America’s Best Trading Partners in 2017

June 22, 2018

In my last post, we looked at a list of America’s biggest trade surpluses in 2017 and found the list populated primarily with two groups of nations – primarily those with low population densities and those who are net oil exporters.  It also included nations both large and small.  What we’re studying here is the effect of population density on per capita consumption and its effect on trade.  Does a low population density facilitate high per capita consumption (and a high standard of living), making the people who live in less densely populated conditions better trading partners?  The only way to know is to factor the sheer size of nations out of the equation and look at our trade surpluses expressed in per capita terms.  On that basis, here is a list of the top twenty nations whose people import the most American-manufactured products:  Top 20 Per Capita Surpluses, 2017.

Again, the list is dominated by two groups of countries – those with low population densities and net oil exporters.  Twelve of the twenty nations have population densities less than that of the U.S.  Eight are net oil exporters.  (Canada and Norway share both characteristics.)  That leaves only two nations with high population densities – the Netherlands and Belgium.  As I noted in my previous post, both of those tiny nations share the only deep water sea port on the Atlantic coast of Europe, which they use to their advantage as a distribution hub for American imports.

The average population density of these twenty nations is 210 people per square mile (compared to 551 for the nations with whom we have the worst per capita trade deficits).  The population density of these twenty nations taken as a whole – the total population divided by the total land mass – is only 21 people per square mile.  (The average was skewed by tiny oil exporters with high population densities.)  Compare that to 375 people per square mile for our worst trade partners.

Note too that the average purchasing power parity (PPP, roughly analogous to wages) of the nations on the list of our best trade partners is $46,000 – which is actually slightly less than the PPP of our worst trading partners at $50,700 per person.  Clearly, low wages play absolutely no role in driving trade imbalances.  That’s not to say that low wages don’t attract business to locate in such nations.  But when they do, wages quickly rise where there is a low population density and any trade imbalance soon vanishes.  But where there is a high population density, labor is in such gross over-supply that wages rise little and a trade deficit persists.  It’s the high population density that causes a long-term trade deficit, not the low wages.

Now that we’ve examined the two ends of the spectrum of trade imbalances – our twenty worst per capita trade deficits in manufactured goods vs. our twenty best surpluses – we’ve found a very compelling relationship between trade imbalance and population density.  Next we’ll look at all 165 nations included in my study and see if the relationship still holds.

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America’s Biggest Trade Surpluses in Manufactured Goods in 2017

June 9, 2018

In previous posts we examined lists of America’s biggest trade deficits, both in terms of sheer size and on a per capita basis, and found that both lists were dominated by nations with very high population densities.  If population density is a factor in driving trade imbalances, then we should see the same but opposite effect at the other end of the spectrum.  If we look at America’s biggest trade surpluses in manufactured goods, we should find the list dominated by nations with low population densities.  Here’s the list:  Top 20 Surpluses, 2017.

On this list we find that there are actually two factors at play.  First of all, the list is dominated by nations with lower population densities.  Eleven of these twenty nations are less densely populated than the U.S.  (On the list of our biggest deficits, only two nations were less densely populated.)  Only six nations on the list are significantly more densely populated than the U.S.  The average population density of the nations on this list is 209 people per square mile.  Compare that to the average for our biggest deficits – 734 people per square mile.  And if we calculated the population density of this group of twenty nations taken together – the total population divided by the total land mass – we find a population density of only 34 people per square mile, compared to a population density of 509 people per square mile on the list of the biggest deficits.

Still, how do we explain the presence on this list of some nations with some very high population densities?  Of those six nations that are significantly more densely populated than the U.S., three – United Arab Emirates, Kuwait and Qatar – are net oil exporters.  As such, it’s almost automatic that we will have a trade surplus in manufactured goods with such nations, regardless of their population density.  Why?  Because oil is priced in American dollars which can only be used to purchase things from America.  Even if the U.S. itself buys little or no oil from such countries, the countries who do must still pay in American dollars.  Strange, I know, but that’s how it is.  The end result is that oil exporters buy American products, either for their own consumption or for re-export to other nations.

That leaves three nations – the Netherlands, Belgium and Ecuador – unexplained.  The Netherlands and Belgium are tiny, adjoining nations who together enjoy the only deep water sea port on the Atlantic coast of Europe.  They use this to their advantage, making themselves into major points of entry for imports from America and for their distribution to the rest of Europe.  So their presence on the list is more of a geographic anomaly than anything else.

At number one on the list, Canada is both very sparsely populated while also being a huge oil exporter.  In fact, they are America’s biggest source of imported oil.  This is why the surplus with Canada is more than three times the size of our next largest surplus.  The U.S. has no better trade partner than Canada – hands down.  While I give Trump high marks for taking on the trade issue, I wish he’d find a way to exempt Canada from tariffs.  Canada has a legitimate beef regarding these tariffs.  Canada is not the problem.

By the way, does it come as a surprise to see Russia on the list?  It’s less surprising when you look at their population density.

Also, take a look at the Purchasing Power Parity (PPP, roughly analogous to wages) of the nations on this list.  The average PPP is just under $40,000 per capita.  The average of the nations on the list of our biggest deficits was $35,000 – a difference of only 15%.  The difference in population density between these two lists is 1400%.  Which do you think is more likely to be the real driver of trade imbalances – wages or population density?

As was the case with our list of the biggest trade deficits, the list of our biggest trade surpluses is also populated with very large and very tiny nations.  In order to factor sheer size out of the picture, let’s next take a look at our biggest trade surpluses expressed in per capita terms.  Stay tuned for the next post.


U.S. Employment Picture Darkening?

May 9, 2018

There was a lot of hoopla that accompanied the April employment report, released last Friday by the Bureau of Labor Statistics.  The economy added another 164,000 jobs and the unemployment rate fell to 3.9% – the lowest rate since December of 2000.  Much discussion ensued in the media over the effects of “full employment.”  Will there now be upward pressure on wages, prompting the Federal Reserve to raise interest rates?  Where will employers find the workers they need?  Will the shortage of labor constrain economic growth?

Less notice was taken of some not-so-rosy news in the report.  Wages rose less than expected – only 0.1%.  The labor force participation rate fell by 0.1%.  And literally no one took notice of some even darker news in the report.  The employment level (from the household survey) rose by only 3,000 after falling by 37,000 in March.  And the civilian labor force has fallen by nearly 400,000 over the past two months, reversing much of the spike that occurred in February, and contributing to the drop in unemployment.  Without that decline in the labor force, unemployment would actually have risen by two tenths over the past two months.

In fact, per capita employment has risen only twice in the past seven months – a two-month spike that occurred in January/February – and remains at exactly the same level as in September.  And the number of unemployed has actually risen slightly.

The fact is that there remains a lot of slack in the labor force.  An accurate reading of unemployment – one that grows the labor force along with growth in the population (instead of erasing people from the labor force if they give up looking for work) – has unemployment at 6.8% and U6 unemployment (a less reported measure that includes discouraged workers) at 12.0%.  This Reuters article, contrary to the title of the article, admits as much – that the job market is “hot” only if you don’t count all the people who have been left behind.

The current expansion is among the longest ever and brought national unemployment to an 18-year low. Yet over 6.3 million are still out of work, many of them clustered in cities with chronic, high unemployment.

6.3 million people is the number that were unemployed before the “Great Recession” of 2008.  It doesn’t even count the additional 5 million people who still haven’t been put back to work since then.

None of this is surprising.  Though the Trump administration is making moves in the right direction with the process of renegotiating NAFTA (the North American Free Trade Agreement), with the imposition of tariffs on steel and aluminum, and with threats of a trade war with China, there has yet to be much in the way of meaningful results.  Our trade deficit is as bad as ever.  Further delay in progress on trade will risk a return to a stagnating economy.


America’s Worst Trade Deficits in 2017

May 2, 2018

I’ve finished compiling and analyzing America’s trade data for 2017, which was released by the Bureau of Economic Analysis in late February.  Why the delay?  Tabulating the results for hundreds of 5-digit end use code products for 165 nations is no small feat.  What we’re looking at here are the deficits in manufactured goods as opposed to services and various categories of natural resources.  Why?  Because manufacturing is where the jobs are.  Yes, there are jobs associated with the harvesting and mining of natural resources but, pound for pound, those jobs pale in comparison to the number generated by manufacturing.

And it should be noted that there are more than 165 nations in the world.  The CIA World Factbook lists 229.  Nearly all of the 64 nations that I left out of this study are tiny island nations with whom combined trade represents only a tiny fraction of America’s total.  Also, their economies tend to be unique in that they rely heavily on tourism and their manufacturing sectors are virtually non-existent, if for no other reason than a lack of space to accommodate manufacturing facilities.

It should also be noted that I’ve “rolled” the results for tiny city-states into their larger surrounding nations – states like Hong Kong, Singapore, San Marino, Luxembourg, Liechtenstein, Monaco and others.  They too tend to have unique economies, heavily dependent on services like financial services, and mostly devoid of manufacturing for the same reason as small island nations – a lack of space.  There is no room for sprawling manufacturing complexes.

So, with that said, let’s begin with a look at America’s biggest trade deficits.  Here are the top twenty:  Top 20 Deficits, 2017

It comes as no surprise that China once again has topped the list with a whopping $384.7 billion deficit.  But there are many interesting observations that can be made about this list:

  1. There’s a lot of variety on this list – nations big and small, rich and poor, Asian, European and Middle Eastern nations.  But there’s one thing that all except one have in common – a high population density.  The average population density of this list is 734 people per square mile.  Compare that to the population density of the U.S. at 91 people per square mile.  On average, the nations on this list are eight times more densely populated than the U.S.
  2. With a few exceptions, these are not poor countries where wages are low.  Half of the top ten nations have a “purchasing power parity” (or “PPP,” a measure of wealth that is roughly analogous to wages) near or, in one case (Ireland), above that of the U.S. ($59,500).  Only one nation in the top ten – Vietnam – has a PPP of less than $10,000.  So, the claim that low wages cause trade deficits isn’t supported by this list.
  3. Two nations on this list – China and India – represent 40% of the world’s population.  On the other hand, there are others that, combined, make up less than 1% of the world’s total.  Naturally, if we have a trade deficit with a big nation, it tends to be really big.  In order to identify the factors that influence trade, we need to factor sheer size out of the equation.
  4. On average, the U.S. trade deficit in manufactured goods has risen by 81% with this group of nations over the past ten years.  Whatever it is that drives trade deficits has a very potent effect.  The fastest growing deficit is with Vietnam, rising by 335% in ten years.  Vietnam is the 2nd poorest nation on the list.  Perhaps low wages do play a role here?  On the other hand, the 2nd fastest growing deficit is with Switzerland, the 2nd wealthiest nation on the list – wealthier than the U.S. – debunking the low wage theory.
  5. It’s often said that America needs to be more productive in order to compete in the global economy.  Yet we see nations like France and Italy on this list – nations notorious for long vacations, short work weeks, etc. – not exactly bastions of productivity.
  6. In 2017, the U.S. had a total trade deficit of $724 billion in manufactured goods.  Of these 165 nations in this study, the top eight deficits on this list account for more than that entire total.  The U.S. actually has a small surplus of trade with the other 157 nations of the world.

In my next post, we’ll take a look at the other end of the spectrum – America’s top twenty trade surpluses in manufactured goods.  If population density is a factor, then we should see that list comprised of nations with low population densities.  And if low wages aren’t a factor, we shouldn’t see anything much different than what we saw on this list presented here.  So stay tuned.


Red China Runnin’ Scared

April 18, 2018

https://www.reuters.com/article/us-usa-trade-china-eu-exclusive/exclusive-china-seeks-trade-firewall-with-u-s-allies-in-rush-of-ambassador-meetings-sources-idUSKBN1HO1Y0

It all began with Trump’s tariffs on steel and aluminum.  Red China responded with tariffs on about $3 billion of American exports.  Trump upped the ante with a proposal for tariffs on $50 billion in Chinese imports.  Red China responded in kind, including tariffs on American soybeans, and they promptly began buying their soybeans from Brazil.  No dummies, the Brazilians.  They raised their prices.  And the EU, now unable to buy from Brazil, placed big orders for American soybeans.  No skin off the noses of American soybean farmers.

Trump then responded with a proposal for tariffs on another $100 billion of imports from Red China, whose tit-for-tat strategy was now exhausted since they import so little from the U.S.  Instead, they threatened severe retaliation in some form that remains unspecified.  But their rhetoric was threatening.  Not Islamist “rivers of blood running through your cities” threatening, but scary enough to those who don’t really understand international trade.

Now it’s looking a whole lot like a bluff.  As reported in the above-linked article, the Chinese are now running scared, trying to drum up support for “free trade” (their version of it) with the EU (European Union).

Some of the western diplomats involved in the meetings with Fu Ziying, who is also a vice-commerce minister, have viewed the approaches as a sign of how anxious Beijing is getting about the expanding conflict with Washington, the sources said.

The rush of meetings last Thursday and Friday with ambassadors from France, Germany, the United Kingdom, Spain, Italy, and the European Union, may be a signal that China is trying to build a firewall against Trump’s aggressive trade measures, the severity of which some foreign diplomats said Beijing had miscalculated.

“China is showing confidence, but internally they appear quite concerned. They have apparently underestimated Trump’s resolve on trade,” the diplomat said, adding that Beijing is nervous about China’s major trading partners siding with Washington.

It’s not likely they’re getting much sympathy from the EU.  In 2016, the EU had a $175 billion trade deficit with Red China.  If anything, the EU is probably realizing that America’s new get tough policy has Red China running scared and, just maybe, they ought to try a little of that tariff medicine themselves.


First Evidence of Chinese Impotence in Trade War

April 9, 2018

https://www.reuters.com/article/us-usa-trade-china-soybeans/as-u-s-and-china-trade-tariff-barbs-others-scoop-up-u-s-soybeans-idUSKBN1HF0FQ

A key component of Red China’s response to America’s initial threat to impose tariffs on $50 billion worth of Chinese goods was to impose its own tariffs on one of America’s biggest exports – soybeans.  Their goal was to stir up angst among American farmers in the hope that they would apply pressure on Trump to back off.  In my post titled “A Trade War?  Let’s Get it On!”, I predicted that their strategy was doomed to failure:

“Oh, by the way, the threat of tariffs on American soybeans would hurt the Chinese more than Americans.  Does Chairman Xi think that his people will simply eat less?  Of course not.  He’ll have to get his soybeans somewhere else, like Brazil, and now those countries who imported soybeans from Brazil will turn to the U.S., probably bidding up the cost of soybeans.  No skin off of our noses, Chairman Xi.”

Now comes the first evidence that this exact scenario has already begun to play out.  In the above-linked article, Reuters reports that America has suddenly begun getting huge orders for soybeans from the EU, who now finds the price of American soybeans more attractive than the rising prices in Brazil.

“Escalating tensions between the United States and China have triggered a flurry of U.S. soybean purchases by European buyers … helped to underpin benchmark Chicago Board of Trade soybean prices after U.S. President Donald Trump threatened to slap tariffs on an additional $100 billion of Chinese goods.

The USDA said 458,000 tonnes of U.S. soybeans were sold to undisclosed destinations, which traders and grains analysts said included EU soybean processors such as the Netherlands and Germany.

If the entire volume is confirmed to be going to the European Union, it would be the largest one-off sale to the bloc in more than 15 years, according to USDA data. The USDA could not immediately be reached for comment.

“We’re seeing a realignment of trade,” largely because the politics is driving up Brazilian soybean prices, said Jack Scoville, analyst with the Price Futures Group.”

I’ve said it before and I’ll say it again over and over.  There is absolutely nothing to fear from America’s efforts to restore a balance of trade with Red China.  Since we are the ones with the huge trade deficit and they are the ones with a huge trade surplus, it’s impossible for America to lose, and impossible for Red China to win.  They are absolutely impotent in this fight.  China’s goods become too expensive?  No problem!  They’re not the only game in town.  We’ll buy them from someone else.  Better yet, we’ll begin making them ourselves.  China provides us absolutely nothing that we can’t make ourselves more efficiently, using cleaner, more environmentally sound processes, and more ethically in terms of worker rights.  And, truth be told, we can make them cheaper.  The logistics involved in shipping things halfway around the world isn’t cheap, you know.  (Did you know that container ships that move goods all over the world, goods which could just as easily be made locally, consume five billion barrels of oil per year?)

And China buys nothing from us that can’t be sold to other customers around the world.

They’ll stop buying our debt, or sell off what they have?  Go ahead.  U.S treasuries are priced in dollars.  Whoever they sell them to has to pay for them with dollars.  So now they’re stuck with dollars which have probably dropped in value – the very situation that necessitated them buying the bonds in the first place.  And, just as we’re seeing with soybeans, there’ll be other investors eager to snap them up.  Heck, if American households switched just a small part of their savings into U.S. bonds, that demand alone would sop up every single bond that China owns.  I won’t take credit for this quote, but I can’t remember where I read it recently, that Red China’s threat to dump its U.S. treasury holdings is like a man holding a gun to his head and saying, “I have a hostage.”

There is nothing to fear here.  America is going to come out a big winner.  It’s a slam dunk.

 


More Trade War Hysteria

April 7, 2018

https://www.cnbc.com/2018/04/04/one-of-the-biggest-us-trade-wars-of-the-past-had-a-tragic-consequence–heres-what-happened.html?recirc=taboolainternal

I was hoping to spend some time tallying the U.S.’s global trade results for 2017, but then this popped up and I just can’t let it pass.  Actually, I was wondering when the free trade globalists would dredge up the subject of the Smoot-Hawley Tariff Act of 1930, blaming it for the Great Depression, as they usually do.  But the writer of the above linked article, in an apparent attempt to ratchet up fears of a trade war, goes a step further and blames Smoot-Hawley for World War II!

She begins by creating the impression that Smoot-Hawley was an opening salvo in a trade war in the 1930s.  She either doesn’t have a clue, or is intentionally trying to mislead her readers.  Let’s get some facts straight.  First of all, the use of tariffs was standard trade policy for the United States since its founding.  In fact, until 1913, there was no need for an income tax in the U.S. because all federal revenue was derived from tariffs.  The Smoot Hawley Act was nothing more than a minor tweak of tariff rates that had been in effect since the Fordney-McCumber Act of 1922.  It increased tariffs on average by 2.7%.  It changed the tariff basis from an ad valorem (percentage) basis to a fixed dollar basis which, under normal circumstances, would actually have slowly reduced tariffs as inflation eroded the value of the tariff.  But, of course, the Great Depression resulted in a protracted term of deflation instead of inflation.

Blaming Smoot-Hawley for the Great Depression is bad enough.  Not only was the change in tariff rates minuscule, but it wasn’t enacted until June of 1930, a year-and-a-half after the stock market crash of 1929 which actually precipitated the Great Depression.  And at the height of the Great Depression in 1933 when GDP (gross domestic product) had fallen by 33%, or $33.1 billion from its 1929 level, the total value of imports and exports had declined by only $6.5 billion.  It was actually the Great Depression that caused the drop in trade, and not the other way around, just as the “Great Recession” that began in 2008 resulted in a sharp decline in trade.

To blame Smoot-Hawley or a “trade war” that didn’t even exist for World War II is truly outrageous.  It was actually the aftermath of World War I and the severe war reparations that were imposed on Germany, resulting in soaring inflation and unemployment, that fostered Hitler’s rise to power.  And that just happened to coincide with the growing aggressiveness of imperialist Japan.  Trade had absolutely nothing to do with it.

Sure, the world made a turn toward free trade following the war with the signing of the Global Agreement on Tariffs and Trade in 1947, but it wasn’t because anyone blamed a “trade war” for causing World War II.  It was because economists, eager to try out the concept of free trade, successfully (but disingenuously) blamed tariffs for the Great Depression and made an argument that the interdependence that would come with free trade could preclude any future world wars.

Actually, if one were to be honest, free trade and the enormous global trade imbalances it has fostered is directly responsible for our current trade tensions.  We need to restore balance to global trade through the use of tariffs or quotas before things get any worse.