge the effect of low wages directly, since the data on wages doesn’t exist and, if it did, it would vary industry-by-industry and even employer-by-employer, making the calculation of an average wage nation-by-nation a nightmare.  But the data is readily available for another factor – “purchasing power parity” (or “PPP”) – essentially a nation’s gross domestic product divided by its population – and it’s a good relative measure of how wages in one nation compare to another.  So let’s plot PPP vs. our per capita balance of trade in manufactured goods:  Per Capita Balance of Trade vs. PPP.

It’s immediately apparent that the data points are not randomly scattered, but tend to form a “V” shape, converging at a zero balance of trade as PPP falls toward zero.  The balance of trade tends to rise upward and outward – in either a positive (trade surplus) or negative (trade deficit) direction as wealth increases.  We already know that those nations on the surplus side (with the exception of the Netherlands) are all nations with population density lower than that of the U.S.  Those on the deficit side are more densely populated nations.

Because the data points fall on both the positive and negative side of the Y-axis, the computer is unable to generate an equation that describes the relationship that seems to be apparent in this chart.  But if we divide the data into two charts, it will be able to tell us the equation and just how strong the correlation may be.  So, first, here’s a chart for the data on the surplus side:  Per Capita Surplus of Trade vs. PPP.   There is a very strong correlation between our trade surplus in manufactured goods and a nation’s wealth.  As we deal with wealthier nations, our trade surplus (if we have a surplus) tends to be larger.  This makes sense.  Wealthier nations, where people earn higher wages, have more disposable income to spend on products both imported and produced domestically.  But, again, it’s important to note the role that population density has played here.  Not only can these people afford to buy more products, but they’re also able to utilize those products because they live in uncrowded conditions that foster high per capita consumption.

It’s also important to note there that, though these are wealthy nations, none are as wealthy (with wages as high) as the United States, with a PPP of $49,800 in 2012.  What this means is that every nation on this chart has a trade deficit with a nation (the U.S.) that actually has higher wages, not lower.  This debunks the notion that low wages cause trade deficits.

Now let’s look at the trade deficit side.  Here’s that side of the chart, with trade deficits now expressed as positive numbers so that a trend line equation can be calculated:  Per Capita Trade Deficit vs. PPP.  What we see here is exactly the same thing – that if we have a trade deficit with any given nation, it will tend to be larger if that nation is a wealthy nation.  While the correlation isn’t as strong – the coefficient of determination is .36 vs. .73 for the surplus nations – there’s still a fairly strong correlation.  Here it’s important to note that every nation on this side of the chart is more densely populated than the U.S. – most of them much more densely populated.  The per capita consumption of these people is stunted by overcrowding, leaving them incapable of consuming enough products to result in a trade surplus for the U.S.  Thus the trade deficit.  But why does the deficit tend to be larger for wealthier, densely populated nations?  These nations have grown wealthy because of their large trade surplus in manufactured goods, not just with the U.S. but with the whole world.  Poorer, densely populated nations are poor because of their overcrowding and because they haven’t been able to elevate their standard of living by manufacturing for export.

So far, it seems we can conclude that low wages don’t necessarily cause trade deficits.  And we can conclude that our trade imbalance (whether its a surplus or deficit) with poor, low wage nations tends to be small, but grows as partner nations become wealthier.  Whether the imbalance is a surplus or deficit seems determined not by wealth and incomes, but by population density relative to the United States.

Economists may argue that those deficits are due to some other factors – currency manipulation perhaps (and we’ll examine that one soon) – but as wages rise, our trade deficit will shrink as our exports become more affordable and their exports become more expensive for us.  Sounds logical, doesn’t it?  Alright, let’s see what the data says.  Let’s begin with a look at how the wealth of these fifteen nations (as measured by PPP) has changed relative to the U.S. since 2001.  U.S. PPP has risen by 38.1% during that period.  So, if a trade partner experiences the same increase in PPP, then their wealth relative to the U.S. hasn’t changed.  If it rises by 48.1%, then the wealth (and wages) in that nation have risen 10% relative to the U.S.  Using that methodology, here’s how the wealth of these nations has changed relative to the U.S. since 2001:  %Change in PPP Relative to U.S..

As you can see, eleven of our top fifteen trade partners experienced faster growing wealth (as measured by PPP) than the U.S., led by China with a growth rate of 210% in excess of the growth rate in the U.S.  On the other hand, four nations – all European nations – experienced a decline in wealth relative to the U.S., led by Italy with a decline of 20%.  If economists are right, then we should see an improvement in our balance of trade with nations that are growing more wealthy relative to the U.S., and a worsening of our trade balance with those nations where wealth (and wages) are declining.  Let’s take a look at the facts.  Here’s a chart that plots that change of wealth since 2001 vs. the change in our per capita balance of trade in manufactured goods:  %Change in PPP vs. %Change in Balance of Trade.

Here we see a shotgun-like scatter of data.  In trying to insert a computer-generated trend line, I got lines sloped in both directions depending on the type of line – linear, exponential, logarithmic and power.  To emphasize the randomness of the data, consider the following:

  • Eleven of these fifteen top trade partners grew in wealth (as measured by PPP) relative to the U.S., led by China with a growth of 210%.  Of these eleven, the U.S. experienced a worsening of its balance of trade with seven of them – the opposite of how economists say it should have responded to rising wages in those nations.
  • Four nations experienced a decline in wealth relative to the U.S., led by Italy with a 20% decline.  (The others are also European nations – the U.K., the Netherlands and France.  Germany was the only European nation among the five nations to experience an increase in wealth relative to the U.S.)
  • Of these four nations that experienced a decline in wealth (and wages) relative to the U.S., our balance of trade worsened with three of them.  It improved with the Netherlands.  This is in line with what economists predict should happen.
  • Overall, our balance of trade responded to changes in wealth among our top fifteen trade partners as economists would predict in only seven instances – less than 50% of the time.

From this data, we can conclude two things regarding the effect of wealth and wages among our trade partners: (1) The imbalance of trade – both surpluses and deficits – will tend to be larger with wealthier nations.  Whether the imbalance is a deficit or surplus has little to do with wages, but is determined by population density.  (2) Over the 12-year span studied, changes in wealth don’t predict which way our balance of trade will change.  Rising wealth is no more likely to improve our balance of trade than it is to erode it.

Currency Exchange Rates

Finally, let’s see what effect changes in currency exchange rates may have played in changing our balance of trade with these top fifteen trade partners.  Economists say that a stronger currency relative to the U.S. dollar should make a nation’s exports more expensive for American consumers and should make American products more affordable for consumers in that nation.  Thus, our balance of trade should improve.  Deficits should get smaller and surpluses should grow.

If we plot this on a bar chart, with two bars representing the percent change in balance of trade in manufactured goods and the percent change in currency, we should see both bars on the same side of the line, if economists are correct.  A positive change in the value of a nation’s currency should correspond with a positive change in our balance of trade with that nation.  So let’s see what really happened.  Here’s the chart:  %Change in Balance of Trade vs % Change in Currency.

Not only do economists seem to be wrong on this issue, the exact opposite seems to be true.  Growth in a nation’s currency exchange rate vs. the dollar is actually far more likely to correspond with a worsening of our balance of trade – not an improvement.  As you can see, economists’ prediction held true with only four nations – India, Canada, Brazil and the Netherlands.  In the case of India, a slightly weaker currency corresponds with a huge increase in our trade deficit.  In the other three cases, a strengthening of the currency corresponds with an improvement in our balance of trade.   In a 5th case – Saudi Arabia – our balance of trade in manufactured goods improved dramatically while the currency exchange rate held steady.  (The Saudi currency is pegged to the dollar.)  With ten of these fifteen nations, the change in our balance of trade was exactly the opposite of what economists predict.  The most blatant example is Venezuela.  In spite of their currency devaluing by 495% since 2001, our balance of trade in manufactured goods with them actually improved by 184%!  In the case of Italy, the Euro rose by 31% but our balance of trade with Italy worsened by 42%.  In the case of China, their currency rose by 24% while our balance of trade with them worsened by 319%!

Once again, economists are wrong and have the cause and effect relationship backwards.  Instead of currency rates affecting the balance of trade, what appears to be happening is that the balance of trade affects currency exchange rates.  If a nation has a trade surplus with the U.S., their currency strengthens.  If a nation has a trade deficit with the U.S., its currency tends to weaken.

Conclusion:

An analysis of trade between the U.S. and its top fifteen trade partners, accounting for 72% of all American exports and imports, proves that the balance of trade in manufactured goods is determined by the population density of the nation in question.  Almost without fail, America experiences a trade deficit with nations more densely populated, and a trade surplus with nations less densely populated.

Claims that low wages cause trade deficits are false.  Our worst trade deficits are with densely populated, wealthy nations.  Densely populated nations that build their economies on manufacturing for export experience growth in their wealth and wages.

Claims that low currency values cause trade deficits are also clearly false.  The cause and effect is just the opposite.  A trade deficit with a particular nation tends to drive the value of that nation’s currency higher.  A trade surplus tends to drive that nation’s currency value down.

Those who claim that if we’re just patient enough, rising incomes and currencies will reverse our trade deficits, haven’t tested their theories against actual data.

Because the majority of the world’s population lives in densely populated conditions, the U.S. is doomed to a massive trade deficit in manufactured goods and a loss of manufacturing jobs as long as it places its faith in flawed free trade theory that fails to account for the role of population density in driving trade imbalances


U.S. Trade Deficit with Germany Soars to New Record

March 21, 2013

The U.S. trade deficit with Germany shattered the record set only one year earlier, soaring from $49.3 billion in 2011 to $59.7 billion in 2012.  The deficit in manufactured goods was $59.9 billion, completely erasing a small surplus in all other categories of goods.  Here’s a chart of the U.S. trade balance with Germany since 2001:  Germany Trade

Economists say that a strengthening currency with our trade partner should improve the balance of trade in our favor.  They also say that low wages cause trade deficits, and that our trade deficit should improve as wages rise, making theirexports more expensive and our exports more affordable.  Here are two charts that plot our exploding trade deficit in manufactured goods with Germany against their currency (Euro) exchange rate and against the change in their per capita purchasing power parity (PPP) – a measure of their wealth and analagous to wages there:  Germany Trade vs Exchange Rate, Germany Trade vs PPP

As you can see, as our trade deficit with Germany has worsened dramatically, the Euro has been rising, from 1.16 Euros per dollar in 2001 to 0.8 Euros per dollar in 2012.  And German PPP has risen by 44% during that same time frame (while U.S. PPP rose 38%).  Clearly, the currency theory holds no water in this case.  Nor does the theory about low wages.  So much for economists’ usual trade scapegoats.  Furthermore, economists, how do you explain the following?

  1. If low wages cause trade deficits, why is our deficit with Germany, when expressed in per capita terms (thus factoring the sheer size of nations out of the equation), the worst among our top five trade partners (Canada, China, Mexico, Japan and Germany) – almost three times worse than our deficit with China – in spite of the fact that they are a wealthy nation, second only to Canada? 
  2. And why is our next worst deficit with Japan (again, almost three times worse than our deficit with China), also a wealthy nation?
  3. Why does Canada have a large trade deficit in manufactured goods with the U.S. when U.S. wages are higher than those in Canada? 
  4. Of these top five U.S. trading partners we’ve examined so far, why has our trade imbalance responded to changes in currency valuation as economists would predict with only one country – Mexico? 
  5. And why has our trade imbalance responded to rising incomes as economists would predict in only one case – Canada?

In contrast to economists’ theories on trade imbalances, the disparity in population density between the U.S. and these top five trading partners has accurately predicted the trade imbalance in every single case.  With the one nation less densely populated than the U.S. (much less), the U.S. enjoys a healthy trade surplus in manufactured goods.  With all four other nations – all of whom are more densely populated than the U.S. – we endure big deficits. 

If you’re new to this blog and don’t understand why population density disparity is by far the single biggest determinant of the balance of trade between the U.S. and other nations, making free trade with badly overpopulated nations tantamount to economic suicide, please read my book, Five Short Blasts, and explore the other data presented on this site. 

My next article will summarize in a similar fashion U.S. trade with our top 15 trade partners.


The Good Half of NAFTA

March 11, 2013

This article marks the beginning of my annual update of trade data for 2012, about a month behind schedule.  Sorry about that, but it’s not my fault.  I’ve been waiting for the Foreign Trade Division of the Census Bureau to publish its annual update of country-by-country trade broken down by the 5-digit “end use code” for all products.  After waiting a month beyond that time when it’s usually published, it became apparent that, for whatever reason (budget cuts, perhaps?), it’s not happening. 

So I’ve had to adjust, switching to data broken down by the 6-digit NAICS code (North American Industry Classification System).  It classifies products in much finer detail than the 5-digit end use code – more detail than necessary for my purposes.  So it’s ballooned my spreadsheets and made my data gathering more difficult.  But for me, at least, it’s fascinating data and interesting work, and so it goes on.

As in the past, I’ll begin with America’s top trading partner, the nation that accounts for 16.1% of all of our exports and imports.  Some may be surprised that it’s not China.  The title of this article should tip you off.  The North American Free Trade Agreement (NAFTA) went into effect in 1994 and established a trilateral free trade zone encompassing the United States, Canada and Mexico.  In terms of total imports and exports, Canada is our biggest trading partner, beating China by $80 billion per year who, in turn, beats Mexico (the other half of NAFTA and our 3rd largest trading partner) by $42 billion. 

Our trade results with Canada stand in stark contrast with our balance of trade with the rest of the world in the critical category of manufactured products.  Here’s a chart of the data for the past twelve years, broken into five categories –  food, feeds and beverages; energy resources (oil, gas, coal & nuclear); metals & minerals; forestry products (lumber, logs, etc.); and manufactured products:  Canada Trade.

Our trade deficit with Canada improved slightly in 2012, declining to $32.5 billion from $35.7 billion in 2011.  The reason for the deficit is no mystery; Canada is, by far, our largest source of imported oil.  Our deficit in that category alone was $83 billion in 2012.  In the category of manufactured products, it’s an entirely different story.  In 2012, we had a trade surplus of $66 billion in manufactured goods with Canada – much larger than with any other nation.  Why do we have such success with Canada when the U.S. suffers a trade deficit in manufactured goods of over $500 billion with the rest of the world?  It’s a matter of population density.  Canada’s is one tenth of the U.S.’s. 

Especially when it comes to our trade deficit with China, economists are fond of blaming low wages in China and a Chinese currency that is kept artificially weak by Chinese manipulation.  But, just as the laws of physics must be valid regardless of one’s frame of reference (the foundation of Einstein’s theory of relativity), so too must the laws of economics.  They should apply to trade with every nation or, if it appears that they don’t, there should be a good explanation.  So let’s see how these claims hold up in the case of trade with Canada.  The following is a chart of our balance of trade with Canada vs. the exchange rate between the Canadian and U.S. dollars:  Canada Trade vs. Exchange Rate.

If economists’ claim that a stronger currency makes imports cheaper for our trading partner and makes their exports more expensive, thus helping our balance of trade, then what we should see is an “X” pattern in this chart.  As the exchange rate drops, the U.S. balance of trade should rise.  (The exchange rate can be a little tricky to understand.  A drop in the rate means that the other country’s currency has gotten stronger.  If it once took two Canadian dollars to buy an American dollar, and now it only takes one, then the Canadian dollar has become twice as strong.) 

In this case, the claim is valid.  As Canada’s dollar has strengthened, from 1.53 in 2001 to being equal to the U.S. dollar in 2012, our balance of trade with Canada (including manufactured goods, as we saw in the previous chart), has improved.  Our deficit has shrunk from $53 billion per year in 2001 to $32 billion in 2012.  But is this improvement really due to the change in exchange rate, or is it due to Canada’s low population density?  The answer to that question will become evident as we explore our trade results with more countries in upcoming articles.

As for the claim that trade deficits are caused by low wages – that is, that manufacturers will move production to where the labor is cheapest –  here’s a chart of our balance of trade with Canada vs. Canada’s purchasing power parity (PPP), a good measure of wage rates relative to our own:   Canada Trade vs. Canada PPP.  As you can see, as incomes have risen in Canada, our balance of trade has improved, just as economists suggest would happen.  But one data point doesn’t validate the theory.  Again, has our balance of trade with Canada improved because of their rising incomes and stronger currency, or has it improved because of Canada’s low population density?

And consider this:  it’s not as though our suplus in manufactured goods with Canada is purely a matter of exporting goods to them while importing nothing.  The U.S. imports more manufactured products from Canada – a high-wage nation – than from any other nation except China.  (We import slightly more from China.)  But China has 40 times more people than Canada.  When expressed in per capita terms, our imports of manufactured goods per Canadian dwarfs those from China!    How do you explain that?  How would economists explain it?  It’s because Canada’s low population density makes them capable of having a high rate of per capita consumption – perhaps even higher than that of Americans.

Free trade with this half of NAFTA – Canada – has indeed been very beneficial to the United States.  This is one situation where it works very well.  There are others, too. But free trade doesn’t always yield such results.  There are situations – as when trading with badly overpopulated nations – when free trade is tantamount to economic suicide. 

So stay tuned.  My next article on our number two trading partner – China – will paint a very different picture.


America’s 20 Best Trade Partners

July 26, 2012

Back in June, I published a list of America’s 20 Worst Trade Partners.  We saw that the list was heavily dominated by nations more densely populated (most were far more densely populated) than the U.S.  Which begs the question:  who are America’s best trading partners and what role, if any, does population density play in that list?  So, using the per capita balance of trade in manufactured goods as our criteria once again, here’s the list:  Top 20 Surpluses, 2011

Here are the key take-aways from this list:

  • The list is dominated by two groups of nations:
    • Net oil exporters.  Regardless of their population density, net oil exporters are flush with U.S. dollars to spend on U.S. goods.  Net oil exporters tend to be large nations with small populations, leaving them with a surplus of oil.  But the list includes four very unique countries, all very tiny and with relatively large populations for their size, but literally afloat on seas of oil:  United Arab Emirates, Qatar, Kuwait and Brunei. 
    • Low population density countries.  Aside from the four net oil exporters mentioned above, only three of the remaining 16 nations are more densely populated than the U.S.:  Belgium, the Netherlands and Panama.  Panama is the least  densely populated of the three, and enjoys a unique situation.  They are flush with U.S. dollars, like net oil exporters, but their dollars are derived from operation of the Panama Canal. 
  • While the average population density of America’s 20 worst trade partners was 491 people per square mile, the average population density of America’s 20 best trade partners is only 191 per square mile.  But here’s a piece of data that really drives home the difference between the two groups:  the total population density of America’s 20 worst trade partners (their total population divided by their total area) is 350 people per square mile.  The total population density of America’s 20  best trade partners is 22 people per square mile.  America’s 20 worst trade partners are 17 times more densely populated than America’s 20 best trade partners.
  • In terms of wealth, the average Purchasing Power Parity (PPP) of America’s 20 best trade partners is $32,630, nearly identical to the average PPP of America’s 20 worst trade partners ($33,770) – further evidence that wages (as measured by wealth) play no role in determining global trade imbalances.
  • Canada is second only to United Arab Emirates on the list of our best trade partners.  Canada has two things going for them:  they’re both a net oil exporter (in fact, America’s biggest source of imported oil) and they enjoy a very low population density.  By contrast, Mexico, our other NAFTA trade partner, is America’s 14th worst trade partner.  They too are net oil exporters, but they’re 15 times more densely populated than Canada. 
  • Five South American nations appear on the list.  Not a single South American nation appears on the list of America’s 20 worst trade partners.  Why?  Not a single South American nation is more densely populated than the U.S.

Finally, it’s worth noting here how the countries of these two lists would be impacted by the population density-indexed tariff structure I proposed in Five Short Blasts to restore a balance of trade in manufactured goods.  Of our 20 worst trade partners, all but two – Sweden and Estonia – would have been subjected to such a tariff.  Not a single nation on the list of our 20 best trade partners would be subjected to a tariff – either because of their low population density or because they are already net importers of American manufactured goods.  This would also leave our largest sources of imported oil free of tariffs.  The point is that the U.S. would have nothing to fear in terms of retaliatory tariffs. 

Now, having examined these two lists of our best and worst trade partners, and the obvious role that population density plays in determining those lists, how much sense does it make to ignore it and apply the same free trade policy to both groups of nations?


America’s Top 20 Customers of Made-in-the-USA Products

December 6, 2011

In a previous post we looked at a list of America’s 20 worst per capita trade deficits in manufactured products.  Today we look at the other end of the spectrum – our top 20 trade surpluses in manufactured products.  In per capita terms, these are the people of the world (other than Americans themselves) who are America’s best customers for American made products.  You may be surprised.  Here’s the list:

 Top 20 Surpluses, 2010

The nations that you see high-lighted in yellow are net exporters of oil.  More about that in a minute.  First, though, it’s important to note that, unlike the list of our worst per capita trade deficits, which was dominated by densely populated countries (only 3 were less densely populated than the U.S.), this list is dominated by sparsely populated countries. 

But there are some notable exceptions, beginning with the top 2 countries – Qatar and United Arab Emirates (UAE).  In general, sparsely populated nations are rich in natural resources and maintain balances of trade by trading those resources for manufactured goods, including American products.  But Qatar and UAE are rare exceptions.  They are very tiny, densely populated nations who just happen to be literally afloat on a sea of oil.  Thus, in spite of their dense populations, they still have large surpluses in those resources that they can trade for manufactured goods, just like the more sparsely populated larger nations, rich in resources, like Canada and Australia.  Kuwait and Brunei are two more examples who appear on the list – tiny, densely-populated nations afloat on a sea of oil, just like Qatar and UAE. 

That leaves four other nations on the list who are more densely populated than the U.S. – Belgium, Panama, The Netherlands and Lebanon.  Panama is easy to explain.  They are only slightly more populated than the U.S. and derive the lion’s share of their wealth, which they’re then able to trade for American manufactured goods, from an unusual source – operation of the Panama canal. 

That leaves only Belgium, The Netherlands and Lebanon – very tiny nations and the three most densely populated nations on the list, by far – as the only remaining anomalies.  The first two are among the wealthiest nations on earth.  And even Lebanon ranks close to the top third of nations in terms of purchasing power.  How do these nations defy the population density bugaboo that makes virtually every other densely populated nation on earth dependent on manufacturing for export?   

First of all, it’s important to note that these three are very tiny nations who, combined, are smaller than the state of Indiana.  Together they make up only 0.07% of the earth’s land mass while the remaining 17 nations on the list account for over 18%.  Nations so small as these tend to have unusual economies that are heavily skewed toward services, especially financial services, and they then trade those services for manufactured goods.  It’s the very reason that I rolled the data for tiny city states like Singapore, Liechtenstein, Luxembourg, San Marino and others into the data for the larger, surrounding countries. 

Regarding Lebanon’s economy, the CIA World Fact Book has this to say:

The Lebanese economy is service-oriented; main growth sectors include banking and tourism.

Tourism?  Really?  While few Americans aside from those with family ties would choose to travel to Lebanon, it seems that their Mediterranean beaches are a big draw for people in that part of the world.  And this is actually the reason that I excluded tiny island nations from my study of population density and per capita consumption.  All have very unique economies dependent on tourism, and they trade tourist dollars for American-made products.  It’s also the same reason that Belize appears on this top 20 list.  While not an island, it too is a small country heavily dependent on tourism. 

In the final analysis, aside from the anomalies of these three tiny, densely populated countries and a few tiny major oil exporters, low population densities dominate the list of nations with whom the U.S. has surpluses in manufactured goods.  The combined population density of the 20 nations on this list is only 20 people per square mile.  Compare that to the list of our top 20 trade deficits, where the combined population density was 343 people per square mile.  The contrast is so stark it bears repeating:  20 people per square mile vs. 343 people per square mile (four times the population density of the U.S.).

If the president wanted to make real progress on restoring a balance of trade, he’d drop his goal of doubling exports and instead focus on boosting free trade with sparsely populated nations while implementing tariffs on imports from densely populated nations. 

Now that we’ve looked at both ends of the trade spectrum, we’ll next consider the entire trade picture for 2010.  Stay tuned.