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.


Exports Fall in July, Lag President’s Goal by Record Amount

September 11, 2012

Wonder why you’re worse off than four years ago?  Wonder why we’re so heavily dependent on deficit spending just to keep the economy on an even keel?  Look no further than the July report on international trade, released this morning by the BEA (Bureau of Economic Analysis). 

The fact that the overall trade deficit held relatively steady at $42 billion is bad enough, but dig deeper and the picture gets uglier.  The trade deficit in manufactured goods jumped over $3 billion to $40.1 billion, continuing an ever-worsening trend and close to the worst level of the Obama administration.  Of course, the trade deficit with China gets much of the blame.  It rose for the fifth consecutive month to a new record – $29.4 billion.  But China isn’t the only story.  The trade deficit with Germany rose to $4.9 billion, just shy of the record of $5.0 billion set in December of last year.  The trade deficit with the rest of the Euro zone was $7.0 billion. 

Remember when, in January of 2010, President Obama vowed to double exports in five years to boost our manufacturing sector?  Overall exports actually fell in July and lagged that goal for the 12th consecutive month, and the shortfall increased to $19.9 billion.  Here’s a chart of our “progress”:  Obamas Goal to Double Exports

But what really matters are exports of manufactured goods, since that’s where the jobs are.  In that category the story is even worse.  Manufactured exports plunged by $3.3 billion and lagged the president’s goal for the 10th consecutive month by the largest amount yet by far – $13.4 billion.  Here’s the chart:  Manf’d exports vs. goal.

And the deficit in manufactured goods continued its worsening trend:  Manf’d Goods Balance of Trade.

Both President Obama and challenger Mitt Romney have pledged to pursue more free trade deals in an effort to open up more markets to our exports.  The problem is that, with each new market that we open, ours opens even wider and for every job created by those exports, two jobs are lost to another wave of imports.  When will a leader step forward with the “brass” (as Obama put it, or was it Biden?  I forget.)  to actually do something about trade policy that’s rooted in failed economic theory developed when trade consisted of swapping tea for beaver skins?


The Sun Won’t Rise Tomorrow

October 5, 2011

No, this isn’t a prediction of the apocalypse.  Rather, I’m using the title of this post to make a point.  The terms “sunrise” and “sunset” are vestiges of the geocentric model of the universe, in which the earth lay at the center while the sun, the moon and stars revolved around us.  Thus, the sun “rose” in the sky in the morning and “set” in the evening.  This model was developed in ancient Greece and held sway until approximately the 17th century.  So fiercely was it defended by the Catholic Church that, when Galileo developed his more accurate concept of “heliocentrism” in which the earth revolved around the sun, he was tried and found guilty by the Inquisition, forced to recant, and spent the rest of his life under house arrest.  Ignorance doesn’t die easily.  To this day, approximately 20% of adult Americans still believe that the sun rotates around the earth.

And so it is with the field of economics today.  Like Pope Urban VIII who had Galileo tried by the Inquisition, modern economists are just as unwilling to consider any challenge to their irrational model of never-ending growth, and they are just as eager to label anyone who dares to delve into concerns about overpopulation a “Malthusian” as Urban was in condemning Galileo as a heretic.  Tomorrow (whether it’s literally tomorrow or sometime in the near future), they say, economic growth will rise again, just as surely as the sun will rise tomorrow.

But the sun won’t rise tomorrow.  While the earth continues its never-ending rotation, which will indeed bring the sun into view on the eastern horizon, the sun is setting forever on economists’ equivalent of “geocentrism,” their flawed theory of never-ending economic growth.  The field of economics will continue its plunge into the darkness of ignorance – perhaps forever or, hopefully, until some economist, as did Galileo, has the courage to brave the scorn of his/her peers and consider economics from a different perspective, willing to examine the full gamut of challenges that overpopulation may present.

* * * * *

This post also marks a turning point in my forecasting of future events, which will take a decidedly more gloomy tone.  From the beginning, when I first began to develop my theory about the effects of the inverse relationship between population density and per capita consumption, I envisioned it as a process that would unfold slowly, taking perhaps decades to manifest itself in noticeable changes in our economy.  I fear that I’ve underestimated the gravity of this theory, blinded by the effectiveness with which debt was used to mask its effects.  That debt ploy has nearly reached its limit and, without it, the effects of unemployment and worsening poverty will escalate rapidly.


Where Does the TEA Party Stand on Trade?

September 3, 2011

As I was commenting on some editorial the other day, I began to wonder where the TEA Party stands on the issue of foreign trade.  The TEA Party has been extremely effective in driving the debate on debt and government spending.  If the TEA Party ever aspires to become a real force in American politics in general, it has to have a position on every issue, especially one as important to the American economy as trade.

So I visited their web site to learn more.  For starters, here’s how their banner reads:

FISCAL RESPONSIBILITY * LIMITED GOVERNMENT * FREE MARKET

Hmmm.  “Free Market.”  What does that mean?  Searching further on the site, here’s their explanation:

… we support a return to the free market principles on which this nation was founded and oppose government intervention into the operations of private business.

What exactly does this mean?  It sounds like it’s focused more on intervention in the market by the federal government.  But what about intervention by world government, which is exactly what the World Trade Organization does, stripping the U.S. of its right to set trade policy and manipulating international trade in favor of developing nations.  When the TEA Party says “… free market principles on which this nation was founded …,” does it understand that our founding fathers relied heavily on tariffs to protect our fledgling economy and build it into an industrial powerhouse?  Does it realize that “free market principles,” at least as they relate to “free trade,” didn’t even exist in the late 1700s when our nation was founded?  It wasn’t until 1812 that economist Ricardo came up with his “principle of comparative advantage,” laying the foundation for free trade theory.  And it wasn’t until 1947 that we were bamboozled by economists into giving it a try.

So I used their web site’s contact form to submit to them the following question:

I run a blog that’s dedicated to a new economic theory and its ramifications for trade policy.  I’m interested in learning the TEA Party’s stance on U.S. trade policy.  In its banner, the TEA Party champions “Free Markets.”  Does that apply only to government interference in markets or more broadly to international trade in general?  Does the TEA Party support America’s membership in and deference to the World Trade Organization, or does it support America’s right to set trade policy in its own best self-interest?

If the TEA Party supports U.S. membership in the WTO, then I’d like to understand how the TEA Party reconciles that stance with the fact that deficit spending is necessary to offset the negative consequences of a trade deficit?  Also, does the TEA Party believe that it’s possible to balance the federal budget while enduring a continuing trade deficit?

Thanks.  I look forward to your reply.

I hope I get a response.  I suspect that the TEA Party hasn’t really given foreign trade much thought.  If they did and if they came to realize that membership in the WTO is “government intervention” in the extreme, and that trade deficits only exacerbate deficit spending, I believe they could become a formidable force in the move to take back our right to manage trade in our own best self-interest.


Economists Admit to Being Clueless about Jobs

July 11, 2011

http://www.cnbc.com/id/43711926

The above-linked article just appeared on CNBC this afternoon.  It seems that economists are admitting to being flummoxed by the incredibly bad June employment report when all of them were expecting some halfway decent job growth. 

I posted a comment in reply to the article at about 1:21 PM, if you want to find it.  But to make it easier, here was my reply:

Economists are clueless about jobs because economists steadfastly refuse to consider the most dominant parameter affecting our economy today – population growth. Since the seeming failure of Malthus’s economic theory about population in the 1800s, anyone who dares to suggest that overpopulation could present a problem for the economy is instantly dismissed as a “Malthsian.”
 
That’s a pity because if economists would once again open their eyes to the full ramifications of population growth and not just the strain on resources and stress on the environment, they may discover very serious consequences for the economy itself in the form of falling per capita consumption and rising unemployment, and the role that population density disparities play in driving global trade imbalances.

Ever-worsening unemployment, destructive trade imbalances and the global debt problem – these are no mystery. They’re completely predictable when you understand the relationship between excessive population densities and low per capita consumption.

Pete Murphy
Author, “Five Short Blasts”

So, “economists,” what are you going to do about it?  Cling to your incomplete economic models or open your minds to the one parameter you refuse to consider in your economic equations?  Sadly, I think I know what their reply will be.  “Malthusian.”

U.S. Falls Further Behind In Goal to Double Exports

April 12, 2011

In January of 2010, President Obama challenged his economic team with the question, “if Germany can be a net exporter of manufactured products, why can’t we?”  And he set a goal of doubling exports within five years.  Though the goal was stated in broad terms of doubling “exports,” the real goal is to double exports of manufactured products, thus rebuilding the battered manufacturing sector of the economy. 

In January of ’10, our manufactured exports were $131.05 billion per month.  To stay on track for meeting that goal, exports of manufactured products should have grown to $152.25 billion by February, ’11. 

This morning the Bureau of Economic Analysis released February trade figures.  The overall balance of trade improved slightly from January, falling from $47 billion to $45.8 billion, though the January deficit figure was revised higher, from $46.0 billion to $47 billion.  Here’s a chart of the balance of trade since President Obama set this export goal:

Balance of Trade

No improvement evident there!  Worse, we continue to lag in our goal to double the exports of manufactured products.  In fact, the shortfall between the goal and actual exports is the worst since the goal was set, coming in at $146.73 billion vs. the goal of $152.25 billion.  Here’s a chart of trade in manufactured goods:

Manf’d Goods Balance

We were on track to meet Obama’s goal through July, but have faltered since.  The shortfall in February of nearly $5.5 billion is the largest since tracking of this goal began, and represents approximately 900,000 manufacturing jobs alone, and perhaps as many services jobs that would support these manufacturing operations.  The February trade deficit of nearly $22.0 billion in manufactured goods represents approximately 3.6 million manufacturing jobs and, again, perhaps as many supporting services jobs. 

It’s no mystery why we’re failing to meet the president’s goal.  Setting a goal is one thing.  Actually taking action to assure that the goal is met is an entirely different matter.  To that end, the president has done nothing, other than to cajole our trade partners to boost their imports of American products and to pursue policies designed to weaken the value of the dollar.  The problem is that promises to boost imports of American goods are unenforceable and meaningless, and currency valuations have absolutely nothing to do with trade balances, as proven by the study I conducted last year.

Only actions that are within our control and enforceable have any hope of restoring a balance of trade and, with it, the manufacturing sector of our economy.  That means tariffs.  And only a tariff structure designed to counteract the driving force behind global trade imbalances – the gross disparities in population density – can correct the imbalances that are destroying our economy without simultaneously damaging beneficial trade.  That means a tariff structure that is indexed to population density and applied only to manufactured products. 

If you’re a newcomer to this site, I encourage you to read more about this new economic theory.