America’s Biggest Trade Surpluses in 2018

In my previous post, we examined the list of America’s biggest trade deficits.  Of the top 20 trade deficits, all but one were with nations more (usually much more) densely populated than the U.S.  It appears that population density may be a factor in driving these deficits.  But what will we find at the other end of the spectrum?  Will a list of our top 20 trade surpluses be dominated by more sparsely populated countries?  Well, let’s see.  Here’s the list:  Top 20 Surpluses, 2018.

We do see more sparsely populated nations on the list, but we also see a half dozen very densely populated nations.  At first glance, there doesn’t appear to be much correlation with population density.  But let’s take a closer look at those densely populated nations.  Do they all have something in common?  Indeed they do.  Most of them, but not all, are net oil exporters.  Canada, United Arab Emirates (UAE), Saudi Arabia, Qatar, Kuwait, Norway and Nigeria are all net oil exporters.  Why is that significant?  Because all oil is priced and sold in U.S. dollars.  And, ultimately, there is only one place where those U.S. dollars can be spent as legal tender – in the United States itself.  So those oil exporters use their “petro dollars” to buy products from the U.S.

Consider an example.  If China buys oil from Saudi Arabia, they have to pay for it with U.S. dollars.  No problem for China.  They’re rolling in dollars that Americans spent on their exported manufactured goods.  So now Saudi Arabia has a bunch of dollars.  They have no choice but to use it to buy American goods or American investments, like U.S. bonds.  But their economy is built around oil.  They don’t manufacture anything else to speak of.  So they have dollars to spend on manufactured goods and the only place they can spend those dollars is in the U.S.  Thus, the U.S. has a trade surplus in manufactured goods with Saudi Arabia and, for the same reason, with virtually every nation that is a net oil exporter.

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

Now, back to the subject of population density.  With all of the above said, the list of our top 20 trade surpluses is still dominated by eleven nations that are less densely populated than the U.S., and three more that are only slightly more densely populated.  The average population density of these twenty nations is 239 people per square mile, compared to the average population density of 629 for the nations that represent our biggest trade deficits.  The combined population density of all twenty nations on the surplus list (total population divided by total land surface area) is  43 people per square mile, compared to 502 for the deficit list.  It certainly appears that population density is a real factor in driving trade imbalances.

A few more observations about this list of our biggest trade surpluses is in order:

1. At number one on the list, Canada is both very sparsely populated while also being a huge oil exporter.  In fact, they are America’s biggest source of imported oil.  This is why the surplus with Canada is more than three times the size of our next largest surplus.  The U.S. has no better trade partner than Canada – hands down.
2. Are you surprised to see Russia on the list?  It’s less surprising when you look at their population density.
3. Also, take a look at the Purchasing Power Parity (PPP, roughly analogous to wages) of the nations on this list.  The average PPP is just under $40,000 per capita.  The average of the nations on the list of our biggest deficits was $35,000 – a difference of only 15%.  The difference in population density between these two lists is almost 1200%.  Which do you think is more likely to be the real driver of trade imbalances – wages or population density?

When it comes to the sheer size of trade imbalances, of course our deficit with China is bigger than our deficit with other, much smaller nations.  And of course our trade surplus with Canada is much larger than, say, our surplus with New Zealand.  Does that mean that Canada should enjoy more favorable trade terms than New Zealand, or that China should be punished with harsher trade terms than, say, Japan or Germany?  Hardly seems fair.  Trade policy should be formulated to address the factor that actually drives trade imbalances, regardless of the size of the nation in question.  That factor is population density.  In order to factor sheer size out of the equation, let’s now look at our trade deficits and surpluses in per capita terms, starting with our biggest per capita trade deficits.  The results are fascinating.  Stay tuned.

A Trump Report Card

It’s been a while since I’ve posted anything, and thought it’d be a good time to give President Trump a sort of mid-term report card, albeit a little late.  I’ll grade him in two subjects only – immigration and trade policy – since these two areas address the economic effects of population growth, both actual growth the effect of growth imported through trade with overpopulated nations, the focus of this blog.  Beyond these, little else matters.  What about environmental policy?  Without a focus on stabilizing our population (and virtually all of America’s population growth is driven by immigration), all other environmental policies are doomed to failure.  What about foreign policy?  It’s impossible to project strength in the world if you’re weak on trade.

So, with that said, let’s begin with the good news:

Immigration Policy:  A+

Trump has done a fantastic job on both illegal and legal immigration, each of which had been contributing a million people per year to America’s population growth.  Thanks both to Trump’s zero tolerance policy for illegal immigration and dramatic cuts in legal immigration, the Census Bureau reduced its estimate of the U.S. population by 1.3 million people at the end of 2018.  He spent a lot of political capital in his efforts to get funding for a border wall and, when Congress wouldn’t agree, had the guts to declare a national emergency to obtain the funds.  “What emergency?” the media cried at first, but not for long, when their own reporters in the field began reporting on the humanitarian crisis at the border that resulted from the adminstration’s efforts to enforce the law instead of turning a blind eye to illegal immigration as previous administrations have done.  Now there’s virtually no complaints about Trump’s enforcement efforts or his emergency declaration.  His policies are likely responsible for the fact that increases at the low end of the wage scale are outpacing higher income increases.  Recently, during a trip to the southern border, Trump declared that “Our nation is full.”  Truer words were never spoken.  Ultimately, this is the biggest reason that immigration needs to be reduced.  Trump has done an absolutely fantastic job of reining in out-of-control immigration.

That’s the good news.  Now for the not-so-good:

Trade Policy:  D

Such a low grade may seem surprising and harsh, especially in light of the tariffs on metals and his seemingly tough position with China, including a 25% tariff on some items and a 10% tariff on half of all Chinese imports.  However, it’s those very actions that elevate his score to a “D” from an “F”, the score I’d give to every previous president going as far back as Franklin Roosevelt.  They’ve been a nice start, but fall far short of what we were led to expect from him in the way of trade policy.  Like all previous presidents of the modern era, Trump has been sucked into endless trade negotiations, a ploy that nations with large trade surpluses have used successfully for decades to forestall meaningful action by the U.S. – namely, tariffs.  We were promised that the North American Free Trade Agreement (NAFTA) would be torn up or promptly replaced.  Trump’s administration did negotiate a new agreement, but one that reportedly does little to shrink the enormous deficit with Mexico and it may never even be enacted, if Congress has its way.

Action on China is stalled.  Tariffs on auto and parts imports now appear to be idle threats.  Beyond China, there’s been no action on reducing the trade imbalance with other nations like Germany, Japan, South Korea, Taiwan, Vietnam and a host of others.  The trade deficit in manufactured goods has continued to explode to new record levels under Trump.  Employment in manufacturing has stalled once again.  Trump sees trade as a venue for demonstrating his deal-making prowess, and he sees tariffs as leverage to use in trade negotiations.  He doesn’t understand that favorable “deals” with overpopulated nations are impossible and a waste of time, and that tariffs are the only way to restore a balance of trade with those nations.  Regarding the ongoing trade negotiations with China, he recently declared that the U.S. will win, whether a deal is reached or not.  He’s wrong.  The Chinese have already won by sucking him into time-wasting talks that, at best, will yield a deal that the Chinese will use to continue to grow their trade surplus with the U.S.  He had them on the ropes with the tariffs and then caved in, letting them off the hook.

In summary, Trump’s trade policy is stalled and our trade deficit is getting worse, not better.  This has been a major disappointment.  He’s wasted valuable time.  As I’ve said many times, a tariff program will produce some pain in the short term as prices rise and companies are slow to build manufacturing capacity in the U.S., but will ultimately yield incredible economic growth once that capacity is in place.  Had Trump been more aggressive with tariffs, the short term pain would have given way to some major economic gains by the time of the 2020 election.  Now, that’s probably not possible and, instead, his economic program is at risk of stumbling into the election.

He’s done a terrific job on immigration but all may be lost if he doesn’t get his trade policy off dead-center.

Auto Tariffs? Bring ’em on!

https://www.reuters.com/article/us-usa-trade-autos/automakers-brace-for-u-s-government-report-on-import-tariffs-idUSKCN1Q503G

A Commerce Department report that likely labels auto imports a national security threat which, under Section 232 of the World Trade Organization, would clear the way for Trump to impose tariffs, is now in Trump’s hands.  It could happen at any time now.  It’s impossible to overstate the consequences of such a move.  Without question, it would be the biggest shake-up in global trade since the signing of the Global Agreement on Tariffs and Trade in 1947.

Let’s begin with some perspective.  In 2018, 17.3 million cars and pickup trucks were sold in the U.S.  Of these, only about half of these vehicles were produced domestically.  The rest are imports.  Through November, the annualized value of imported cars in 2018 was approximately $180 billion.  The annualized value of auto parts was approximately $165 billion.  Together, that’s $345 billion worth of imported cars and trucks.  Roughly half of the cost to produce autos and parts is labor – about $172 billion.  If we assume that the average annual wage paid to auto workers is about $50,000, then that’s a total of about 3.5 million jobs that are lost to imports.

With that background, let’s take a look at the above-linked Reuters article about the possibility of Trump imposing a 25% tariffs on imported autos and parts.

The report’s recommendations may bring the global auto industry a step closer to its worst trade nightmare – U.S. tariffs on millions of imported cars and parts of up to 25 percent that many in the industry fear would add thousands of dollars to the cost of vehicles and potentially cost hundreds of thousands of jobs throughout the U.S. economy.

While it may be a “nightmare” for the “global auto industry,” it would be a dream come true for domestic U.S. manufacturers.  A 25% tariff would indeed drive up the cost of imports by thousands of dollars, and could even increase the cost of domestic autos some, depending on the amount of imported parts used in their manufacture.  The net result?  It’s not hard to imagine.  If you were in the market for a new vehicle that currently costs $30,000, which would you buy?  An import that now costs $37,500 or a domestic that now costs maybe $31,000.  It’s a no-brainer, one that would be repeated millions of times per year by new car buyers.  The result is that domestic auto manufacturing would soon double in volume while imports would slow to a trickle.  It’s as simple as that.

So how can one claim that  “hundreds of thousands of jobs” would be lost throughout the U.S. economy?  It’s easy to make that claim as long as you’re talking only about jobs lost and don’t include job gains elsewhere.  Sure, there’d be lots of jobs lost (and a couple hundred thousand is feasible) in the distribution, sales and servicing of imported autos.  But the loss of those jobs would be offset ten-fold or more by gains in the manufacturing, distribution, sales and servicing of domestic autos, not to mention the jobs involved in building the required manufacturing facilities, including buildings and machinery.

And what about this?

Senator Rob Portman, an Ohio Republican, recently introduced legislation that would shift responsibility for Section 232 investigations from Commerce to the U.S. Defense Department. The law containing the provision was passed in 1962 to keep U.S. industries healthy to meet Cold War defense needs.

“There is no way that minivans from Canada are a national security threat,” Portman told reporters.

Portman is wrong on two levels.  First of all, every imported car and truck weakens our manufacturing sector.  That could be critical in a time of war.  Just as important as our victories in the battlefield that ultimately forced the surrender of Germany and Japan in World War II was America’s industrial might that supplied them with weapons and materials.  No other nation on earth could even come close to matching America’s industrial power.  By the end of World War II, America’s shipyards were building complete destroyers, from the keel up, in two days, and Ford’s Willow Run factory in Michigan cranked out B-24 bombers at the rate of one per hour around the clock, or 650 bombers per month.  That didn’t happen by magic.  It took a veritable army of men and women experienced in manufacturing.

Existential wars – wars fought for survival against an enemy bent on conquering you – like our war against the Axis powers in World War II, are wars of attrition.  Who wins and who loses is often determined by who runs out of something first.  It doesn’t have to be ammunition or tanks or ships.  It can be something as simple as boots.  Every nut and bolt counts.  The lack of even one component can grind a war machine to a halt.  Supply chains that depend on overseas suppliers can be quickly and easily disrupted.  In other words, it’s critical to our survival that we maintain a robust manufacturing base, one that can be quickly converted to a wartime footing to supply everything imaginable that we might need.  Anything that degrades that capability is a national security threat.

Secondly, our national debt – now over $22 trillion – has grown to the point at which it threatens the viability of our economy.  Our national debt is directly tied to our trade deficit.  Every dollar drained from our economy by purchases of imports must somehow be put back to work in the economy, and the only mechanism available to do that is through federal deficit spending, financed by the sale of debt to those countries awash in our trade dollars.  Our debt is now growing by nearly a trillion dollars per year, and the $345 billion trade deficit in autos and parts is a major contributor.  The trade deficit is, without question, a national security threat and every imported minivan that Senator Portman references is part of the problem.

Tariffs are the only mechanism at our disposal for restoring a balance of trade – something we haven’t had since 1975 – and applying tariffs on the import of autos and parts is critical if we are to have any hope of achieving that balance.  Tariffs can’t simply be used as leverage to force other nations into trade concessions because they’ll never willingly give up their trade surpluses, regardless of their promises, as we’ve seen time and again for many decades.  We need tariffs now and they need to be permanent.

 

Trade Deficit Exploding

So far, the minimal tariffs that Trump has imposed on China (10% tariffs on half of their exports) has been powerless to stop a tax cut-fueled explosion in the trade deficit.  On Friday, the Labor Department released the employment report for October and, once again, it was a strong one.  The economy added 250,000 jobs.  Unemployment held steady, and wages rose at their fastest pace in years.  The economy is doing well, at least better than it has since the U.S. granted “most favored nation” status to China in the year 2000.

However, at the same time on Friday, the Commerce Department released the trade figures for the month of September – the first month that the tariffs were in full effect – and it’s clear that much of the economic stimulus provided by the tax cut that went into effect this year is ending up in the hands of China, Japan and Germany.  The trade deficit in manufactured goods exploded to another new record – $71.6 billion (an annual rate of $859 billion) – blowing past the previous record set only one month earlier.  Look at this chart:  Manf’d Goods Balance of Trade.

This morning, I came across this commentary on CNBC:  https://www.cnbc.com/2018/11/05/us-keeps-cutting-large-checks-to-china-japan-and-germany—commentary.html.  I don’t agree with everything said here, but it’s encouraging to see that people are starting to “get it” when it comes to the trade deficit:

“Those who are sadly and incorrectly arguing that this does not matter should note that America’s trade deficits will be added to its $8.6 trillion of net foreign debt recorded at the end of the second quarter.

That large overseas transfer of American wealth is also a drag on economic growth. In the first nine months of this year, the growth of the gross domestic product was lower than the growth of domestic demand as a result of increasing U.S. trade deficits.”

Finally, someone acknowledging that the trade deficit is the driving force behind our growing national debt.

Trump is exactly right to treat the trade deficit as a national security threat and to begin imposing tariffs on that basis.  So far, however, it’s been too little.  The tariffs need to be extended to all imports from China.  They need to be raised to 25% or more.  And they need to be extended beyond China, to Germany and Japan and anyone else who attempts to prop up their economies at the expense of American workers.  When that happens – when corporations stop seeing tariffs as a fleeting ploy in trade negotiations and instead see manufacturing in the U.S. as a more profitable business model than paying high tariffs – then and only then will trade become more balanced and fair and the trade deficit will begin to decline.

EU Scared to Death by Trump’s Tariff Threat

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

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

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

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

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

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

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

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

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

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

 

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

America’s Worst Trading Partners

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

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

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

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

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

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

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

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

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

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

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

More Trade War Hysteria

https://www.cnbc.com/2018/04/04/one-of-the-biggest-us-trade-wars-of-the-past-had-a-tragic-consequence–heres-what-happened.html?recirc=taboolainternal

I was hoping to spend some time tallying the U.S.’s global trade results for 2017, but then this popped up and I just can’t let it pass.  Actually, I was wondering when the free trade globalists would dredge up the subject of the Smoot-Hawley Tariff Act of 1930, blaming it for the Great Depression, as they usually do.  But the writer of the above linked article, in an apparent attempt to ratchet up fears of a trade war, goes a step further and blames Smoot-Hawley for World War II!

She begins by creating the impression that Smoot-Hawley was an opening salvo in a trade war in the 1930s.  She either doesn’t have a clue, or is intentionally trying to mislead her readers.  Let’s get some facts straight.  First of all, the use of tariffs was standard trade policy for the United States since its founding.  In fact, until 1913, there was no need for an income tax in the U.S. because all federal revenue was derived from tariffs.  The Smoot Hawley Act was nothing more than a minor tweak of tariff rates that had been in effect since the Fordney-McCumber Act of 1922.  It increased tariffs on average by 2.7%.  It changed the tariff basis from an ad valorem (percentage) basis to a fixed dollar basis which, under normal circumstances, would actually have slowly reduced tariffs as inflation eroded the value of the tariff.  But, of course, the Great Depression resulted in a protracted term of deflation instead of inflation.

Blaming Smoot-Hawley for the Great Depression is bad enough.  Not only was the change in tariff rates minuscule, but it wasn’t enacted until June of 1930, a year-and-a-half after the stock market crash of 1929 which actually precipitated the Great Depression.  And at the height of the Great Depression in 1933 when GDP (gross domestic product) had fallen by 33%, or $33.1 billion from its 1929 level, the total value of imports and exports had declined by only $6.5 billion.  It was actually the Great Depression that caused the drop in trade, and not the other way around, just as the “Great Recession” that began in 2008 resulted in a sharp decline in trade.

To blame Smoot-Hawley or a “trade war” that didn’t even exist for World War II is truly outrageous.  It was actually the aftermath of World War I and the severe war reparations that were imposed on Germany, resulting in soaring inflation and unemployment, that fostered Hitler’s rise to power.  And that just happened to coincide with the growing aggressiveness of imperialist Japan.  Trade had absolutely nothing to do with it.

Sure, the world made a turn toward free trade following the war with the signing of the Global Agreement on Tariffs and Trade in 1947, but it wasn’t because anyone blamed a “trade war” for causing World War II.  It was because economists, eager to try out the concept of free trade, successfully (but disingenuously) blamed tariffs for the Great Depression and made an argument that the interdependence that would come with free trade could preclude any future world wars.

Actually, if one were to be honest, free trade and the enormous global trade imbalances it has fostered is directly responsible for our current trade tensions.  We need to restore balance to global trade through the use of tariffs or quotas before things get any worse.

U.S. Trade Deficit with EU Rises to New Record in 2017

The U.S. trade deficit in manufactured goods with the EU (European Union) rose to a new record of $148.2 billion in 2017.  Here’s a chart of that deficit, dating back to 2001:  EU.  After falling slightly in 2016, it rose again to eclipse the record 2015 deficit by $0.3 billion.

This deficit is a lot less than our deficit with Red China, but some perspective is in order.  The population of the EU is 556.6 million people.  The population density of the EU is 327 people per square mile.  The population of Red China is 1.38 billion people and their population density is 383 people per square mile.  Our trade deficit in manufactured goods with Red China in 2017 was $405 billion.  In per capita terms, our trade deficit in manufactured goods with Red China was $294.  In per capita terms, our trade deficit in manufactured goods with the EU was $246.

So the only reason that our deficit with the EU is that much less than our deficit with Red China is that the EU is that much smaller.  If the EU were the same size as China, our deficit with the EU (in manufactured goods) would have been $367.4 billion – only 9% less than our deficit with Red China.  The reason for this is that the EU is nearly as densely populated as Red China – only 14.6% less densely populated.

Some say that our huge trade deficit with Red China is due to low wages.  Then how do you explain that, in per capita terms (which factors out the sheer size of a country), the trade deficit with EU, where wages are about 2-1/2 times higher than Red China,  is nearly as bad as the deficit with Red China?  In fact, almost half of our trade deficit with the EU is with Germany, where wages are nearly on a par with those in the U.S.   How do you explain that?  It’s because trade imbalances are caused not by low wages, but by disparities in population density.  The EU is more than three times as densely populated as the U.S.  China is four times as densely populated.  Germany is six times.  Trade deficits with such nations are virtually assured because their over-crowded conditions drive down their consumption while they produce just as much.  They can’t absorb their own output, much less consume imports from America.

Trade negotiations with nations that are so badly overpopulated are utterly futile because it’s impossible to negotiate down the disparity in population density.  The only thing the less densely populated nation (the U.S., in these circumstances) can do to restore a balance of trade is to levy tariffs or set quotas.  It’s the only way.

If still not convinced, my next posts will take a broader look at U.S. trade results with the world as a whole, and you’ll see that the population density effect is absolutely undeniable.

A Trade War? Let’s Get It On!

I’ve been waiting a long time for this – my whole life, really – and now it seems to be happening.  Trump seems to be finding his footing in making good on his promise to end the “free trade” rape of America’s economy and workers.  In the wake of imposing tariffs on steel and aluminum, this week he also edged closer to slapping tariffs on $60 billion worth of Chinese imports.  And the whole community of globalist trade parasites that has fed on the American economy for decades is freaking out.

It’s been amusing to watch the reaction and threats of retaliation.  First, the EU (European Union) threatened to slap tariffs on American exports of bourbon, Levi’s blue jeans and Harley Davidson motorcycles.  Trump responded, “go ahead, and we’ll put a 25% tariff on imports of European cars.”

Let’s stop right there and take a look at this situation.  In 2017, the EU imported $839 million worth of bourbon whiskey.  Sounds like a lot of booze, right?  And while I can’t separate Harley Davidson motorcycles from other brands and bicycles, I can tell you that the EU imported $802 million worth of motorcycles and bicycles in general from the U.S.  And how many pairs of jeans did they import?  None.  Zilch.  Why?  Because virtually none are made in the U.S.  It’s kind of pathetic, actually, that EU officials can’t even name three American imports without getting one of them wrong.  I’m sure that the folks at Levi’s had  puzzled looks on their faces and, at the same time, officials in Bangladesh or wherever Levi’s are made these days cringed.  By contrast, the U.S. imported $43 billion worth of cars from Europe – half coming from Germany alone.  Upon hearing Trump’s threat to slap tariffs on their car imports, the EU backed off fast from further retaliation threats.

You might ask, couldn’t the EU then respond with tariffs on imports of American cars?  Yeah, but they only imported $8 billion worth of cars in 2017.  The whole idea of “retaliation” is to strike back in a way that hurts at least as much as what’s been done to you.  Therein lies the problem for anyone with a huge trade surplus with the U.S.  It’s impossible to “retaliate” in any meaningful way.  In the above scenario, where the U.S. puts $1.6 billion worth of bourbon and motorcycle exports at risk, the EU stands to lose twenty-five times that much in auto exports.  The U.S. could actually just hand Jim Beam and Harley Davidson $1.6 billion to make up their loss, and still be way, way ahead.

Then there’s China or, as I’ll refer to them from now on, “Red China.”  That’s how they used to be known under Chairman Mao Tse Tung, until the U.S. began making overtures to them in the hope of turning them into a more free and open society.  But, in my opinion, with Xi Jingping’s power grab, making himself China’s communist dictator for life – just like Chairman Mao – China no longer deserves that respect.  From now on, they’re once again “Red China” and “Chairman Xi.”

So, anyway, back to Red China.  Trump is threatening to slap tariffs on $60 billion worth of their exports, and it would probably escalate from there.  Already, Red China has threatened to retaliate with tariffs on soybeans, and then with tariffs on an additional 127 American products.  And the Chicken Littles of globalism are freaking out with dire warnings of the consequences of a trade war.

So, just like we did with the EU above, let’s take a detailed look at this situation.  In 2017, Red China imported $12.4 billion worth of soybeans from the U.S.  The other 127 products total up to $3 billion for a grand total of $15.4 billion worth of retaliation to America’s tariffs on $60 billion worth of Chinese exports.  So, once again we see that Red China is incapable of mounting any kind of real retaliation at all.  With over $500 billion in exports to the U.S., while only importing $130 billion, there’s simply no way for Red China to retaliate in any meaningful way.  If all trade with Red China were halted completely, the U.S. wins by $370 billion.  Hell, we could just hand soybean farmers $12.4 billion and still be ahead by $357.6 billion!

Oh, by the way, the threat of tariffs on American soybeans would hurt the Chinese more than Americans.  Does Chairman Xi think that his people will simply eat less?  Of course not.  He’ll have to get his soybeans somewhere else, like Brazil, and now those countries who imported soybeans from Brazil will turn to the U.S., probably bidding up the cost of soybeans.  No skin off of our noses, Chairman Xi.

Not so fast, the free trade advocates and globalists warn, American consumers will be hurt by higher prices in a trade war.  Oh, really?  Not if you factor quality into the equation and the fact that cheap junk from Red China has to be constantly replaced.  Last year, I replaced the faucet in our bathroom, which had been there for thirty years.  We wanted to replace it with the exact same model, since it’s used in other bathrooms in the house and still goes well with the other decor.  Already  it’s falling apart.  The handles keep coming loose because the threads were cut too sloppy (as is often the case with Chinese products) and the hot water handle squeaks like a rusty gate.  So the cheap Chinese version barely lasts a year while the old, American-made version held up for thirty.

This week, while doing a wood-working project, my lightly-used, Chinese router quit.  I wanted to replace it with a good, American-made router but I found out, sadly, that none are made in the U.S.  Not only that, no power tools of any kind are made in the U.S. anymore.

So, no sooner did I buy a cheap Chinese router, than my printer quit on me, just past its warranty.  New printers have become an almost annual purchase for me.  To summarize, I’m really getting sick of dealing with poor quality Chinese junk, just like virtually every American is.  A boon to U.S. consumers?  Baloney!

Of course, the real reason that the claim of lower costs for American consumers is a lie is because cost is relative to income, and our huge trade deficit and corresponding job losses with Red China have held down and even cut American incomes more than it has reduced costs.

Trump has used “national security” as his rationale for levying tariffs on steel and aluminum.  Why stop there?  Look at clothing.  Virtually none is made in the U.S.  Isn’t it a matter of national security that we might all be running around naked during a war?  Well, we could make our clothes, right?  Nope.  No fabric is made in the U.S. either.

Or how about the example of power tools I talked about above?  It takes tools to make things.  We don’t even have the tools it takes to make tools!  Where would we get them during a war?  Let’s face it.  If a war broke out right now, we’d soon find ourselves fighting it naked with nothing more than clubs.  Maintaining a healthy manufacturing sector – one capable of manufacturing everything that we need – is a matter of national security.

A trade war?  It’s impossible for the U.S. to do anything but win, and win big.  Come on, President Trump, let’s get it started!

Trade Deficit in Manufactured Goods At Record High

The trade deficit in manufactured products* rose to a record high of $64.6 billion in October, surpassing the previous record of $63.3 billion set in March of 2015.  Take a look at this chart of our monthly deficit in manufactured goods:  Manf’d Goods Balance of Trade. Exports of manufactured goods haven’t risen since September of 2011 (in spite of Obama’s laughable proclamation in 2010 that we would double exports in five years).  In the meantime, imports have soared by almost $30 billion.  It’s a dubious distinction for President Trump who, during his inaugural address in January, spoke of “…rusted-out factories scattered like tombstones across the landscape of our nation…” and proclaimed that “This American carnage stops right here and right now.”

To be fair, Trump didn’t mean that it would happen on the spot.  His administration has been taking steps to address our trade problem, trying to renegotiate NAFTA (the North American Free Trade Agreement with Mexico and Canada), imposing tariffs on some products and, most recently, blocking China from rising to “market economy” status with the World Trade Organization.  Aside from the work on NAFTA, which may conclude soon with the U.S. walking away from that ill-conceived agreement, the rest amounts to little more than the token steps taken by previous administrations.  The net result is that the plight of the manufacturing sector of our economy grows steadily worse.

Enough is enough.  It’s time to walk away from both NAFTA and the World Trade Organization and begin implementing tariffs.  Any tariffs would be better than our current trade policy, but smart tariffs that address the real cause of our trade deficit – attempting to trade freely with badly overpopulated nations characterized by bloated labor forces and anemic markets – would be much more effective.  As an example, it was reported yesterday that Canada, angered by their treatment in the NAFTA negotiations, has canceled an order for Boeing-made fighter planes.  Why are we treating Canada this way?  Sure, we have a trade deficit with Canada, but it’s due entirely to oil.  In 2016, our biggest trade surplus in manufactured goods, by far, was with Canada – $44 billion, more than double any other country.  Canada is our best trading partner.  Why anger them?  Why not tell Canada that our beef is with Mexico, with whom we had a trade deficit in manufactured goods of almost $68 billion in 2016 – our third worst behind China and Japan – and that they’ll get just as good a deal from the U.S. without NAFTA?  Slap the tariffs on Mexico, not Canada.

We could completely wipe out our trade deficit in manufactured goods by applying tariffs to only ten countries – China, Japan, Mexico, Germany, Ireland, Vietnam, South Korea, Italy, India and Malaysia.  These ten countries, all more densely populated than the U.S. (all but Ireland are many times more densely populated), account for all of our trade deficit in manufactured goods.  While we have defiicts with others, they are much smaller and are offset by surpluses with the rest of the world.  The point is, we don’t have to anger the entire world with tariffs – just ten out of the more than 220 countries in the world.  So let’s be smart about how we do it, but the time has come, Mr. President.  Stop delaying the inevitable.  Do what you know needs to be done.

* The trade deficit in manufactured products is calculated by subtracting services, trade in petroleum products, and trade in foods, feeds and beverages from total trade, as reported by the Bureau of Economic Analysis in its monthly reporting of international trade.