America’s Worst Trade Partners in 2016

July 6, 2017

America’s trade policy is a disaster.  There’s just no other way to describe it.  In 2016, our trade deficit rose to almost $505 billion, beating the old record set in 2015.  We can’t continue on this path.  An economy that has that much money drained from it can only avoid a permanent state of recession through deficit spending, which is exactly what we’ve done for decades, and it’s bankrupting us.  Our infrastructure is crumbling.  The Social Security trust fund is on a path to bankruptcy.  Medicare is already there.  Household incomes and net worth are declining.  And the government can’t come up with a scheme that makes health care affordable.

But what to do?  How did “free trade,” the darling of economists, back-fire so badly for the U.S.?  A quick glance at the balance of trade data, which is broken into “services” and “goods,” reveals a nice surplus in services.  It was in this category that the U.S. economy was really expected to shine, and it has.  But the “goods” part of the equation has run completely off the rails, with the deficit in goods dwarfing the small surplus in services.

What’s the problem with “goods?”  Is it oil?  There was a time, decades ago, when the deficit in goods was due almost entirely to oil imports.  But no more.  It has shrunk dramatically and now accounts for less than 25% of the goods deficit.  The vast majority of our deficit in goods is due to manufactured products.  So let’s focus there.

Let’s begin with a look at which nations account for our biggest trade deficits in manufactured goods.  Here’s a list of the top twenty in 2016:  Top 20 Deficits, 2016.  China is at the top of the list, yielding a trade deficit that’s more than four times as large as the next nation on the list, Japan.  In fact, so large is the trade deficit with China that it is larger than all of the nations of the rest of the world combined.  It would seem that China must be doing something underhanded.  Some say that the problem is low wages in China.  Others claim that China manipulates its currency, keeping it artificially low, thus making its exports cheaper for American consumers and making American imports too expensive for Chinese consumers.  Or maybe it’s just the sheer size of China, a big country with one fifth of the world’s population.

What is it about this list of nations that they have in common?  The list includes nations from Asia, Europe, the Middle East and Central America.  It includes some of the wealthiest nations on earth – like Germany, Switzerland and Ireland – casting doubt on the “low wage” theory.

I mentioned China’s size.  But geographic size can’t be much of a factor.  Without any people, we wouldn’t even have trade with any particular country or region.  Take Antarctica.  It’s bigger than China, but we have no trade with that continent at all.  People are what’s important.  It’s their consumption of products that drives trade.  So maybe that’s where we should start looking.  Perhaps the number of people in a country – or their population density – is a factor.  So let’s take a look.  Let’s express the trade deficit with each one of those countries in per capita terms.  Now look at the list:  Top 20 Per Capita Deficits, 2016.

The median population density of the 165 nations* included in this study is 184 people per square mile.  The population density of the U.S. is apprximately 90 people per square mile.  Seventeen of the twenty nations on this list have population densities above the median.  The odds against that happening are 128:1.  Conversely, the chances of that happening are only 0.7%.  Clearly, population density is a factor.  The average population density of these nations is 522 people per square mile – almost three times the world median and more than five times the density of the U.S.

In per capita terms, China barely even makes the list, ranking 19th out of these twenty nations. Eleven of the twenty nations are European Union nations.

And what about the claim that low wages are to blame for trade deficits?  That’s clearly nonsense.  The average “purchasing power parity” (roughly analogous to wages) is just over $46,000 – on a par with the U.S.

On average, the per capita trade deficit with these nations has risen by 88% in the past ten years.

The fact that America’s deficit with Ireland, with a population density close to the world median, is almost three times that of Switzerland, the number two nation on the list, is an indication that something else is going on that tilts trade in favor of Ireland, and indeed there is.  Ireland is a tax haven and America is a fool to tolerate it.

Why is population density such a dominant factor in determining the balance of trade?  It’s because of the inverse relationship between population density and per capita consumption.  It’s because people living in crowded conditions consume less but are just as productive.  The result is that they come to the trade table with a bloated labor force and an emaciated market.  To understand more about why this happens, read Five Short Blasts.  It’s also the theme of this blog.

Any trade policy that fails to account for the role of population density in driving trade imbalances and fails to employ tariffs to maintain a balance of trade with overpopulated nations is doomed to failure.  America’s free trade policy is blind to this factor.  The resulting trade deficit is inevitable.

Next we’ll take a look at the list of America’s twenty best trade partners.  If population density is a factor, we should see the opposite results on that list.  It should be dominated by nations with low population densities.  Stay tuned.

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  *  There are 229 nations in the world.  Tiny island nations and city-states have been excluded from the study.  Trade with these nations is minuscule, accounting for less than 1% of U.S. trade.  The U.S. tends to have a surplus with such nations, regardless of their population density, since their economies are primarily based on tourism and not manufacturing.


America’s Worst Trading Partners in 2015

May 19, 2016

It’s time for my annual ranking and analysis of America’s best and worst trading partners for 2015.  No surprise, it was another dismal year for American manufacturers, racking up the 40th consecutive year of trade deficits and setting a new record in the process – a deficit of $648 billion.  That surpasses last year’s record deficit by a whopping $109 billion.

Since the surpluses of trade with our best trade partners is overwhelmingly swamped by the deficits with our worst partners, let’s begin there.  This year I’m going to first present the list in the most basic terms – a list ranked in order of the sheer size of the deficits. Check out this list of America’s twenty worst trade partners in terms of our deficit in manufactured products:  Top 20 Deficits, 2015.

The nations at the top of this list should come as no surprise to anyone.  Trade with China dwarfs them all with a deficit of $367.5 billion – more than four times larger than our second largest deficit with Japan.  That’s not surprising when you realize that China has ten times as many people as Japan.  China actually accounts for about one fifth of the entire world’s population.  The following are some other key observations about this list:

  • Look at the population density of these nations.  The average population density is 737 people per square mile.  That’s eight times the density of the United States.  With only one exception – Sweden – every nation on this list is more densely populated than the U.S.  Most are much, much more densely populated.
  • Eight of these nations are wealthy European nations.
  • Over the past ten years, our trade deficit has worsened with 17 of these nations.  Most have worsened dramatically.  The nation with whom our balance of trade has improved the most (that is, with whom the deficit has declined the most in the past ten years) is Sweden – the only nation on the list less densely populated than the U.S.
  • Our trade deficit with Japan has actually declined by 18% over the past ten years.  Why?  Simple.  South Korea is “eating their lunch.”  Imports of South Korean cars – Hyundais and Kias, along with imports of South Korean appliances like those made by LG, Samsung and others – has cut into Japan’s market share.  Remember when President Obama signed a new trade deal with South Korea in 2012, proclaiming it a “big win for American workers?”  In three short years our trade deficit with South Korea jumped 50%.
  • Our fastest growing trade deficit is with Vietnam, growing by 440% in the last ten years.  Some may point to the fact that at $6100 per person, Vietnam has the lowest purchasing power parity of any nation on this list – only slightly better than India – and that this is the reason for the explosive growth in our trade deficit with them.  However, our second-fastest growing trade deficit is with Switzerland, a nation that is actually more wealthy (with higher wages) than the U.S.  What Vietnam and Switzerland do have in common is a high population density.  It’s the one thing that (nearly) all of these diverse nations have in common.

Many people will look at this list and quickly conclude that, when it comes to our trade deficit, the problem is China and so that’s where we should focus.  Somehow, some way, they’re obviously not playing fair with us.  They’re manipulating their currency, they’re ignoring workers’ rights.  They’re trashing the environment.  And so on.  So let’s get tough with China.

The problem is that China can legitimately complain that of course our deficit with them is big, simply because they are a big nation.  Person-for-person, our trade deficit with Japan is worse.  OK, so in an effort to be fair, let’s broaden our efforts to include Japan.  “Not so fast!” the Japanese will complain.  “What about Germany?  Their surplus with you is nearly as large and they have only half as many people as we do!”

The point is that in determining the root cause of these enormous deficits in order to formulate an effective trade policy, we need to factor out of the equation the sheer size of these nations.  Let’s determine who are really our worst trade partners on a person-for-person basis.  So here’s a list of our worst trade partners in terms of the per capita trade deficits:  Top 20 Per Capita Deficits, 2015.

Now we can see what a mistake it would be to simply conclude that China is the problem.  In per capita terms, they barely make the list of the top twenty worst deficits.  In fact, there are now ten European nations on this list and, in per capita terms, our trade deficit in manufactured products is worse with all ten of them than it is with China.  Here are some more key observations about this list:

  • Once again, all but two of the nations on this list – Sweden and Finland – are more densely populated than the U.S.  Most are far more densely populated.  Only three have population densities less than the median population density of the world, which is 184 people per square mile.  One – Ireland – is right on the median.  The other 80% of the nations on this list are much more densely populated.
  • Most of these are wealthy nations, with an average purchasing power parity of $44,370 per person.  In fact, the top of the list is dominated by the wealthiest.  Clearly, the argument that low wages cause trade deficits doesn’t hold water.  If anything, the cause and effect is exactly the opposite.  Running large trade surpluses makes nations wealthier.
  • There is one nation on this list that is a net oil exporter – Mexico.  I point this out because oil is priced in U.S. dollars, and every dollar spent on oil produced by foreign countries must be repatriated to the U.S., since that is ultimately the only place where they are legal tender.  Those dollars are repatriated in several ways, primarily through the purchase of American bonds or through the purchase of American goods.  The latter tends to make net oil exporters strong buyers of American products, which usually means that the U.S. enjoys a surplus of trade in manufactured products with such nations.  But not Mexico.  What this means is that the large trade deficit in manufactured goods that we have with Mexico is actually even worse than it appears.  For a nation whose population density is one of the lowest on the list – less than twice that of the U.S. – it means that something beyond population density – such as some unfair trade practice – is at work here.  Ditto for Ireland, which has fashioned itself into a tax haven for manufacturers, virtually bankrupting itself during the “Great Recession” of a few years ago.

If you are seeing such data for the first time, it may be a little early, based on this data alone, to conclude that population density is the driving force behind trade imbalances.  More proof is needed.  If such a relationship exists, then we should see exactly the opposite at the other end of the spectrum.  We should see a list of America’s best trade partners – those with whom we have trade surpluses – loaded with nations with low population densities.  We’ll take a look at that list in my next post.

If you’re already acquainted, however, with the relationship between population density and trade imbalances, which I explored thoroughly in Five Short Blasts, then this data is just further proof that population density is, in fact, the driving force behind these trade imbalances.  Such deficits are inescapable when applying free trade theory, which fails to account for large disparities in population density, to such nations.  It will only get worse with each passing year, exactly as we have seen.

 


Back from Ireland

April 14, 2015

My wife  and I have just returned from a trip to Ireland, America’s worst trade partner in terms of their per capita trade surplus in manufactured goods, and I thought I’d share some observations.

First of all, perhaps because I visited areas more attractive to tourists (mostly in Kerry County), I didn’t really see much evidence of a large presence of American companies there.  However, shortly after arrival, as we were checking into our hotel just outside Dublin, an older gentleman who was dressed as a businessman somehow recognized me as an American and asked if I was there on business.  “No, we’re just here on vacation,” I replied.  “Oh, well there are a lot of American companies here, you know.” he said.  “Yeah, I know.” I replied.  If only he knew just how well I knew that fact and how I felt about it but, following an all-night flight and a harrowing drive through Dublin to the hotel (my first experience driving on the left in a right-hand-drive, manual transmission car), I didn’t have the energy to get into a discussion.

One morning at breakfast at our next hotel in Killarney, a young hotel employee (maybe thirty) who was busy bussing tables and restocking the breakfast buffet, struck up a conversation, asking what part of America we were from.  “Michigan,” we replied.  (I found it interesting that of all of the people we met who asked such a question, maybe only half knew where Michigan was located.  It was oddly comforting that Europeans can also be “geographically-challenged” in the same way that many Americans are criticized for being.)  Anyway, the thing that this young guy seemed most interested in was the current state of the job market in America.  He noted that things had been difficult there as Ireland struggled to emerge from the economic mess it landed in during the “Great Recession.”  (You may recall that Ireland was dubbed one of the “PIIGS” nations of Europe – Portugal, Ireland, Italy, Greece and Spain – who had racked up massive national debts and were now a drain on the Euro Zone economy.)

On another occasion, as we waited for a tour of the Muckross House in Killarney National Park, one of the ladies selling tickets bemoaned the fact that they were short on tour guides, thanks to government austerity measures.  I was beginning to understand that employment was still a significant concern in Ireland.  This seemed strange, given Ireland’s relatively huge trade surplus with the United States.

The longer we were there, I grew more accustomed to the charm of the Irish brogue.  But I also began to notice that, in many cases, the accent didn’t seem right.  I then began to realize just how many of the people we were speaking with weren’t Irish at all but immigrants, primarily from around Europe and some clearly from the Middle East.  Especially in the hotels, the staffs seemed to be dominated by immigrants.  At an ice cream shop, the young lady who waited on us was French.  When I asked if it was difficult to get a work permit in Ireland, she explained that as a citizen of the Euro zone, she had just as much right to work there as anyone.

Although Ireland is twice as densely populated as the U.S., it’s actually rather sparsely populated by European standards, where most of continental Europe is as densely populated as China.  Thus, it’s become a magnet for migration of Europeans looking for a better life in a less crowded land where, though unemployment is still a problem, it’s much better than in other places.  We talked with a lady who had recently moved to the Killarney area from England, a nation four times as densely populated as Ireland.  She was ecstatic to be there.

Ireland is a beautiful place that everyone should try to visit at some point.  The people are friendly and we never had a bad meal.  The countryside is beautiful, dominated by sheep pastures delineated by ancient stone walls and hedgerows.  But, as someone hypersensitive to the subject of overpopulation, I can see that Ireland is in a state of transition, and I fear that their culture will gradually fade into the boring sameness that increasingly characterizes our globalized world.

Speaking of England, on our last day in Ireland I was watching a BBC news broadcast in which some journalist was interviewing Ed Miliband, Labour Party candidate challenging David Cameron for British prime minister in the upcoming election.  I was shocked (pleasantly so) by a question that the interviewer put to Mr. Miliband.  But that’s a subject for my next post.

 

 


America’s Worst Trading “Partners”

April 2, 2014

The word “trade” implies a mutually beneficial exchange of goods and services.  I buy stuff from you and, in return, you buy stuff from me.  A good trading partner is a nation that buys (imports) as much as it sells (exports).  A bad trade relationship is one in which a nation sells (or exports) while buying little in return.  Such a relationship isn’t mutually beneficial.  In such a relationship, one nation creates jobs at the other’s expense and drains funds away from the other’s economy.

America’s free trade policy has resulted in both good and bad trade relationships.  On balance, its many beneficial trade relationships have been more than offset by a minority of really bad ones.  But what’s the best way to judge?  Some differences in trade imbalances are due to a huge disparity in the size of nations.  Is a big nation that maintains a large trade surplus with the U.S. any better than a tiny nation with a proportionately large imbalance?  The only way to judge such imbalances fairly is to express them in per capita terms.  That is, how much does each person in that nation buy from the U.S. vs. how much they manufacture and sell to us? 

When expressed in per capita terms, the results are surprising.  Here’s the list:  Top 20 Deficits, 2012.  The key take-aways from this list are as follows:

  • Note the population density of the nations on this list.  By comparison, the population density of the U.S. is approximately 86 people per square mile.  Eighteen of these twenty nations are more densely populated than the U.S.  Eight are more than five times as densely populated.  In fact, the average population density of the nations on this list is 493 people per square mile – more than five times the density of the U.S.  Only two are less densely populated – Sweden and Finland.  When I first published this list in 2006 in Five Short Blasts, Sweden ranked number two.  By 2012, they have fallen to number eleven.  And their surplus with the U.S. has been reduced by half. 
  • Note the “per capita purchasing power parity (PPP)” of the nations on this list.  By comparison, U.S. PPP is approximately $48,500.  Most of the nations on this list are relatively wealthy nations, debunking the myth that trade deficits are caused by low wages.  If low wages are to blame, how do you explain the presence of Ireland, Switzerland, Taiwan, Denmark, Germany, Japan and Austria (among others) in the top ten of this list?  Also, the PPP of this list has risen dramatically in the past six years.  (More on this topic in a later post.)
  • Though China gets all of the attention for its massive trade deficit with the U.S., it barely makes the top 20 list, coming in at number 18.  It has risen only one place on this list since 2006.  In per capita terms, its trade imbalance with the U.S. is rather unremarkable relative to the other nations on this list.  In fact, when you understand the role that population density plays in driving trade imbalances, the huge trade deficit with China, given its sheer size and enormous population, is exactly what should have been expected. 

People who live in overcrowded conditions buy fewer products because they have no room to utilize them.  They buy or rent smaller homes because there is no room for larger homes.  They own fewer cars because their roads are choked with traffic and they choose mass transit instead.  Because their homes are smaller, they buy less furniture, far less lawn and gardening equipment and smaller appliances.  They buy less sporting equipment like boats, golf equipment, tennis equipment – you name it – simply because of the scarcity of resources for using such.

When two nations grossly disparate in population density atttempt to trade freely with each other, the work of manufacturing is spread evenly across the combined labor force, but the disparity in per capita consumption remains.  They buy less from us than we buy from them.  The result is inescapable – a trade deficit and loss of jobs for the less densely populated nation.  In effect, a host-parasite relationship is established in which the more densely populated nation feeds on the market of the other nation.  The less densely populated nation pays the price for the other nation’s overpopulation.  It hardly seems fair, does it?


Trade Deficit with EU Soars in October; Exports Lag Obama’s Goal by $49 Billion

December 4, 2013

http://www.bea.gov/newsreleases/international/trade/2013/pdf/trad1013.pdf

As announced by the Bureau of Economic Analysis (BEA) this morning (see above link), the U.S. October trade deficit moderated slightly to $40.6 billion from $43 billion in September.  The overall trade deficit continued its moderating trend that began in February of last year, thanks primarily to an improving balance of trade in oil.  During that time frame, oil imports have fallen by $7.0 billion while oil exports have risen by $3.2 billion – a swing of $10.2 billion in the balance of trade in oil.  That’s great news.  Here’s the chart for the overall balance of trade:  Balance of Trade.

The bad news lies in the details.  Our balance of trade in manufactured goods, though it improved by $1.6 billion in October, continues on an overall downward trend.  Here’s the chart:  Manf’d Goods Balance of Trade.

Exports of manufactured goods lagged the president’s goal of doubling them in five years for the 27th consecutive month and by a record margin – $33.9 billion.  They haven’t risen at all in the past year.  Overall exports lagged the president’s goal for the 25th consecutive month, and by nearly $49 billion.  In other words, the U.S. would now be enjoying a surplus of trade if the the president had met his goal.  But that was never possible since the U.S. has absolutely no control over exports.  Here’s the chart:  Manf’d exports vs. goal.

But the most disturbing news in the report is what’s happening to our balance of trade with Europe.  In October, the trade deficit with the EU hit a new monthly record of $14.3 billion.  And it’s on pace to shatter the annual record, set only last year, by 15%.  This is led by a record deficit with Germany of $6.9 billion in October.  Our trade deficit with Germany is on pace to shatter last year’s annual record by 22%.  And we also had a record deficit with Ireland in October  of $3.2 billion –  also on pace to beat last year’s annual record. 

President Obama’s approval rating has been sinking.  Nowhere is his failure greater than his failure to follow through with his campaign promise to fix America’s broken trade policy.


America’s Worst Trade Partner

May 4, 2013

No, it’s not China.  Our largest trade deficit, by far, is with China, but China is also a very, very large country that accounts for one fifth of the world’s population.  And it’s not Japan or Germany, with whom we suffer our second and third largest trade deficits.  Obviously, I need to define my criteria for “worst trade partner.”  I’m putting this into per capita terms.  That is, man-for-man, citizen-for-citizen, which country sucks more trade dollars out of Americans’ pockets than any other?

The hands-down winner is Ireland.  In 2012, every man, woman and child in Ireland was $5,012 wealthier because of Ireland’s $24 billion per year trade surplus with the U.S.  And Ireland has fewer than five million people.  That’s over $20,000  per year for every family of four.  And every family in America is poorer because of it.  But that’s actually an improvement over 2011, when our per capita trade deficit with Ireland set a record of $6,244.  Here’s a chart of our balance of trade with Ireland since 2001:  Ireland Trade.  The improvement in our balance of trade with Ireland in 2012 was due entirely to a slowdown in imports of pharmaceuticals from Ireland.

To put the size of our per capita trade deficit with Ireland in perspective, it’s seven times worse than our per capita trade deficit with both Germany and Japan.  And it’s almost twenty times worse than our per capita deficit with China. 

Ireland is almost twice as densely populated as the U.S., which accounts for some of this trade imbalance.  (There is a strong correlation between the population density of our trading partners and our trade imbalance with them, both in terms of whether the imbalance is a surplus or deficit, and how large the imbalance tends to be.)  But that doesn’t explain such an enormous imbalance with such a small country.  Ireland offers huge tax incentives to foreign corporations to set up shop there.  Pharmaceutical manufacturers in particular have taken advantage of it.  Never mind the fact that this tax policy bankrupted Ireland and landed them on the list of EU “PIIGS” (Portugal, Ireland, Italy, Greece and Spain).  Like those other nations, they have the EU to bail them out.  This situation constitutes a blatant unfair trade practice.  But, as with all unfair trade practices, the U.S. simply turns a blind eye. 

So, the next time you’re sick and at least try to take a little comfort in thinking that your spending for pharmaceuticals may be helping some American workers and the American economy, think again.  Our trade policy with Ireland is a good part of the reason that all of us are becoming increasingly dependent on the federal government to provide us with health care.


America’s 20 Worst Trade Partners

June 11, 2012

Who were America’s 20 worst trade partners in 2011?  First, we have to define “worst.”  By “worst” I mean those nations with whom the U.S. has its biggest trade deficits in manufactured goods.  By that simple measure alone, China is, hands-down, our worst trade partner by far.  But China is also a very large country with one fifth of the world’s population.  So we need to factor out the sheer size of nations to avoid having this list degenerate into nothing more than a list of nations by size.  A more appropriate definition of “worst trade partner” factors out size by expressing the trade deficit in per capita terms – that is, divided by the population of each nation in question. 

Now the results might surprise you.  Using that criteria, here’s a list of America’s 20 worst trading partners:  Top 20 Deficits, 2011

The following are some key take-aways from this list:

  • Of these twenty worst per capita trade deficits in manufactured goods, eighteen are nations more densely populated than the U.S.  (U.S. population density is 85 people per square mile.)  The average population density of these twenty nations is 491 people per square mile – almost six times as densely populated as the U.S.
  • Of these twenty nations, the average purchasing power parity (PPP) is $33,700 per person.  Only six have PPP less than $20,000 per person.  (Only one of the top ten has PPP less than $20,000.)  This tends to debunk the myth that trade deficits are caused by low wages.
  • Ireland is far and away America’s worst trading partner.  That tiny nation of only 4.7 million people (0.07% of the world’s population) accounts for 7% of our total trade deficit in manufactured goods.  On a per capita basis, our trade deficit with Ireland is 28 times worse than our per capita deficit with China.  Ireland’s trade surplus with the U.S. accounts for 16% of their PPP.  Our per capita trade deficit with Ireland in 2011 worsened by 18% from 2010.  Though Ireland is twice as densely populated as the U.S., that doesn’t account for such a gross imbalance of trade.  Ireland is the world’s champ when it comes to employing unfair trade practices, particulary in the form of subsidizing foreign manufacturers with a free tax ride.  Ireland, in turn, is subsidized by the European Union, being one of the first to require a bailout of their banking system. 
  • Of our top ten worst trade partners, five are EU members.
  • China (four times as densely populated as the U.S.) ranks 16th on the list, the same as their 2010 ranking. 
  • South Korea (15 times as densely populated as the U.S.), with whom the U.S. entered into a new free trade agreement early this year, is America’s 13th worst trade partner, the same ranking as in 2010.

It’s China that draws all of the attention in discussions about America’s trade deficit.  But, when you look at this list, it becomes clear that our trade results with China are no different than our trade results with many other nations.  The fault lies not with China’s trade policies, but with our own – a trade policy that fails to account for the role of population density in driving global trade imbalances.  Actually, the fault lies with the field of economics and its stubborn refusal to give any consideration to the potential consequences of population growth.