EU vs. China: America’s Worst Trading Partner?

February 8, 2016

In terms of our total trade deficit, China is without question America’s worst trading partner, draining $370 billion from our economy and robbing us of five million manufacturing jobs.  Just look at how bad it is and how fast it’s getting worse:  China.

But China is an enormous country with one fifth of the world’s population, so naturally our trade deficit with them is huge.  But how do they stack up if we put that trade deficit into per capita terms?  That is, how much do Chinese citizens drain from our economy compared to, say, the citizens of the European Union?

The European Union, or EU, is is made up of 26 European nations.  It’s analogous to the United States, where each European country is a “state” in the EU.  Combined, they are a “nation” of 1. 7 million square miles – about half the size of China, with a population of over 550 million people – about 40% that of China.

So here’s the chart of our trade with the EU in manufactured goods:  EU.  Wow, it looks remarkably the same as the above chart of our trade with China, doesn’t it?  In fact, when expressed in per capita terms, our trade deficit in manufactured goods with the EU is $247 per person.  Our deficit with China is $271 per person.  So, in per capita terms, just as it is in terms of the total trade deficit, China is America’s worst trading partner, but I’ll be that this is much closer than you’d have thought.

Why is this?  The two couldn’t be more different.  China occupies most of Asia while the EU, of course, covers most of the European continent.  The EU is significantly wealthier than China, with a purchasing power parity of over $40,000 per person compared to about $12,000 per Chinese citizen.  Aren’t we told that the reason we have such a large trade deficit with China is because of low wages?  So why is our trade deficit with the EU, in per capita terms, almost the same?

It’s because there’s one thing the two have in common.  Both are very densely populated – almost to the same extent.  The EU’s population density of 325 people per square mile is only about 14% less than the population density of China, at 380 people per square mile.  So it’s not just a coincidence that our trade deficit with the EU, in per capita terms, is only 9% less than our deficit with China.

The point of all of this is that, when it comes to America’s trade deficit, all of the focus is on China, their low wages and their (supposed) currency manipulation.  But the fact is that our deficit with China is big merely because China is big.  When size is factored out, our deficit with China is absolutely no different than our deficit with other nations that are comparably overpopulated compared to the U.S. (where our population density is about 87 people per square mile).  The deficit is driven almost solely by the disparity in population density, and other scapegoats like low wages and currency valuations have absolutely nothing to do with it.

No progress toward restoring a balance of trade can ever be made as long as we continue to focus on irrelevant factors.  When dealing with such overpopulated nations, the only way to assure a balance of trade is by using tariffs to offset the inherent bias toward a trade deficit that their population density makes unavoidable.  The middle class in the U.S. is threatened because our trade policy fails to account for the role of population density in driving trade imbalances.

 

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Middle Class Can’t Afford Homes

January 31, 2008

http://money.cnn.com/2008/01/29/real_estate/Housing_unaffordability_persists/index.htm?section=money_mostpopular

This article is proof of what I’ve been saying about our current recession.  You have to look past the most obvious symptoms – like the burst of the housing bubble – to find what’s really going on if we want to take meaningful action. 

Even in spite of the decline in housing prices, the middle class still isn’t even close to being able to afford an average home.  Why?  Because incomes haven’t kept pace with inflation?  Why?  Because we’ve carved out much of the entire manufacturing sector of our economy and given it away to foreign countries for nothing in return. 

Labor obeys the law of supply and demand as much as any other commodity.  Take away a big piece of the labor demand and the price will drop.  Wages will go down.  Balance our trade equation with a tariff structure (one indexed to population density), and that demand for labor will come back home and restore wage growth. 

We can cut interest rates and pass stimulus packages until the cows come home; in the long run it won’t make a bit of difference in stemming our economic decline.  We have to take meaningful action to address real problems instead of treating only the symptoms.  You can’t cure the flu by wiping your runny nose.  Neither can we fix our economy with actions that don’t address the real problem.

Pete