Here’s a chart showing America’s top 15 trade partners (in terms of the percentage of total imports and exports) in 2013: Top 15 Trading Partners in 2013. First, some general observations are in order.
- There are 229 nations on earth. These fifteen nations alone account for nearly three quarters of all U.S. trade.
- These fifteen nations represent approximately one half of the world’s population.
- Those not well-versed in U.S. trade data are probably surprised to see Canada at the top of the list. It’s not such a surprise when you learn that Canada is America’s largest supplier of oil and gas. Canada’s share of U.S. trade rose in 2013 to 16.4% from 16.1% in 2012.
- Second on the list is China – not such a surprise. China’s share of U.S. trade also rose in 2013 to 14.6% from 14% in 2012.
- Third is Mexico, with their share of U.S. trade rising to 13.2% from 12.9% a year earlier.
- These three nations – Canada, China and Mexico – account for about 44.2% of all U.S. trade.
- Japan, fourth on the list, saw its share of U.S. trade slip from 5.7% to 5.3% in 2013.
- South Korea leapfrogged ahead of the United Kingdom on the list, rising to sixth place while the U.K. slipped to seventh.
- France rose from 10th place in 2012 to eighth place in 2013, while Brazil and Saudi Arabia each slipped a notch.
- Venezuela, 14th on the list in 2012, fell off the list in 2013 and was replaced by Switzerland.
The above list is based on total imports and exports of all goods and services. But what really matters is manufactured products, since jobs are concentrated in that category. Exports add jobs to an economy, and imports take them away. A trade deficit in manufactured products represents a net loss of jobs. So let’s turn our focus to that category of trade. I should note here that, from this point on, trade imbalances will be expressed in per capita terms in order to factor out of the equation the sheer size of nations. If the U.S. has a deficit of $1 billion with a nation of one million people and a deficit of $100 billion with a nation of 100 million people, it would be wrong to conclude that the people of the latter nation are a bigger drag on our balance of trade, since the people of both nations export $1,000 more to the U.S. than they import from us.
Of these fifteen nations, twelve are more densely populated than the U.S. and three are less densely populated. With the three less densely populated nations, the U.S. enjoys a surplus of trade in manufactured products with all three – Canada ($1,988 per person), Brazil ($112 per person) and Saudi Arabia ($595 per person).
On the other hand, of the twelve nations more densely populated than the U.S., we suffer a trade deficit in manufactured goods with all but one of them – The Netherlands. The Netherlands has an unusual economy. As the only nation in Europe with a seaport on the Atlantic coast, it’s economy is heavily focused on trade, buying from the U.S. and then re-selling to other nations. This is the reason that the U.S. enjoys a healthy surplus with The Netherlands. Of the remaining eleven nations more densely populated than the U.S., our per capita trade deficits with them rank as follows:
- Switzerland: -$1,859
- Germany: -$822
- Taiwan: -$706
- Japan: -$696
- S. Korea: -$496
- Mexico: -$335
- Italy: -$319
- China: -$259
- France: -$208
- U.K.: -$30
- India: -$11
Surprised? If you’ve read Five Short Blasts, then you’re not surprised at all. You understand how population density (and almost nothing else) drives trade imbalances. When expressed in per capita terms, our enormous trade deficit with China (enormous because of its sheer size and population) seems rather mundane. Others are much worse because they are much more densely populated than China. In fact, if we plot our per capita trade deficit in manufactured goods versus population density, we find that the data follows a line that describes a logarithmic decay in our balance of trade as population density rises: Per Capita Balance of Trade vs. Pop Density.
As you can see, trade with nations less densely populated than the U.S. (about 86 people per square mile) will almost surely be beneficial to the U.S. and produce a trade surplus. Trade with more densely populated nations will result in a trade deficit and a drag on the U.S. economy. The U.S. began trading freely with the other nations on this list long before we began trading freely with China in 2000. For those who understand the role of population density in driving trade imbalances, it would have been easy to predict the results – a huge trade deficit. In fact, the results of our trade policy with China fall very neatly along that line.
Some argue that trade deficits are caused by low wages in places like China. Look again at the above list. Low wages? Not in Switzerland. And not in most of the other nations on that list. In fact, wages in China have risen dramatically and our deficit with them has only gotten worse. To better understand the real relationship between wages and trade, take a look at this chart that plots PPP (purchasing power parity, analogous to average wages) vs. our balance of trade with our top fifteen trade partners: Per Capita Balance of Trade vs. PPP. The truth is that when trading with very poor nations (where wages are very low), we experience neither a large trade deficit or surplus. As you can see, the relationship between trade imbalance and the wealth of nations forms an almost perfect “V”. On the right side of the chart (which represents trade surpluses), the per capita surpluses grow larger as the wealth of our trading partner increases. On the left side of the chart (representing trade deficits), the deficits with wealthy nations are larger than those with poor nations.
When you think about it, this makes sense. Those nations on the right side (the surplus side) of the chart are less densely populated nations. Their citizens are capable of consuming products and they are resource-rich, enabling them to produce products and have a self-sufficient economy. Because they are wealthy, they are able to import products from America. The right side of the chart, however, is populated with very densely populated nations where their citizens have insufficient space to consume at a high level, and they are resource-poor. They are heavily dependent on manufacturing for export to sustain viable economies. Poor people can’t buy and import products. That’s why there are no big trade deficits (in per capita terms) with poor nations. Once manufacturing is introduced into their economies, however, wages begin to rise and they are then able to begin importing some products. That’s why the trade deficits are larger with wealthier nations – because our trade deficit has made them wealthier. It should be noted, however, that the trade deficit we have with them is never reversed. Regardless of how wealthy they become through manufacturing for export, it is still impossible for them to consume at a high level.
China is a good case in point. Trade with China started at a low level. Once it started, wages in China began to grow and they have the fastest-growing economy in the world. But, as wages have risen in China, our trade deficit with them has actually accelerated instead of moderating, as the low-wage theory would predict. It has accelerated because the Chinese are incapable of consuming at a high enough level to restore a balance of trade. Contrast this with a poor, sparsely-populated country. If manufacturing is introduced there, we will have a trade deficit with them for a brief period of time, but wages will quickly rise as their labor supply is quickly exhausted, and their wealth will quickly enable them to begin importing American goods. A balance of trade is soon restored.
All of this illustrates just how foolish it is to apply free trade policy equally to both sparsely-populated and densely-populated countries and expect the same results. Free trade with badly overpopulated nations is a sure-fire loser, guaranteed to produce large trade deficits and to devastate the manufacturing sector of the economy. It has nothing to do with low wages; nor does it have anything to do with currency valuations, which I’ll cover in an upcoming post. Our enormous trade deficit is driven almost entirely by attempting to apply free trade policy to nations that are severely overpopulated.