Trade Deficit in Manufactured Goods At Record High

December 7, 2017

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.

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How the Global Elite Sewed the Seeds of Trump’s Victory and Their Own Demise

November 23, 2016

With each passing day since the election I am more amazed than the day before at what I see happening as the Trump administration begins to take shape and at the reaction from world leaders, the business world and political pundits.  I have a lot of thoughts I want to share about what this all means but, before getting into all that, I thought I’d share another take on just what happened with this election – a “take” that I haven’t heard from anyone else yet.

As global corporations began the process of implementing the New World Order that had its genesis in the signing of the Global Agreement on Tariffs and Trade in 1947 – especially as the process accelerated first with the signing of the North American Free Trade Agreement, followed closely by the admission of China to the World Trade Organization, both events occurring during the Clinton administration – the painful process of passing out pink slips to American manufacturing workers got underway in earnest.

With nothing more than a small severance check and, perhaps, some “job re-training” (to do exactly what was never clear), millions of people were suddenly faced with the question, “now what do I do?”  They began with the obvious – look for another job.  When that didn’t work, more and more people tried their hands at starting their own businesses. It stimulated an interest in entrepreneurism like we hadn’t seen before.  People sought out the advice of successful entrepreneurs and began to revere the most successful among them.

The appetite for entrepreneurial advice didn’t escape television executives.  Never one to miss an opportunity, enter Donald Trump and his reality show “The Apprentice,”  which first aired in January of 2004 and has run continuously since then in various formats.  Viewers were awed by his business instincts, his ability to see through phoniness and identify those with real ambition, and his ability to win at business.  For people who had been exposed to the lies and BS that were standard fare used by corporations to justify the sacrifice of their jobs on the altar of globalism, this was refreshing.  This was someone they could admire.

What the global elite didn’t anticipate was that they were making a hero of a fabulously successful entrepreneur who didn’t need their money, one with political ambitions and one who, for whatever reason, seemed to have an affinity for the working class.  I’m reminded of the natural world where imbalances have a way of correcting themselves.  If a population of some species grows out-of-control, other forces have a way of reining it in.  In the same way, when the global elite concocted a system that helped some at the expense of others, they unwittingly sewed the seeds of that system’s own demise.

 


The ‘Malo’ Half of NAFTA

March 15, 2013

In the previous two articles, we examined trade with America’s two largest trading partners (by total imports and exports):  Canada and China.  We saw that while the U.S. has a fairly large trade deficit with Canada, all of it and more is due to the fact that Canada is by far our largest source of imported oil.  The U.S. actually enjoys a healthy surplus of trade in manufactured goods with Canada, making Canada the good half of NAFTA – the North American Free Trade Agreement.

Now we turn to the other half of NAFTA – Mexico.  Mexico is a fairly densely populated nation – almost twice as densely populated as the U.S.  Mexico isn’t a wealthy nation but, by world standards, they’re not poor either.  With a per capita purchasing power parity (PPP) of $15,300, Mexico ranks 83rd out of 228 nations, placing them in the top 40%.  However, 51% of its people live in poverty, though it’s not for lack of jobs.  Mexico currently enjoys a rather low unemployment rate – 4.5% – a rate that is the envy of the United States.

Here’s a chart of overall trade with Mexico, through 2012:  Mexico Trade.

Since 2007, our overall trade deficit with Mexico has moderated somewhat, dropping from $73 billion to $61 billion in 2012.  But all of that decline is due to a drop in oil imports.  Our deficit in manufactured goods rose in 2012 to $46.1 billion, only $0.8 billion shy of the record deficit set in 2007.  Expressed in per capita terms, that’s a deficit of $401 with every Mexican citizen.  In 2011, our per capita deficit with Mexico in manufactured goods was our 14th worst – worse than China, with whom our per capita deficit is “only” $258.

So, of our top three trading partners in 2012 (who together account for 43% of all U.S. trade), the U.S. enjoys a surplus in manufactured goods with only Canada, a nation with a population density of less than ten people per square mile.  The U.S. suffers large deficits with China and Mexico, nations with population densities of 361 and 151 people per square mile respectively.  You should be starting to get suspicious that population density may be a factor.

As we did with Canada and China, let’s consider the other factors that economists like to blame for trade deficits – weak currencies and low wages.  The following is a chart of our trade deficit in manufactured goods with Mexico vs. the peso-dollar exchange rate:  Mexico Trade vs Exchange Rate.

As the peso has weakened from 9 per dollar in 2001 to 14 pesos per dollar in 2012, our trade deficit in manufactured products with Mexico has worsened dramatically, almost doubling during that 11-year span.  This is the effect that economists would predict but, so far, the exchange rate theory is only batting 2 for 3, while the population density theory is batting a thousand.  Mexico’s weakening currency may explain why our enormous deficit with Mexico is so out-of-proportion to their population density. 

And I won’t deny that low wages also play a role.  Many American companies have set up shop just across the border for that very reason.  Here’s a chart of our balance of trade in manufactured  goods with Mexico vs. their PPP:  Mexico Trade vs PPP.

As you can see, Mexico’s PPP (analagous to wages in Mexico) has risen by over 50% since 2001.  But, instead of our balance of trade improving as economists would predict, our trade deficit in manufactured goods with Mexico has nearly doubled.    If the “low wages” theory really held water, we should be seeing at least some improvement in our balance of trade with Mexico as their incomes have risen dramatically.  Instead, it has gotten much worse.  Once again, we see that economists have the cause and effect backwards.  Mexicans are growing wealthier because of their surplus with the U.S., instead of rising incomes in Mexico improving our balance of trade.   So far, economists’ “low wages” theory is batting zero.

Taken together, the 55% decline in the value of the peso since 2001 essentially cancels out the 50% rise in PPP (and wages) during the same period in Mexico.  So traditional economic theory should predict that our trade imbalance with Mexico should have held steady instead of nearly doubling.  The real explanation for that is that the effects of the population density disparity are becoming more pronounced the longer we attempt to apply free trade in a situation where it’s a hopelessly inappropriate trade strategy. 

Free trade with sparsely populated Canada – the good half of NAFTA – makes sense and has been enormously beneficial to the U.S.  Free trade with Mexico – the “malo” (or bad) half of NAFTA – has been a trade policy disaster, draining hundreds of thousands of manufacturing jobs from the U.S.  And it’s getting worse as the Obama administration stands idly by and renegs on its promise to fix NAFTA.

Next up, our 4th largest trading partner:  Japan.


Vote on Tuesday

October 26, 2010

I was actually planning to  publish a post titled “Vote on Tuesday?  Don’t Bother.”  Both parties run on platforms designed to energize their base and then, when elected, move toward the middle.  The result is that both parties are indistinguishable and nothing ever changes, at least not on the critical issues of immigration and trade.

Then this came in the mail yesterday:

It seems that Lance Enderle is running to replace incumbent Mike Rogers in Michigan’s 8th Congressional District.  Since moving to Michigan in ’01, I have supported Republican Mike Rogers because of his opposition to illegal immigration and amnesty for illegals.  But, like virtaully all Republicans and Democrats, Mike was a staunch supporter of free trade.  So I had to hold my nose each time I voted.  Besides, Mike’s opposition to illegal immigration was more passive than active.  Being in a “throw the bums out” frame of mind, I’d probably have voted against him this time around anyway. 

As you should know by now, there are only two issues that I believe affect the direction of this economy – trade and immigration.  Everything else is a side-show that ultimately has little impact on our economy.  Since both parties generally support high rates of immigration and free trade, I’ve had no enthusiasm for this election.  They’re all the same and no one is going to take a stand on these issues. 

But, as you can see, Lance Enderle has clearly stated his belief that NAFTA (North American Free Trade Agreement) should be repealed, and he believes in raising tariffs on all imports.  While that actually goes further than I would (I’d only raise tariffs on manufactured imports from overpopulated nations), it’s a step in the right direction.  Tariffs on all imports would be better than what we have now.  At least now I have a reason to go to the polls on Tuesday.  And, if Enderle is elected, at least we’d have one advocate for sensible trade policy in Congress.  If he makes it, I hope he doesn’t disappoint me on these promises in the way that Obama did.


$US-$Can Exchange Rate vs Balance of Trade

July 8, 2010

Yesterday we looked at the dollar-yuan exchange rate and found no tendency for a declining dollar to positively impact the balance of trade between the U.S. and China.  But that’s just one piece of data.  Today we’ll examine the effect of exchange rate on trade between the U.S. and Canada.

In this case we have more data available.  The following chart includes the total balance of trade between the U.S. and Canada dating back to 1985, the balance of trade in manufactured goods dating back to 2001 (the data I compiled in researching my book), and the exchange rate dating back to 1990.  Here’s the chart:

$US-$Can Rate vs Balance of Trade

Some observations:

  1. First of all, it’s important to note that, since Canada is America’s largest supplier of imported oil and gas, our balance of trade with Canada is dominated by trade in those categories.  Oil is priced in U.S. dollars.  A falling dollar results in higher oil prices.  Thus, as the dollar declines, one would expect that our balance of trade in oil would worsen.  Economics says that as the price of an imported commodity rises, imports will decline as consumers switch to domestic suppliers.  But that doesn’t work for oil.  Domestic supplies are maxed out and, in fact, declining.  We have no choice but to continue to import at the same rate.
  2. From 1990 through 2002, as the dollar soared in value by 35%, our balance of trade with Canada worsened by 625%, a move in the direction that economists would predict, but the size of the move is beyond what one would expect.  Early in this time frame, NAFTA (the North American Free Trade Agreement) was implemented (on January 1, 1994).  You can see that our trade deficit (again, driven by oil imports) really took off at that point.  Thus, the worsening of our total trade deficit with Canada during that time frame had much more to do with the implementation of NAFTA than it did with the strengthening of the dollar.
  3. From 2003 through 2008, however, our overall balance of trade with Canada continued to worsen in spite of a dramatic decline in the dollar.  This is likely due to the rising price of oil, coupled with rising demand.
  4. Looking at the effect of the exchange rate on trade in manufactured goods from 2001 to 2009, we see what seems to be exactly the relationship that economists would predict – that the falling dollar resulted in an improvement in our balance of trade, improving from a slight deficit to a tidy surplus of over $40 billion in 2009.  But is this really caused by the falling dollar or was it driven by the disparity in population density between the U.S. and Canada?  The U.S. is ten times as densely populated as Canada.  My theory would predict that, upon implementation of free trade between two such countries, the more densely populated will end up with the trade surplus in manufactured products.  And that’s exactly what has happened here. 

So is America’s  rising surplus in manufactured goods due to the falling dollar or due to the population density disparity?  It’s impossible to say with certainty based on just this one data point.  Our experience with China indicates that the falling dollar has no effect.  Our experience with Canada is inconclusive.  My prediction is that, as we examine more exchange rates with other countries, it will become clear that the effect of exchange rates is dwarfed by the effect of population density disparities, if there is any exchange rate effect at all.  Stay tuned.

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Exchange rate data provided by OANDA:  http://www.oanda.com/?srccont=breadcrumb

http://www.oanda.com/?srccont=breadcrumb