Currency Valuations and Trade, 2001-2012

May 23, 2014

Economists claim that, when the dollar strengthens vs. other currencies, our trade deficit will worsen as our exports become more expensive for other nations and as our dollar goes further toward the purchase of imports.  Our large trade deficit with China is often blamed on the Chinese manipulating their currency to keep it artificially low in value in order to protect their trade surplus with the U.S.

In my previous post, in which we examined the effects of changes in curency valuation from 2011 to 2012 – just one year’s worth of data – we concluded that any such evidence in support of economists predictions was pretty sketchy at best.  We concluded that tracking the data over a longer time frame was necessary.

So, in this post, we’ll examine changes in currency valuations and America’s imbalances in trade in manufactured goods from 2001 to 2012.  Surely, this should be enough time for long-term changes in valuations to have their effect on trade imbalances if, indeed, there is any effect at all.

Here’s a scatter chart that plots the change in currency valuation vs. the change in America’s trade imbalance in manufactured goods over this twelve-year time frame:  2001-2012 Change.  One thing jumps out right away – that most of the data points lie to the left of the y-axis, indicating that most nations’ currencies fell in value relative to the dollar.  This would seem to suggest that America’s trade imbalance should have worsened over this time frame.

It depends on how you look at it.  In fact, America’s trade imbalance actually worsened dramatically during that time frame.  But if you simply average the change for each country, without weighting them for our trade volume (in other words, for example, tiny Cameroon is counted the same as China) the average change in America’s trade imbalance is a big improvement of 286%, in spite of an average decrease in exchange rate (or strengthening of the dollar) of 11.1%.  You have to look at the individual data points to understand this large discrepancy.

There were many very large swings in our trade imbalances over this 12-year time frame.  For example, we experienced a worsening imbalance of more than 1000% with three nations:  Estonia (-7,732%), Nicaragua (-1,388%) and Vietnam (-1,000%).  On the other hand, we experienced an improvement in our balance of trade of more than 1,000% with 15 nations.  They are Malawi (4,827%), Iraq (4,815%), Iran (3,770%), Ethiopia (3,416%), Sudan (2,624%), Guinea-Bissau (2,033%), Benin (1,48%), Papua New Guinea (1,868%),  Suriname (1,856%), North Korea (1,732%), Mozambique (1,597%), Russia (1,345%), Tajikistan (1,231%), United Arab Emirates (1,170%) and Togo (1,101%).

The U.S. experienced an improvement in its trade balance in manufactured goods of between 500% and 1,000% with fifteen other nations, but let’s stop right here.  An examination of the above list of 15 nations makes it apparent that there is much more at play here than population density or currency valuations to explain such huge increases.  There’s politics at play.  You’ll notice many African nations on this list.  It’s no secret that, as China’s influence in Africa has grown as Africa has become a major source of resources and raw materials for China’s economic expansion, the U.S. has tried to counter China’s growing influence there with big increases in foreign aid.  And all aid is counted as exports at book value.  Iraq and Tajikistan?  Huge influxes of military equipment and supplies to prosecute the wars in Iraq and Afghanistan.  Iran (until recently) an attempt to curry favor with the more moderate regime that has taken hold there.

So averaging all these countries together is yielding a very distorted picture.  As we did in my previous post, let’s simply break it down by country – which ones’ currencies increased or decreased in value, and how did our trade imbalance with them respond?  Of the 164 nations studied, 67 experience a weakening of their currency.  Our trade imbalance weakened with 21 of them.  (Economists would predict that our trade imbalance would have worsened with a majority of them, not by only 31%.)

The currencies of 76 nations rose in value.  Of these, our trade imbalance improved with 52 of them.  This is more in line with what economists would predict.  In seven cases, currency valuations were unchanged.  Our balance of trade weakened with one of them.  (There was no currency data available for 14 nations.)  So, all total, our trade imbalance responded as predicted in 73 of 156 cases – a little less than half.  What this tells us is that changes in our trade imbalance as a result of currency valuation changes was completely random.  There is no relationship whatsoever.

And what if we focus on just America’s top 15 trade partners who account for 95% of all of America’s trade?  What we find is that the currencies of eleven of them rose from 2001-2012 relative to the dollar.  In response, our balance of trade improved with only three of them – Canada, Brazil and the Netherlands.  Three others experienced weakening currencies – Mexico, India and Venezuela.  Our balance of trade worsened with all but Venezuela.  Saudi Arabia’s currency was flat (since it’s tied to the dollar).  Our balance of trade improved with them.  So, when it comes to our top trade partners, our balance of trade responded over a 12-year period as economists would suggest  in only four cases – exactly the opposite of what economists would predict.


This results of this twelve-year study prove that there is absolutely no merit to economists’ claims that currency valuations plays a  role  in driving trade imbalances.  Blaming other nations for manipulating currency valuations to gain unfair trade advantages is a complete waste of time.

Another of economists’ popular scapegoats for trade imbalances is the lure of low wages in foreign countries.  We’ll explore the validity of this claim in an upcoming post.

Currency Valuations & Trade in 2012, Part 1

May 18, 2014

While compiling the trade data for 2012 that’s been the subject of recent posts, I also gathered currency valuation data (from the OANDA web site) for  each trading partner.  In the past, I’ve done this with America’s largest trading partners and the data seemed to indicate that currency valuation plays no role in driving trade imbalances and that, if anything, the relationship between currency valuation and trade imbalance is the opposite of what economists suggest – that changes in currency valuation are actually the result of trade imbalances, not the cause.  It’s an intriguing finding, one that merits a more exhaustive study.  So I expanded it to include every country.

Effect of Changes in Currency Valuations, 2011-2012

Let’s begin with the changes in trade balances in 2012 from the previous year.  Here’s a scatter chart that plots change in currency valuation vs. the change in the balance of trade in manufactured goods from 2011 to 2012:  2011-2012 Change.  As you can see, this chart shows no correlation whatsoever.  Most of the data points lie to the left of the zero line of the x-axis,  meaning that most currencies of the world weakened relative to the dollar in 2012.  Economists would predict that, therefore, most of the data points would lie below the zero line of the y-axis, indicating that our trade imbalance worsened in response.  In fact, of the 110 nations who experienced a decline in their currency relative to the dollar, our trade imbalance worsened with 67 of them.  It improved with 43 of them.  That seems to provide some weak evidence that economists may be right.

But, wait.  Not so fast.  There are other indications that just the opposite may be true.  For example, on average, other nations’ currencies declined vs. the dollar in 2012 by 8%.  Yet, on average, our trade imbalance in manufactured goods actually improved by 14%.  This seems to contradict the fact that, overall, our trade imbalance actually worsened in 2012.  The reason for the contradiction is that these figures aren’t weighted according to nations’ sizes.

And if we look at the 20 nations with the biggest declines in their currencies, we find that our trade imbalance weakened with only nine of them.

Furthermore, although most nations’ currencies declined in 2012, not all of them did.  Twenty-two nations’ currencies actually rose.  Of these, our balance of trade improved, as economists would predict, in only eleven cases – exactly half.

The currencies of twenty nations experienced no change at all vs. the dollar.  Our trade imbalance improved with sixteen of them.

There was no currency data available for eleven nations.

If we narrow our focus to our fifteen largest trading partners, who account for 95% of America’s trade volume, we find that ten of them experienced a decline in the value of their currency.  Our balance of trade weakened with all of them but one – France.  However, it should also be noted that, of these ten countries, eight of them are more densely populated than the U.S., and our trade imbalance worsened with every one of them.  Of the remaining five nations, three experienced an increase in the value of their currency – China, Japan and India.  Yet, our trade imbalanced worsened with all three, who also happen to be much more densely populated than the U.S.

Two of the fifteen had a stable currency valuation in 2012 – Saudia Arabia and Venezuela – both big oil exporters.  Our balance of trade improved with both of them in 2012.

It’s difficult to separate the effect of currency valuation from the effect of population density on our trade imbalance in manufactured goods.  But, while the effect of population density is clear – that trading with nations much more densely populated virtually assures a worsening trade imbalance – the effect of currency valuation is sketchy at best.  Of the 132 nations who experienced a change in currency valuation in 2012, our trade imbalance responded as economists would predict in only 78 of those situations – 59% of the time.

2012 was a year in which the dollar rose relative to most currencies.  And it was a year in which our trade imbalance worsened.  Was it because we continue to pursue free trade with badly overpopulated nations or was it because of currency valuation?  Maybe it would help to take a longer-term perspective.  Stay tuned for the next post on this subject.


Toyota Fires American Workers, None in Japan

January 24, 2009

Earlier this month, Toyota announced their first-ever annual loss in their 70-year history.  (See “Toyota Dumping Cars on U.S. Market.”)  The strenghtening of the yen is one of the major factors.  In response to this, Toyota announced a couple of days ago that they would be laying off 1,000 workers in North America and Europe.  Then today comes this announcement – that they will be cutting production in their Japan plants by 60%. 

Toyota Motor Corp (7203.T) plans to reduce vehicle production in Japan by nearly 60 percent in April, a level that could force it to cut its domestic workforce amid slumping car sales, Tokyo Shimbun newspaper reported on Saturday.

Yet, in spite of this huge cut in production in Japan, not a single Toyota employee will lose their job.

Toyota, the world’s biggest automaker, is whittling down its non-permanent workforce by letting contracts expire, but executives have said they intend to leave full-time staff untouched despite unprecedented factory suspensions in Japan.

Toyota has announced plans to close all its domestic factories for a combined 14 days between January and March, reducing work to a single shift at 17 assembly lines, out of 75 globally, at different times from January and February.

What I find interesting is that, if the currency exchange rate is now a major factor in Toyota losing money, it would make sense to shift operations and production to North America and Europe, where the currency is weak, and cut operations in Japan.  Yet, they are doing just the opposite. 

This is a good example of what I’ve been saying about currency exchange rates – that a falling dollar will do nothing to reduce the trade deficit.  Japan and other nations who are utterly dependent on sustaining a huge trade surplus with the U.S. in order to avoid high unemployment will do anything to keep production in their home country, even if it seems to make no business sense.  They’ll do anything to hold onto their domestic production, including dumping, subsidizing their automakers, etc.  They do this because they know that it’s a relatively cheap way to keep jobs, much cheaper than government programs and unemployment insurance.  They voice support for the concepts of “free” trade and market forces but, when a global recession takes hold and it becomes every man for himself, see how quickly they retreat into taking care of their own. 

You may point to the big drop in the trade deficit in November as evidence that the weakening dollar is having  an effect on the trade deficit, but that’s not true.  The trade deficit fell in November due to an over-all slowdown in consumer spending, and not due to any shift in consumer spending away from imported products to domestically made products. 

I bring all of this up to emphasize the point that it is absolutely futile to count on outside forces – things like currency valuation and trade negotiations – to rein in our trade deficit.  Decades of experience with this approach have only yielded a trade deficit that has exploded completely out of control.  The only way to get the deficit under control is to take positive action in the form of tariffs to assure a balance of trade.  It worked for the first 171 years of our history – from 1776 to 1947, when we signed the Global Agreement on Tariffs and Trade – and it would work again.  Our trade policy for the last six decades has been an abysmal failure.  It’s time to go back to what has been proven to work.