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.

Trade Policy with Ireland a Failure on Two Levels

June 2, 2011

The above linked op-ed piece from Reuters notes that Ireland is on the dole from the IMF and asks whether Ireland will be the next Greece. 

Coincidentally, I’ve been in the process of updating my trade data for 2010, going through the nations alphabetically, and just finished Ireland.  If you’ve read Five Short Blasts or if you’ve followed this blog, then you’re among the few people who understand that our trade deficit in manufactured goods with Ireland, when expressed in per capita terms, is the largest by far – more than 25 times worse than our deficit with China.  What I’ve been finding as I’ve updated my data is that trade in general rebounded a bit in 2010, following a big recession-driven plunge in 2009.  Deficits tended to grow once again while surpluses – primarily with nations less densely populated than the U.S. – also grew.  So I was curious to see what happened with Ireland.  Here’s the chart, updated with 2010 data:

Ireland Trade

Our trade deficit in manufactured goods with Ireland exploded to a new record of  $24.6 billion, shattering the old record of $20.8 billion set in 2008, driven by imports of pharmaceuticals of $22.7 billion.  In per capita terms, that’s $5,930 per Irish citizen, almost 27 times worse than our trade deficit with China.  It accounts for 16% of Ireland’s per capita income. 

By the way, going off an a tangent for a moment, remember when there was a lot of pressure to allow the importation of drugs from Canada as a remedy for high drug costs?  Remember the response?  “We can’t assure the safety of our drugs if we import them from Canada!”  Oh, really?  I wonder how many people realized that most of our drugs are imported anyway, not from Canada but from Ireland?  And, even if we imported them from Canada, most of those drugs would still come from Ireland anyway, imported from Ireland into Canada and then re-exported to the U.S., where they’d have otherwise gone in the first place. 

But let’s get back on topic.  Ireland is a nation almost twice as densely populated as the U.S.  As such, it would qualify for the lowest level of import tariffs under the population density-indexed tariff plan that I proposed in Five Short Blasts, a tariff of 5%.  That alone would generate $1.25 billion in new federal revenue.  Enough to motivate our drug companies to shift their production back to the U.S.?  Probably not. 

So, while our trade policy is a failure because it doesn’t account for the disparity in population density, there’s something else at work here too.  Even I’d be the first to admit that the disparity in population density, relatively small in comparison to other nations like Japan, Germany and China, doesn’t explain our deficit with Ireland.  The bigger factor is the free tax ride Ireland gives to foreign investment, especially the drug companies.  Ireland is subsidizing its pharmaceutical industry – providing them an unfair trade advantage. 

And now we see that they’re paying the price.  Ireland’s broke and is being subsidized by the IMF – in other words, by the American taxpayer.  So, in addition to our foolish trade policy shipping away our pharmaceutical industry, its jobs, and a not-insignificant chunk of our domestic economy, we further erode our own economy by adding to our own debt with the funding of the IMF. 

Free traders would say that we need to compete better with Ireland.  But how?  Give the pharmaceutical industry a tax break?  They already get that from Ireland!  So that’s no incentive.  And what exactly has the tax break gotten for Ireland except a big deficit and bankruptcy?  No, the real answer is to impose tariffs on Irish imports – not just the 5% tariff called for by the disparity in population density but an additional tariff to compensate for the unfair tax advantage offered by Ireland, perhaps raising the total tariff to 20% or more, boosting our increase in revenue to $5 billion. 

Free traders would howl, “but this will ignite a trade war with Ireland and we’ll lose out on all the exports to that country!”  Maybe.  But even if trade with Ireland came to a screeching halt, the loss of our $6 billion in exports to Ireland would be offset by the elimination of $31 billion in imports.  We’d be five times better off! 

Our trade policy is an abysmal failure and there may be no better example than Ireland.  It’s resulted in the loss of a big part of our pharmaceutical industry, the loss of many thousands of high-paying jobs, has left Ireland in no better fiscal position and now requires more from our taxpayers to fund the IMF to support Ireland’s policy of subsidizing foreign investors.  Does any of this make any sense whatsoever? 


Pharma Trade Masks Rise in Trade Deficit in November

January 13, 2011

The November trade deficit held steady in November, dropping by $0.1 billion from October.  However, a big jump in exports of pharmaceuticals, coupled with a big drop in imports of the same, masks an overall worsening of the trade deficit.  Pharma exports rose by $1.0 billion in November while imports of the same fell by $0.9 billion.  Take away this $1.9 billion improvement in the balance of trade in pharmaceuticals and the balance of trade in non-petroleum goods worsened by $1.4 billion. 

Each month there seems to be some fluke that is capping the trade deficit at around $40 billion.  This month it’s pharmaceuticals.  Last month it was an anomaly in oil and food.  The bad news is that there’s no real improvement where jobs are concentrated – in manufactured products. 

Here’s an update to my charts of trade and the progress toward meeting Obama’s goal of doubling exports in five years. 

Balance of Trade     Obamas Goal to Double Exports, 1st year     Obamas Goal to Double Exports

While exports are tracking pretty close to (but below) that goal, the trade deficit hasn’t budged.  Imports have risen just as fast.  The end result is that unemployment holds steady at historically high levels. 

I’ve said it before, often, but it bears repeating:  the U.S. can’t export its way out of its trade deficit.  The only way is to completely abandon its commitment to the blind application of free trade theory and return to the sensible and targeted use of tariffs to assure a balance of trade.

U.S. Trade with Ireland: 25 Times Worse Than China

March 19, 2009

Now that we’ve finished examing trade in manufactured goods between the U.S. and our largest trading partners, I was curious to see what has happened to trade with Ireland since publishing my book in 2007.  If you’ve read Five Short Blasts, then you know that, in 2006, our per capita trade deficit in manufactured goods with Ireland was by far the worst in the world, 25 times as bad as our per capita deficit in manufactured goods with China.  Recently, I’ve watched news stories of the demise of the “Celtic Tiger.”  If you can believe what you hear, the boom has gone bust in Ireland. 

But there’s certainly no indication of that in our balance of trade.  Here’s a graph depicting that balance, broken into several major categories:


As you can see, our deficit in manufactured goods with Ireland has only grown worse, soaring from $17.9 billion in 2006 to $20.8 billion in 2008.  This translates into a per capita trade deficit in manufactured goods of $5,010 per person in Ireland, boosting their already very high per capita purchasing power parity to $47,800, about the same as Americans.  In spite of the fact that the per capita trade deficit in manufactured goods with China has soared to $206 per person, the growth in the deficit with Ireland has kept pace and remains nearly 25 times worse. 

Because Ireland is almost twice as densely populated as the U.S., my theory correctly predicts that the U.S. would have a trade deficit with Ireland in manufactured goods, but nothing on the order of what we actually have.  Interestingly, nearly all of this deficit is due to imports of pharmaceuticals.  It seems that Ireland is America’s drug manufacturer of choice.  Why?  I can’t say for sure but suspect a combination of factors:  a well-educated work force, a strategic location in the middle of the air and sea routes between North America and Europe, a mild climate and, just perhaps, Ireland’s expertise in brewing beer and distilling whiskey.  After all, the fermentation process used to make some drugs isn’t terribly different than that used in brewing.  In addition, if you were an executive with a drug company and had to travel to some foreign land to check up on your drug factory, what better place to visit than Ireland?  What I can’t figure, though, is what benefit American drug companies derive from manufacturing in Ireland.  Obviously, wages there aren’t much lower than in America.  If anyone can shed light on this, I’d love to hear from you. 

Ireland is a good example of why blaming our trade deficit on Chinese trade tactics is misguided.  When China’s relative size is factored into the equation by translating the trade deficit into per capita terms, it becomes clear that the deficit with China is no worse than our deficit with other densely populated nations, of which Ireland is the most egregious example.  The population density-indexed tariff structure I proposed in Five Short Blasts would impose a rather small tariff of about 5% on Irish imports.  That might be all the motivation needed for American drug makers to repatriate their manufacturing operations, especially as profit margins for drugs are trimmed, making a big difference in our balance of trade with Ireland.