I have finally finished tabulating the trade data for each country for 2014. (2015 data won’t be released by the Bureau of Economic Analysis until sometime in March.) What took me so long? This is no small task. Since the BEA doesn’t track “manufactured products” as a category, I have to take the data for hundreds of product codes for each of 165 nations and subtract out the categories of raw materials in order to arrive at a figure for manufactured products. I maintain a massive spreadsheet for each nation and then compile the results for all on an even bigger spreadsheet.
Anyway, the results are in and over the next couple of weeks or so, beginning with this post, we’ll break down and analyze the results. I like to begin by listing America’s 20 worst per capita trade deficits in manufactured goods. In essence, this is a list of America’s 20 worst trade partners. These trade deficits are expressed in per capita terms in order to put the citizens of all nations on an equal footing. For example, our trade deficit with China, when expressed in dollars, dwarfs that of every other nation because they represent one fifth of the world’s entire population. But when it comes to trade, borders are meaningless and China could just as easily be 100 smaller nations instead of one. It would have no effect on our total trade deficit whether we draw a line on a map around 1.3 billion people, or draw 100 lines around clusters of 13 million people each. Expressing the deficits in per capita terms eliminates the sheer size of nations as a factor.
If you’re new to this web site, you probably expect to see this list populated with poor nations. You’d be wrong and, by the end of this post, you’ll understand why. So let’s take a look at the list for 2014: Top 20 Deficits, 2014. Some observations are in order:
- The key take-away from this list is that 18 of these 20 nations are more densely populated than the U.S. Most are much more densely populated. The average population density of this list is 539 people per square mile. This compares with the U.S. population density of about 87 people per square mile. This average is up from the average population density of 504 people per square mile on the 2013 list.
- Instead of poor, low wage nations, this list is populated by rather wealthy, high wage nations. The average purchasing power parity (PPP) of the nations on this list is $40,700 per person, up from $35,330 in 2013. Only one nation on this list has a PPP of less than $10,000 – Vietnam, at $5700 per person. Only three other nations have a PPP of less than $20,000 – Costa Rica, Mexico and China. By comparison, U.S. PPP was $54,400 in 2014.
- Though our trade deficit with China has exploded since they were first granted “Most Favored Nation” status in 2000, their position on this list has barely budged since I published Five Short Blasts in 2007. They were 19th on the list in 2006 and have risen only one point to 18th in 2014. That’s because our trade deficit with nearly all of these nations has grown just as rapidly. To illustrate this, I’ve included a column on the chart that shows the percent change in our balance of trade with each nation over the past ten years. Our deficit with China has grown by 82%. But the results with some other nations have been even worse. In 2006, Costa Rica didn’t even appear on this list. In fact, in 2005, we had a trade surplus with Costa Rica. That has now reversed into a large trade deficit, big enough to move them to number 8 on this list. The same is true for Vietnam. In 2005 they were nowhere close to being on this list but, in the past ten years, our deficit with Vietnam has worsened by almost 500%. Our deficit with Switzerland has worsened by over 200% in the last ten years, moving them to 2nd on the list. It’s worth noting here that Switzerland is the one nation on the list that is even wealthier than the U.S. But the one thing all of these nations have in common is a high population density.
- In case you’re tempted to conclude that Costa Rica, Vietnam, Mexico and China are on this list because of low wages (low PPP), consider this. In the past ten years, their PPPs have risen by 41%, 136%, 50% and 184% respectively. If wages are a factor in trade imbalances, then such rapidly rising wages should tend to slow or even reverse our trade deficit with these nations. Instead, each is accelerating.
- It’s also worth noting here than one of the only two nations on the list less densely populated than the U.S. – Sweden – is slowly sliding off of this list. Our trade deficit with Sweden has actually improved by 44% over the past ten years – the only such improvement on this list. As a result, they’ve slid from no. 2 on the list in 2006 to no. 12 in 2014.
- Another nation that has slid noticeably on this list is Japan. They were no. 4 on the list in 2006, sliding to no. 10 in 2014. Why? Other nations, most notably South Korea and Germany (who have each risen on the list), have cannibalized their auto exports. This explains why Japan’s economy has been mired in recession for years.
In 2014, the U.S. suffered a total trade deficit in manufactured goods of $539.9 billion. The trade deficit in manufactured goods with just the twenty nations on this list was $728.3 billion. In other words, these twenty nations account for our entire trade deficit in manufactured goods, and then some. It should be clear to anyone that it’s the large disparity in population density between the U.S. and these nations that drives our trade deficit. It’s just as clear that low wages play no role whatsoever. Any trade policy that fails to take into account the role of population density in driving trade imbalances is doomed to failure, just as U.S. trade policy has been for decades.
Those who blame trade imbalances on low wages either don’t understand trade or are simply lying. So too are those who blame currency valuations – something we’ll examine later. And those who tell you that we simply need to be more competitive are playing you for fools. The only way to restore a balance of trade is by applying tariffs to counteract the effect of population density.
Not enough proof? Stay tuned. In my next post we’ll take a look at the opposite end of the spectrum – America’s twenty best trade partners – and see if population density is a factor there too.