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.


Trade Deficit with Japan Grows 22% in 2012

March 18, 2013

We now turn our attention to Japan, America’s 4th largest trade partner (by total imports and exports), accounting for 5.7% of all U.S. trade in 2012.  In 2012, the U.S. imported $141 billion in manufactured goods from Japan, an increase of $16.7 billion, while our manufactured exports to Japan rose by only $6.3 billion.  The result was that our deficit in manufactured goods with Japan worsened by 12.6%, contributing the lion’s share to an overall worsening of our trade balance with Japan of 22%.  If you’re president Obama, with his myopic focus on exports, the $6.3 billion increase can be ballyhooed as great news – as long as you’re dumb enough to turn a blind eye to the much worse increase in imports. 

It should come as no surprise that automobiles account for $37 billion of the imports from Japan, dwarfing the next biggest category of products – motor vehicle transmission and power train parts, at $6.2 billion.  That’s a $7 billion increase in imports of Japanese vehicles over 2011.   In comparison, the U.S. exported less than $1 billion worth of automobiles to Japan in 2012.  No suprise.  The Japanese auto market is so badly stunted by overcrowding that even Japanese auto companies have trouble selling vehicles there. 

Here’s a chart of our overall balance of trade with Japan, dating back to 2001:  Japan Trade

In response to my suggestion that the U.S. needs to change its trade policy and return to the use of tariffs to assure a balance of trade, people sometimes reply that “tariffs don’t work; they’ll just raise their tariffs too and we’ll lose all our exports.”  Or I hear that “you can’t do that; it’ll start a war.”  Well, here’s a link to an article that appeared on Reuters just a couple of days ago, reporting on Democratic lawmakers’ alarm that Japan might be included in Obama’s trade talks:

http://www.reuters.com/article/2013/03/15/us-usa-japan-autos-idUSBRE92D14A20130315

“In an industry with razor-thin profit margins, the elimination of the 2.5 percent car tariff (as well as the 25 percent truck tariff) would be a major benefit to Japan without any gain for a vital American industry, leading to more Japanese imports, less American production and fewer American jobs,” the lawmakers said in a letter to Obama.

… Levin (Michigan senator Carl Levin) … played a major role in persuading the Obama administration to renegotiate auto provisions of a free trade pact with South Korea.

The revised pact, which took force one year ago, allowed the United States to keep its 2.5 percent tariff on South Korean autos until the fifth year and to keep its 25 percent tariff on South Korean light trucks until the eighth year, when it will begin to be phased out.

Has anyone noticed that you don’t see any Japanese or Korean trucks on American roads (aside from Japanese-brand pickup trucks that are built in the U.S.)?  That’s because 25% tariffs have been extremely effective in keeping them out, preserving market share for American truck manufacturers.  And have you heard any Americans complaining about that?  Has anyone complained that shipping costs are too high because we don’t have enough cheap Japanese and Korean trucks in our trucking fleets?  Of course not.  People do complain about shipping costs, but that’s because of the high price of fuel.  Virtually no one in America even knows that we maintain high tariffs on Japanese and Korean trucks, with the exception of people employed in the truck-manufacturing industry – people who owe their jobs to those tariffs.

Why don’t we take the same approach with automobiles?  Since the Japanese and Koreans won’t buy our cars, why don’t we raise our tariffs on theirs?  Why don’t we take this same approach to all of our trade imbalances with other nations? 

As I’ve done in my previous articles on our top three trade partners – Canada, China and Mexico, let’s now take a look at how our trade balance with Japan has responded to changes in Japan’s currency and Japan’s purchasing power parity – or PPP – analagous to Japanese wages.  Economists are fond of blaming trade deficits on artificially low currency values and on low wages.  Here’s a chart of our trade deficit in manufactured goods with Japan vs. the yen-dollar exchange rate:  Japan Trade vs Exchange Rate

As you can see, while the yen held steady in value in 2012, our trade imbalance with Japan worsened dramatically.  In fact, over the past eleven years, while the yen has appreciated in value by 37% – rising in value from 124.4 yen per dollar to only 79.22 yen – our trade deficit worsened by 14%, rising from $80 billion in 2001 to $91 billion in 2012.  This is exactly the opposite of what economists say should happen.

In the meantime, Japan’s PPP has increased by almost 40%, rising from $25,900 in 2001 to $36,200 in 2012.  Of course it’s gone up.  The Japanese are getting richer from their growing trade surplus.  In the meantime, Americans’ median income has actually declined.  Here’s a chart of our trade deficit in manufactured goods with Japan vs. the rise in their PPP:  Japan Trade vs PPP

Once again, we see that the “low wages” theory doesn’t hold water.  Our trade deficit with Japan gets worse as their wages have risen.  And, in terms of PPP, Japan ranks among the top 16% of the wealthiest nations on earth.  They’re not a “low wage” nation at all.  In fact, our trade deficit in manufactured goods with Japan, expressed in per capita terms,  is three times worse than our deficit with China, in spite of the fact that wages in Japan are four times higher than Chinese wages.  How do you explain that? 

The explanation is that low wages and currency valuations have almost nothing to do with trade imbalances, while they have everything to do with disparities in population density between the U.S. and its trading partners.  So far, with America’s top 4 trading partners, accounting for 48.7% of all of our trade, population density accurately predicts the balance of trade with all four, while the currency valuation theory is batting only .500 and the low wages theory is batting .250.

In my next two articles, we’ll focus next on our 5th largest trading partner – Germany, followed by an overall assessment of trade with our top 15 trading partners.  Stay tuned.


The ‘Malo’ Half of NAFTA

March 15, 2013

In the previous two articles, we examined trade with America’s two largest trading partners (by total imports and exports):  Canada and China.  We saw that while the U.S. has a fairly large trade deficit with Canada, all of it and more is due to the fact that Canada is by far our largest source of imported oil.  The U.S. actually enjoys a healthy surplus of trade in manufactured goods with Canada, making Canada the good half of NAFTA – the North American Free Trade Agreement.

Now we turn to the other half of NAFTA – Mexico.  Mexico is a fairly densely populated nation – almost twice as densely populated as the U.S.  Mexico isn’t a wealthy nation but, by world standards, they’re not poor either.  With a per capita purchasing power parity (PPP) of $15,300, Mexico ranks 83rd out of 228 nations, placing them in the top 40%.  However, 51% of its people live in poverty, though it’s not for lack of jobs.  Mexico currently enjoys a rather low unemployment rate – 4.5% – a rate that is the envy of the United States.

Here’s a chart of overall trade with Mexico, through 2012:  Mexico Trade.

Since 2007, our overall trade deficit with Mexico has moderated somewhat, dropping from $73 billion to $61 billion in 2012.  But all of that decline is due to a drop in oil imports.  Our deficit in manufactured goods rose in 2012 to $46.1 billion, only $0.8 billion shy of the record deficit set in 2007.  Expressed in per capita terms, that’s a deficit of $401 with every Mexican citizen.  In 2011, our per capita deficit with Mexico in manufactured goods was our 14th worst – worse than China, with whom our per capita deficit is “only” $258.

So, of our top three trading partners in 2012 (who together account for 43% of all U.S. trade), the U.S. enjoys a surplus in manufactured goods with only Canada, a nation with a population density of less than ten people per square mile.  The U.S. suffers large deficits with China and Mexico, nations with population densities of 361 and 151 people per square mile respectively.  You should be starting to get suspicious that population density may be a factor.

As we did with Canada and China, let’s consider the other factors that economists like to blame for trade deficits – weak currencies and low wages.  The following is a chart of our trade deficit in manufactured goods with Mexico vs. the peso-dollar exchange rate:  Mexico Trade vs Exchange Rate.

As the peso has weakened from 9 per dollar in 2001 to 14 pesos per dollar in 2012, our trade deficit in manufactured products with Mexico has worsened dramatically, almost doubling during that 11-year span.  This is the effect that economists would predict but, so far, the exchange rate theory is only batting 2 for 3, while the population density theory is batting a thousand.  Mexico’s weakening currency may explain why our enormous deficit with Mexico is so out-of-proportion to their population density. 

And I won’t deny that low wages also play a role.  Many American companies have set up shop just across the border for that very reason.  Here’s a chart of our balance of trade in manufactured  goods with Mexico vs. their PPP:  Mexico Trade vs PPP.

As you can see, Mexico’s PPP (analagous to wages in Mexico) has risen by over 50% since 2001.  But, instead of our balance of trade improving as economists would predict, our trade deficit in manufactured goods with Mexico has nearly doubled.    If the “low wages” theory really held water, we should be seeing at least some improvement in our balance of trade with Mexico as their incomes have risen dramatically.  Instead, it has gotten much worse.  Once again, we see that economists have the cause and effect backwards.  Mexicans are growing wealthier because of their surplus with the U.S., instead of rising incomes in Mexico improving our balance of trade.   So far, economists’ “low wages” theory is batting zero.

Taken together, the 55% decline in the value of the peso since 2001 essentially cancels out the 50% rise in PPP (and wages) during the same period in Mexico.  So traditional economic theory should predict that our trade imbalance with Mexico should have held steady instead of nearly doubling.  The real explanation for that is that the effects of the population density disparity are becoming more pronounced the longer we attempt to apply free trade in a situation where it’s a hopelessly inappropriate trade strategy. 

Free trade with sparsely populated Canada – the good half of NAFTA – makes sense and has been enormously beneficial to the U.S.  Free trade with Mexico – the “malo” (or bad) half of NAFTA – has been a trade policy disaster, draining hundreds of thousands of manufacturing jobs from the U.S.  And it’s getting worse as the Obama administration stands idly by and renegs on its promise to fix NAFTA.

Next up, our 4th largest trading partner:  Japan.


U.S. Trade with China: A Trade Policy Disaster

March 13, 2013

In my last article, we examined trade with Canada, America’s largest trading partner.  We saw that free trade with Canada, a nation with a population density of less than 10 people per square mile, is a resounding success.  America actually enjoys a significant surplus of trade in manufactured goods with Canada. 

Today we turn our attention to America’s second largest trading partner (in terms of total imports and exports) – China.  China is a large nation, almost exactly the same size as Canada.  But, while Canada has a population of 34 million people, China’s population is 1.35 billion people – 40 times as many – yielding a population density of 361 people per square mile.  They are more than four times as densely populated as the U.S. and 37 times more densely populated than Canada.

China is still a relatively poor nation, with a per capita purchasing power parity (PPP, essentially their GDP divided by the population) of $9,100 per year.  (America’s is approximately $48,000 per year.)  But their economy is the fastest growing in the world, and their PPP is double what it was only ten years earlier.  In fact, China now ranks 118th out of 228 nations in terms of its PPP.  At today’s rate of growth, they will rank in the top 50% of nations next year in terms of wealth. 

It’s a common misconception that American manufacturers fled for China in order to take advantage of cheap labor there.  The end results certainly seem to corroborate that theory, but that’s not really how it happened.  American manufacturers did indeed flock to China to set up shop, not to save a few bucks on cheap labor (much of which is offset by high logistics costs), but to position themselves in an untapped market of 1.35 billion new consumers.  But, once there, Chinese consumption was very slow to develop, leaving all those newly established Chinese manufacturers with lots of product to sell.  Naturally, they exported it back to the U.S.  American manufacturers, already running on thin profit margins and dependent on maintaining market share for their survival, were driven out of business in droves.  The belief among economists has been and continues to be that, if we’re just patient enough, the Chinese will develop into American-style consumers and the whole process will reverse itself.

Folks, it ain’t happenin’!  It’s not going to happen – ever.  With each passing year our trade deficit with China worsens dramatically.  The year 2012 was no different.  Here’s a chart of trade with China since 2001, shortly after they were granted “most favored nation” status by the U.S. and were admitted into the World Trade Organization:  China Trade.  In 2012, our overall trade deficit with China worsened by another $20 billion.  Of course, the Obama administration, with its myopic focus on exports, is quite pleased with the $9.7 billion increase in exports to China (of which, only $2 billion were manufactured products).  They completely ignore the $26.3 billion increase in imports from China – and the corresponding loss of manufacturing jobs. 

This is an economic and trade policy disaster for the U.S.  Our trade deficit with China alone has cost us five million manufacturing jobs and probably an equal number of ancillary, supporting jobs.  What’s going wrong?  Economists can’t admit that there may be a flaw in free trade theory that makes free trade with badly overpopulated nations a losing proposition.  Instead, they have two popular scapegoats.  The first is that the Chinese currency is kept artificially low, making their exports cheaper and making our exports more expensive to Chinese consumers.  It sounds logical.  But, if the theory is valid, then any strenghtening of their currency should begin to reverse our trade deficit with China or, at the very least, begin to slow its growth.  Here’s a chart of our trade deficit in manufactured goods with China, plotted against the Chinese yuan – U.S. dollar exchange rate:  China Trade vs Exchange Rate

Since 2005, the exchange rate has fallen steadily from 8.22 yuan to the dollar to 6.31.  (A drop in the exchange rate means that the yuan has gotten stronger.)  That’s a drop of 23.3% – enough that we should begin to see some effect.  But, aside from an improvement in the trade deficit in 2009 that was due entirely to the global slow-down in trade resulting from the deep global recession, there’s been absolutely no slowing of the growth in our trade deficit.  Does the stronger yuan hurt Chinese manufacturers’ profits?  Absolutely.  But does it make them stand idly by and watch their U.S. market share erode?  Of course not.  They respond as our own manufacturers do when profits are squeezed; they cut costs in order to hold onto (and even grow) their market share.  The result is that our trade deficit with China has actually gotten worse as their currency has strengthened.

We saw the same thing happen in trade with Japan.  While the yen-dollar exchange rate plunged from approximately 300 in the late ’60s to about 90 today, our trade deficit with Japan, instead of shrinking as economic theories suggest should happen, actually exploded.  The data shows that economists have the cause and effect backwards.  Instead of trade deficits falling in response to a falling exchange rate, it’s actually the exchange rate that falls in response to a worsening trade deficit. 

So much for that theory.  What about the claim that low wages in China are to blame for our trade deficit?  Again, it sounds logical.  But then it’s also logical that rising wages in China should be reversing or at least slowing the growth of our trade deficit with China.  Here’s a chart of our trade deficit in manufactured goods with China vs. China’s PPP, a good approximation of Chinese incomes:  China Trade vs China PPP.  Instead of our balance of trade improving while China’s PPP grew by 348%, our deficit in manufactured goods has exploded by 380%, from $83 billion in 2001 to $315 billion in 2012! 

And, by the way, if low wages are what’s fueling our trade deficit with China, then how does one explain that, in per capita terms, we have much larger trade deficits with fifteen other nations (including Ireland, Switzerland, Israel, Taiwan, Denmark, Austria, Japan, Germany, S. Korea, Mexico and Italy), all of whom have much higher incomes than the people of China?

How can this be?  It seems completely illogical – that is, until you understand that, once again, economists have the cause and effect backwards.  Instead of rising incomes producing an improvement in our balance of trade, incomes are rising in China because of our trade deficit.  Incomes in China will continue to rise as China drains more money from the American economy.

So, economists, now you’re left with nothing – no explanation whatsoever for why the same trade policy so highly successful with Canada has yielded such disastrous results with China.  The answer lies where economists dare not go – overpopulation.  People living in crowded conditions are incapable of consuming products at the same rate as Americans or Canadians.  On a per capita basis, Canadians import 135 times more from the U.S. than the Chinese.  The problem is not that Americans import too much from China, but that China imports far too little from the U.S.  They can’t.  Their overcrowding renders them incapable of absorbing their own manufacturing capacity, let alone importing more from the U.S.

When it comes to America’s trade deficit, China gets all of the attention simply because of the sheer magnitude of their trade imbalance.  But in upcoming articles we’ll see that our trade results with China are consistent with other overpopulated nations and are exactly what should have been expected when we applied a failed trade policy to a nation with one fifth of the world’s population.  China isn’t the problem.  The problem is our own trade policy, rooted in a flawed, antiquated and failed 19th century theory.


Economists’ Next Big Idea: The “Invisible Foot” (?!?)

March 2, 2013

http://blogs.reuters.com/reihan-salam/2013/03/01/to-create-growth-unleash-the-invisible-foot/#comment-330

This is the 21st century.  An unmanned vehicle roams the Martian terrain, beaming back analyses of soil samples.  The human genome has been mapped, opening the door to incredible medical advances.  Human organs can be reproduced on a 3-D printer with ink of living stem cells.  We carry incredible computing and communication technology in our shirt pockets.  Physicists work on nano-structures and discover ever-smaller particles while unlocking the mysteries of the universe. 

Then there’s the pseudo-science of economics.  As central banks feverishly shovel money into the economy in a clumsy effort to fend off global economic collapse, economists grope in the dark to find explanations that fit their gilded 19th century theories.  The above-linked article by Reuters columnist and economist Reihan Salam reports on economists’ latest and greatest answer – the “Invisible Foot” – apparently the long-ignored but newly rediscovered and dusted-off counterpart to Adam Smith’s “invisible hand.” 

Can you believe this?  Here we are, in the 21st century, with the global economy collapsing all around us, and we’re talking about invisible hands and feet.  This is the best that the progeny of our best economics universities can come up with?  Invisible hands and feet?  It seems more suited to a Harry Potter movie than 21st century economic reality.  (Not that I’ve ever seen a Harry Potter move.)

The idea goes something like this:  as opposed to Adam Smith’s “invisible hand” of consumption driving economic growth, the “invisible foot” (brainchild of mid-20th century economist Joseph Berliner) aims to give productivity a swift kick in the pants.  Here’s how the author of the article explains it:

… This invisible foot of new competition is what drives incumbent firms to either step up their games ‑ a process that often involves burning through stockpiles of cash and shrinking profits ‑ or go out of business.

… Unfortunately, this reallocation of resources ‑ from inefficient incumbents to innovative upstarts and the incumbents that manage to keep up with them ‑ stops when incumbent firms succeed in erecting regulatory and legal barriers to shield themselves against competitors, which is why regulatory reform and patent reform are so important. It is also why we ought to take care not to give large incumbents any undue advantages in our tax code.

… the tax-deductibility of interest expenses and not dividends gives the entrenched corporate Goliaths that have the option to borrow a big boost, while doing nothing for the would-be corporate Davids eager to take them on.

… With this in mind, Robert Pozen of the Brookings Institution and Harvard Business School and his research associate, Lucas Goodman, have devised an ingenious plan to level the playing field.  First, they call for cutting the corporate tax rate from 35 percent to 25 percent. … To finance this substantial cut, Pozen and Goodman propose a modest 60 percent to 85 percent cap on the amount of interest companies can deduct from their tax bills, sharply reducing debt bias and keeping the proposal revenue-neutral. … The end result could be an entrepreneurial renaissance, as lumbering corporate dinosaurs that had used cheap credit to scare off competitors are forced to reckon with innovative new rivals.

The following is the comment I posted in response to this article (which you can find by scrolling down to about the 7th comment), repeated here for your convenience:

There seems to be no limit to the goofy places that economists’ tortured logic will take them. The “Invisible Foot?” Here we are in the 21st century and this is what we get from the field of economics – the “Invisible Foot?”

The real problem has, for many decades now, been economists’ inability to distinguish true, healthy economic growth from macroeconomic growth, a large component of the latter being a malignant growth fed by nothing more than population growth. If the macroeconomy grows by 1%, but the population has grown by the same amount, no one is better off. In fact, all are worse off.

Because of their self-imposed blindness to the economic ramifications of population growth (no self-respecting economist dares risk being labeled a “Malthusian”) the field of economics is blind to the very real inverse relationship between population density and per capita consumption, and its implications for worsening unemployment, poverty and global trade imbalances. Economists can’t see that, beyond some critical population density, while population growth continues to stoke total sales volumes and corporate bottom lines, the cost of dealing with rising poverty while maintaining an illusion of prosperity through deficit spending is bankrupting local and national governments across the globe.

Instead, the field of economics maintains its “see no evil” posture and dreams up things like the “Invisible Foot,” an idea that might have played well during the dawn of economics in the 18th century. Are we really to believe that a revenue-neutral reshuffling of the tax code will spawn some sort of economic renaissance? Has no one noticed that the economies of those countries with lower corporate tax rates are still dominated by the same global mega-corporations as the U.S.? Are we to believe that these corporations grew as they did by being sloppy and inefficient, instead of mercilessly boosting productivity by cannibalizing the competition and slashing redundant workers?

The cowardly refusal of the pseudo-science called “economics” to even consider the most dominant factor driving economic trends today makes it the laughing stock of the 21st century. This nutty idea is just one more example of why.


The Synergism Between Overcrowding and Poverty

September 3, 2012

http://www.cnbc.com/id/48822618

The above-linked article appeared on CNBC a few days ago.  Every once in a while I see these reports that make me believe that, ever so slowly, the field of economics may emerge from its self-imposed blindness to the real world.  This article reports on a paper written by Northwestern University economist Robert Gordon.  (I tried unsuccessfully to find the paper itself.)  It seems that Gordon predicts that we are headed for a prolonged period – decades – in which growth in per capita consumption, “the main engine of the consumer-based U.S. economy” (the article’s author’s words, not mine), will fall to nearly zero. 

First of all, it’s significant any time any economist takes any notice at all of per capita consumption since, in the field of economics, per capita consumption is one of those givens that is no cause for concern.  It’ll always be there and it’ll always grow.  You don’t need to worry about it. 

Gordon serves up six reasons why that may not be true:

  1. Changing and unfavorable demographics.  (It’s not clear what Gordon means by this.  An aging population, perhaps?)
  2. Rising education costs and poor secondary school performance.
  3. Growing economic inequality.
  4. Increased competition due to globalization.
  5. Energy and environmental costs and challenges.
  6. High levels of consumer and government debt. 

No, he didn’t mention overcrowding or population density, but his reasoning is a step in that direction.  How many of the above factors can be blamed, at least partially, on either overpopulation or trade with overpopulated nations?  All but the first, and maybe that one too, if it was clear what was meant.  Number 6 is the result of the use of debt to mask the effects of worsening overpopulation (and free trade with badly overpopulated nations) for decades.  That tactic is nearly exhausted and now the debt itself has become an impediment to per capita consumption.

Which led me to a realization.  I don’t know why I hadn’t thought of it before – the synergism between overcrowding and poverty in driving down per capita consumption.  When I researched Five Short Blasts, I tried to separate the effects of poverty from the effects of overcrowding in per capita consumption data.  Poor people consume less merely because they are poor.  I was looking for disparities in per capita consumption among nations of roughly comparable wealth so that the population density effect was clear. 

But there’s an obvious feedback loop here that now seems so obvious to me.  As overcrowding drives down per capita consumption, it’s inescapable that it will drive up unemployment.  (And free trade with badly overcrowded nations will have the same effect.)  Worsening unemployment puts downward pressure on wages and begins to fuel a rise in poverty.  And, where the initial effect upon per capita consumption caused by slowly rising population density may have been small, the effect of declining incomes isn’t.  It’s directly proportional.  People who earn 10% less will consume 10% less (once their access to credit has been exhausted).  When people consume 10% less, then more people are thrown out of work and the whole process can begin to spiral out of control. 

It’s obvious then that anything, no matter how small, that tends to erode per capita consumption presents a serious threat to the economy.  As economists like the one reported on in this article begin to ponder that per capita consumption may not be a given after all – that there may be factors that can negatively affect it – they will discover the obvious factors first.  It may take a long time, but perhaps they’ll eventually discover the common thread woven through them all – the very population-driven “economic” growth, beyond some critical level, that all of them have worshipped for centuries.


Surprising Facts About 2011 U.S. Trade Data!

April 21, 2012

I haven’t posted much lately because I’ve been working hard on analyzing the 2011 trade data, which was released by the BEA (Bureau of Economic Analysis) in late February.  My focus, of course, is on manufactured products, since that’s where the jobs are.  Separating the trade in manufactured goods from total trade for each nation is no small undertaking, since nowhere does the BEA report on “manufactured products” as a separate category.  It has to be done nation-by-nation, combing through hundreds of product end-use codes for each.  I’m now ready to begin reporting on what I’ve found, beginning with some interesting, surprising facts.  (More posts will follow.)

For those of you new to this web site and the concepts presented here, my goal is to create an understanding of the forces that drive global trade imbalances, especially America’s very large trade deficit in manufactured products with the rest of the world.  Why manufactured goods?  There are two kinds of “goods”:  natural resources and the products into which those resources are transformed through manufacturing. 

The reason for trade imbalances in natural resources is no mystery.  Nations deficient in a particular natural resource, as is the case with the U.S. and oil, will experience a trade deficit in that resource.  Nations with a surplus of such resources will have a trade surplus.  It’s as simple as that.  But there are also very large imbalances in the trade of manufactured products that aren’t so easily explained.  Economists blame many factors including low wages, currency manipulation, trade barriers and lax labor and environmental standards.  Yet, in spite of decades of efforts to address these issues, imbalances have only grown worse. 

In Five Short Blasts, I presented an entirely new explanation for trade imbalances:  the role of population density.  And, since publication of that book, I’ve also presented on this blog data that debunks the role of the traditional scapegoats – low wages and currency exchange rates.  Now we have a fresh batch of data for 2011.  Let’s examine whether population density still holds up as an explanation and whether wages and exchange rates have played any role at all. 

First, some explanation of my methodology is in order.  In my research prior to publishing Five Short Blasts in 2007, I discovered that the inclusion of tiny island nations and city-states in the data tends to obscure the relationship between population density and trade imbalances.  Almost without exception, tiny island nations have unique economies that are totally dependent on tourism.  Because such nations use tourist dollars to purchase manufactured products, the U.S. has a surplus of trade in manufactured goods with virtually every one of them, regardless of their population density.  And the trade with all of these nations taken together is so minuscule that it has no measurable effect on America’s balance of trade.  For those reasons, those nations are omitted from the study. 

Also, tiny city-states are somewhat similar in that they tend to have economies skewed by their imbalance between urban and rural settings and their nearly total lack of resources.  For this reason, I have rolled the data for such city-states into the data of their much larger, surrounding (or neighboring) nations.  (These city-states are Andorra, Gibraltar, Hong Kong, Macao, San Marino, Vatican City, Liechtenstein, Luxembourg, Monaco and Singapore.)  What’s left is a total of 165 nations. 

With all of that background, let’s begin with some basic facts about America’s balance of trade in 2011:

  • In 2011, the U.S. balance of trade worsened by almost $60 billion, with the trade deficit increasing to $560.0 billion – a 12% increase.  Of this increase in the trade deficit, $46.3 billion was due to an increase in the deficit in manufactured products. 
  • The U.S. had a trade deficit of $423.4 billion in manufactured products in 2011, compared to $377 billion in 2010.
  • It’s natural to expect, then, that our balance of trade worsened (trade deficits grew larger or surpluses grew smaller) with the majority of nations.  But that’s not what happened.  Of the 165 nations examined, our balance of trade in manufactured products worsened with only 76 nations (46%).  It actually improved with 88 nations (54%).  (South Sudan is new to the study and did not exist in 2010.) 

 

Evidence of The Role of Population Density in Trade Imbalances

Now, let’s break this down by population density – or, more precisely, by population density relative to that of the U.S. – to see if some relationship emerges.  Of these 165 nations, 111 are more densely populated than the U.S.; 54 are less densely populated.  If population density is not a factor in trade imbalances, then the number of nations with whom the U.S. experienced a worsening in its trade balance – 76 nations – should be distributed proportionately among these two groups – 51 nations among the more densely populated nations and 25 among the less densely populated nations.  But here’s what actually happened:

  • Of the 76 nations with whom our balance of trade worsened, 62 were nations more densely populated than the U.S.; only 14 were among the less densely populated nations.
  • Although only 33% of nations are less densely populated than the U.S., of the 88 nations with whom our balance of trade improved, 44% (39) were among that group. 
  • Of the 54 nations less densely populated than the U.S., the balance of trade improved with 39. 

That data on the change in our trade imbalance from 2010 to 2011 seems to show a relationship with population density.  But that’s just the change in the imbalance.  What about the imbalances themselves?  Of the 165 nations included in the study, the U.S. had a trade deficit in manufactured products with only 51 of them.  Since 67% of these nations are more densely populated than the U.S., we should find 34 of these trade deficits among the more densely populated nations and 17 of them among the less densely populated ones.  But here’s what actually happened in 2011:

  • Of the 111 nations that are more densely populated than the U.S., the U.S. had a trade deficit with 47.
  • Of the 54 nations less densely populated than the U.S., the U.S. had a trade deficit in manufactured goods with only 4. 
  • Of the 51 nations with whom the U.S. had a trade deficit in manufactured goods, 47 (or 92.2%) were with nations more densely populated than the U.S.  The four less densely populated nations with whom we had a trade deficit in manufactured goods were Estonia, Laos, Sweden and Finland.

That is powerful evidence of a a strong relationship between population density and trade imbalances in manufactured goods. 

 

What about Low Wages as a Cause for Trade Deficits?

Unfortunately, it’s not possible to evaluate the role of wages directly.  This would require knowing the unit labor costs for every product imported and exported, and doing a complicated calculation to determine the average unit labor costs for the sum total of imports and exports.  However, we do know the “purchasing power parity” (“PPP,” roughly the nation’s gross domestic product divided by its population) for each nation, and PPP gives us a pretty good way to compare relative wage rates of one nation vs. another. 

In terms of PPP, the U.S. is one of the wealthiest nations in the world and, therefore, its workers are among the best-paid.  With a PPP of $48,100, the U.S. ranks fifth among the 165 nations included in the study.  Only Qatar, the Falkland Islands, Norway and United Arab Emirates have higher PPP.  So 161 of the 165 nations included in the study have lower-paid workers than the U.S.  But, since we have a trade deficit with only 51 nations, this immediately casts doubt on the claim that low wages cause trade deficits.  If lower wages cause trade deficits, then we should be experiencing trade deficits with 161 nations – not a mere 51. 

OK, maybe much lower wages are required.  So let’s divide these nations around the median PPP of $8,000 – 82 nations above the median and 83 nations below.  Surely we will find our 51 trade deficits concentrated among the low PPP nations.  Right?  That’s the theory.  Now here’s the facts:

  • Of the 82 nations above the median PPP, the U.S. had a trade deficit in manufactured goods with 32. 
  • Of the 83 nations below the median, the U.S. had a trade deficit in manufactured goods with only 19. 

Not only does this data not support the claim that low wages cause trade deficits, it seems to be solid evidence that either exactly the opposite is true or, more likely, that the cause and effect are reversed.  It may be that a large trade deficit with a nation tends to boost wages in that nation by driving up the demand for labor to fill manufacturing jobs.  As an example, consider Germany and Japan – two relatively high wage nations.  When put in per capita terms (thus adjusting for the relative size of a nation), our trade deficit with each is far larger than our trade deficit with lower-wage China.  Why?  Because their high wages are the result of a prolonged, strong demand for manufacturing labor created by our demand for their exports.  Wages in China, much newer to the stage of world trade, are rising fast.  If something besides low wages is the cause of a trade deficit (like population density?), then it’s logical to expect that high wages in the surplus country will follow, as happened in Germany and Japan and as is happening now in China.

 

What about Currency Exchange Rates as a Cause of Trade Imbalances? 

Finally, let’s examine what role, if any, currency exchange rates play in driving trade imbalances.  Economists and political leaders have been blaming “currency manipulation” by China for their enormous trade surplus with the U.S.  By keeping the value of the Chinese yuan artificially low, they claim, China’s exports are cheaper while imports into China are more expensive to Chinese consumers.  On the surface, this argument seems to make sense.  But because it seems to make sense, perhaps too little effort has been made to validate that theory.  If that theory holds water, then an examination of changes in currency exchange rates for all 165 nations should find that our balance of trade has tended to improve with those nations whose currencies rose relative to the dollar, while worsening among those nations whose currencies declined.  Here’s what actually happened in 2011:

  • Of the 165 nations studied, 99 had a stronger currency in 2011 than in 2010.  19 experienced no change in exchange rate with the dollar.  Only 46 had weaker currencies. 

That fact alone already casts doubt on the currency theory since, as noted earlier, our overall balance of trade worsened in 2011.  Since the currencies of 99 nations (60%) – including China – rose in 2011 while only 46 nations (28%) saw a decline in their currencies, the U.S. should have experienced an overall improvement in its balance of trade.  It did not.  More facts: 

  • With the 99 nations who had stronger currencies, the U.S. experienced an improvement in the balance of trade in manufactured goods with 52 of them (52.5%). 
  • With the 19 nations with unchanged currency exchange rates, the U.S. experienced an improvement in the balance of trade with 12 of them.
  • With the 46 nations who had weaker currencies in 2011, the U.S. experienced an improvement in the balance of trade with 24 of them (52%). 

So an increase in a nation’s currency was just as likely to produce a worsening of our trade imbalance as an improvement, and vice versa.  In other words, there’s absolutely no relationship between currency valuation and trade imbalance evident here. 

I’ll be the first to admit that a one-year move in currency exchange rate may not be enough to change the momentum of trade imbalances.  However, I’ve previously conducted a similar study of the effect of 18-year changes in currency exchange rates and found exactly the same thing.  (See https://petemurphy.wordpress.com/2010/11/17/study-finds-no-relationship-between-currency-exchange-rate-and-trade-imbalance/.)

How can this be?  Perhaps looking at it from another angle will shed some light. 

  • Of the 51 nations with whom the U.S. had a trade deficit in manufactured goods in 2011, 40 nations’ currencies rose in value.  Two were unchanged.  Only 9 experienced a decline in their currency.
  • Of the 114 nations with whom the U.S. had a trade surpluse in manufactured goods in 2011, 37 experienced a decline in their currency. 

From this we can conclude that currencies rise relative to the dollar in response to trade surpluses with the U.S.  However, changing exchange rates have absolutely no effect in reversing trade imbalances.  Therefore, those who pin their hopes on a rising Chinese yuan to bring manufacturing jobs home from China are going to be sorely disappointed, just as they have been as the yuan has risen in value for years.  Our trade deficit with China has only grown worse, just as our trade deficit with Japan only grew worse as Japan’s yen rose by over 300% over the past three decades. 

Conclusion:

From the United States’ 2011 trade data we can conclude two things: 

  • it’s population density that drives our trade imbalances.
  • wages and currency exchange rates play absolutely no role in those imbalances. 

I’ll be presenting some even more fascinating facts from the 2011 trade data in upcoming posts.  Unfortunately, those posts will probably have to wait for a couple of weeks.  But stay tuned!  You won’t want to miss them.


Analysis of Trade Data Exposes Flaw in U.S. Trade Policy

March 5, 2012

No nation on earth is more devoted to the concept of “free trade” than the United States.  And no nation on earth pays more dearly for that misguided policy.  America’s trade deficit is the worst in the world – six times worse than the 2nd ranked nation – India.  Because of that trade deficit and the need to draw dollars back into the economy through the issuance of debt, its external debt is also the worst in the world – 50% worse than the next most indebted country – the U.K.

China accounts for the lion’s share of the U.S. trade deficit.  Economists and political leaders would like you to believe that our deficit with China is the result of low wages, currency manipulation and unfair trade practices because, if you believe this, then you believe that a “level playing field” can be achieved with China by addressing those issues, thus restoring a balance of trade and bringing manufacturing jobs back to the U.S.  What they don’t want you to believe is that the entire concept of “free trade,” at least in many situations, may be fatally flawed. 

For those of you who are new to this site and who haven’t read my book, the data that I present below will come as a surprise, for no economist has ever made the linkage between balance of trade and population density.  For those of you familiar with this site, the chart below is a new, concise way of presenting an analysis of U.S. trade data that exposes the real flaw in our trade policy.

I’ve just completed an analysis of our trade results with America’s top 15 trade partners, breaking down the balance of trade in goods into several categories of natural resources and manufactured products.  The following chart tracks the balance of trade in manufactured products for those 15 nations, from 2001 through 2011.  But the trade data is presented in per capita terms instead of in raw dollars in order to factor out the sheer size of nations like China.  Of course China dominates our balance of trade.  They account for one fifth of the entire world’s population.  Would the results be any different if China was actually a cluster of smaller nations?  Probably not.  So how can we tell whether our trade policy with China is any less effective than the same policy applied to a much smaller nation?  The way to do it is by dividing the balance of trade by the population of that nation and expressing it in per capita terms.

On this chart you’ll find each nation identified on the right axis, next to its 2011 data point.  Below each nation, you’ll see two numbers.  The first number is the ratio of that nation’s population density compared to the U.S.  For example, the top nation on the chart – Canada – is 0.11 times as densely populated as the U.S.  The second number is that nation’s “purchasing power parity,” a figure that approximates each nation’s GDP (gross domestic product), divided by its population.  It’s a good measure of the wealth of each nation and a good indication of wages paid there. 

The list of America’s top 15 trade partners was taken directly from the Census Bureau’s “Foreign Trade” web site.  They are determined by the total of both imports from and exports to each country and account for 96% of all U.S. trade.  Those top 15 trading partners are:

  1. Canada
  2. China
  3. Mexico
  4. Japan
  5. Germany
  6. U.K.
  7. South Korea
  8. Brazil
  9. France
  10. Taiwan
  11. Netherlands
  12. Saudi Arabia
  13. India
  14. Venezuela
  15. Singapore

With that explanation, here’s the chart:  Trade in Manfd Goods with Top 15 Partners

Some observations are in order:

  • Of these 15 nations, the U.S. has a trade deficit in manufactured goods with eight of them:  India, France, China, Mexico, South Korea, Germany, Japan and Taiwan.  Every one of these eight nations is more densely populated than the U.S.  Mexico is almost twice as densely populated.  France is more than 3 times as densely populated.  China is more than four times as densely populated.  The rest are much more so.
  • In per capita terms, our trade deficit with China is rather unremarkable.  In 2011, the deficit with Taiwan was four times worse.  The deficits with Germany and Japan were three times worse. 
  • These deficits are not one-year anomalies.  In every case, they have been consistent or worsening over this 11-year span. 
  • The worst per capita trade deficits are with wealthy nations.  Among our four worst per capita trade deficits, all of those nations rank among the top 20% of the world’s wealthiest nations.  This debunks the myth that large trade deficits are caused by low wages.  As I’ve reported before, the cause and effect is exactly the opposite of what economists claim.  High wages among these trade partners are the result of their trade surplus with the U.S. Wages in China are rising fast as their trade surplus with the U.S. expands.  The trade deficits are caused by the disparity in population density.  Wages are the result of the trade imbalance, not the cause.
  • It’s often said that a lack of competitiveness is also a cause of our trade deficit.  Yet, in per capita terms, we have a trade deficit with France, arguably the least competitive nation in the developed world, that’s nearly as large as our per capita deficit with China.  It has nothing to do with competitiveness.  It has everything to do with population density.
  • Our deficit with India, in per capita terms, is very small; yet, they’re nearly three times more densely populated than China.  Why?  It’s difficult to explain.  There was never the rush of manufacturers into India like we saw with China.  Perhaps India’s hyper-population density and accompanying poverty made corporations skeptical of India’s ability to develop into western style consumers.  Perhaps there’s a limit to the conditions that wealthy corporate executives are willing to endure in their quest to grow profits.  And now that China has cannibalized virtually all of the world’s manufacturing capacity, especially America’s, there’s little left for India. 
  • Now, turning our attention to the positive, surplus side of the chart, we find that of these seven nations – Canada, Singapore, the Netherlands, Saudi Arabia, Venezuela, Brazil and the U.K. – four are less densely populated than the U.S.:  Canada, Saudi Arabia, Venezuela and Brazil. 
  • Of the three more densely populated nations that appear on the surplus side of the chart, the one with whom we have the highest per capita surplus is also the tiniest:  Singapore.  Singapore is actually a city state, with a population of about 5 million people – smaller than some U.S. cities and metropolitan areas.  Such tiny city states represent only a thin slice of what constitutes a real economy.  In such cases, the relationship between population density and trade imbalances isn’t valid.  However, if the trade results with Singapore were rolled into the surrounding nations of Malaysia and Indonesia, the U.S. would still have a large trade deficit with those nations, just as the population density relationship would predict.
  • The Netherlands is a similar situation – a tiny state consisting of two large cities:  Amsterdam and Rotterdam.  However, with the only seaport on the Atlantic coast of Europe, the Netherlands has develped their economy around trade and financial services and enjoys a unique trade surplus in spite of their extreme population density.  Singapore and the Netherlands combined account for only 0.3% of the world’s population.
  • That leaves the U.K. as the only densely populated country of any significant size with whom the U.S. has a very slight surplus of trade in manufactured goods.  The U.K. has one of the most unique economies in the world in that they are the only nation of any significant size (in terms of population) that still manages to be a net oil exporter.  Most nations with large populations are unable to meet their oil needs from domestic sources.  This oil income, combined with the powerful financial sector of their economy, provides them with a stream of income that can be spent on imports, including imports from the U.S. – primarily civilian aircraft and pharmaceuticals. 

While these 15 nations account for the bulk of U.S. trade, the U.S. engages in robust trade with nearly every nation, and if we expand this analysis to include them, the same pattern is evident.  With most densely populated nations – including most of Asia and Europe – the U.S. suffers trade deficits in manufactured goods.  With most more sparsely populated nations – including all of South America and most nations of Africa – the U.S. enjoys a surplus of trade in manufactured goods.  With poor nations, our trade imbalance (whether a deficit or surplus) tends to be very small.  With wealthy nations, the imbalance (again, whether surplus or deficit) tends to be large.  Whether a nation is poor or wealthy has no effect in determining whether the balance will be a surplus or deficit. 

If you’re new to this site and this concept, I encourage you to read further to learn more about how population density supresses per capita consumption and, consequently, drives global trade imbalances.


Dean of Business at GWU Calls for Reconsideration of Economic Theory

January 20, 2012

http://www.forbes.com/sites/dougguthrie/2012/01/17/the-need-for-a-radical-reconsideration-of-neoclassical-economic-theory/

This morning I came across the above-linked opinion piece that appeared on the Forbes web site a couple of days ago.  Dr. Doug Guthrie, dean of the business school at George Washington University, proposes that recent failures of capitalism are rooted in the failures of economic theory taught at our universities.  He observes:

There remains an unconscionable chasm between economic theory and reality.

… Americans and their leaders are ready for a deeper conversation about the role of economics in society—a dialogue that is not dominated by economists or marked by abstruse debates about the core assumptions underpinning theoretical mathematical models.

… We need a field of economics that thinks in broad social scientific terms and is engaged in real world problems rather than entrenched in dogma and theory.

Hallelujah!  This is what I’ve been saying all along, that the solutions to our problems won’t be found in the political arena, since politicians merely follow the advice of their economists.  There are no solutions that don’t begin with some soul-searching by the field of economics itself; that don’t begin with some economist brave enough to challenge the ridiculous claim that man is clever enough to beat down any challenge to growing our population indefinitely. 

That’s not specifically what dean Guthrie is proposing, but it’s certainly a step in that direction.  Perhaps economists will overcome their reluctance to consider population growth when they grow even more uncomfortable with the growing derision of their academic peers (like dean Guthrie) that now seems to be taking root. 

I submitted a comment to Forbes which is repeated below for your convenience:

The problem with neoclassical economic theory – indeed, with the entire field of economics – is that it has turned a blind eye to the most powerful force at work in our economy today: population growth. Following the beating endured by economists in the wake of the seeming failure of Malthus’ theory, economists steadfastly refuse to ever again give credence to concerns about overpopulation. Man, economists say, is clever enough to overcome any challenge that population growth may present.

While mankind may be able to push back technological boundaries, there are other economic consequences against which we are powerless. While population growth stokes macroeconomic growth, total consumption and total sales volume, it also spawns overcrowding that is steadily eroding per capita consumption. And, since per capita consumption and per capita employment are inextricably linked, worsening unemployment, falling incomes and poverty are inescapable. The inverse relationship between population density and per capita consumption is irrefutable. The data is there for all to see.

The ramifications are enormous. Huge disparities in population density from nation to nation result in huge disparities in consumption, driving global trade imbalances. Badly overpopulated nations are desperately dependent on manufacturing for export to employ their bloated labor forces, and equally dependent on the resultant trade imbalances that threaten our financial system. And with each passing day, the supply of labor grows more out of balance with demand, making nations more dependent on deficit spending to maintain an illusion of prosperity. Unsustainable debt loads now threaten our financial system with collapse.

There is much more reason for concern about overpopulation that mere stress on resources and strain on the environment. Until the field of economics overcomes its cowardly refusal to even consider the subject of population growth and its full range of implications, matters will only grow worse.

Pete Murphy
Author, “Five Short Blasts