America’s Worst Trading “Partners”

November 7, 2019

In one of my most recent posts, we examined a list of America’s worst trade deficits.  China was at the top of the list.  No surprise.  China is a very large country with one fifth of the world’s population.  It only makes sense that our biggest trade deficit would be with one of the world’s biggest countries.  But anybody can make a list of our biggest deficits with little effort.  My purpose is to ferret out the root cause of America’s massive trade deficit.  Is it really low wages that attracts companies to shift production offshore, like economists say, or is there something else at work?  For decades the U.S. has focused its efforts to address our trade imbalance on things like intellectual property, working conditions and environmental standards.  Yet our deficit continues to explode.  Are we working on the right things?  Are we missing something?

I pointed out that the list of our biggest deficits did have one factor in common.  Nineteen of the twenty nations on that list had a high population density – very high in most cases.  If population density is a factor in driving trade imbalances, then it stands to reason that a list of our worst deficits in per capita terms, factoring the sheer size of nations out of the equation, would be dominated by nations with a high population density.  Such a list would essentially constitute a list of our worst trading partners, on a “man-for-man” basis.  Will that list be dominated by people earning low wages, as economists would suggest, or will it be dominated by people living in highly congested, densely populated conditions?  Let’s take a look.  Here’s the list:  Top 20 Per Capita Deficits, 2018.

Observations about this list:

  1. Seventeen of these twenty nations are more densely populated than the U.S.  The average population density is 540 people per square mile, which is 5-1/2 times more densely populated than the U.S.  The aggregate population density – the total population of the countries on this list divided by the total land surface area – is 377 people per square mile – almost four times the population density of the U.S.
  2. Three nations less densely populated than the U.S. are on the list:  Finland, Sweden and Estonia.  Estonia is new to the list and is likely a one-year fluke.  The U.S. had a trade surplus with Estonia until 2010.  Since then, the deficit with Estonia has swung up and down dramatically.  Sixty percent of our imports of manufactured goods from Estonia are telecommunications equipment.  Finland’s economy is heavily dependent on exports, which make up one third of its gross domestic product (GDP).  As is the case with our deficit with all European nations, imports of autos account for a big share of the trade deficit – 27% in the case of Finland.  Sweden is even more heavily dependent on exports, which account for 44% of its GDP.  To put those figures in perspective, the U.S. derives less than 8% of its GDP from exports.
  3. The average “purchasing power parity,” or “PPP,” is just over $39,000 per capita per year vs. U.S. PPP of $59,000.  While that figure seems to lend a little support to the “low wage” theory about trade imbalances, it’s a fairly weak correlation.  It’s especially weak when you see that the top two nations on the list – Ireland and Switzerland – are actually more wealthy than the U.S.  The average PPP of the top ten nations on the list is $47,190.  Only Vietnam has a PPP below $10,000.  China and Mexico are the only other two nations on the list with a PPP less than $20,000.
  4. Our per capita deficit with Ireland – not the highest population density on the list but still more than twice as densely populated as the U.S. – leads the list with a huge per capita surplus with the U.S. of almost $8,600, which accounts for nearly 12% of its PPP.  But population density alone doesn’t explain Ireland’s position at the top of this list.  Ireland is a tax haven for corporations, a situation that the U.S. government has inexplicably done nothing to address.
  5. China, at the top of the list of our trade deficits, barely makes this list at all, coming in at no. 20.  Given that the tariffs imposed on Chinese imports this year have begun to shrink our deficit with China, it’s likely that it won’t make the list at all for 2019.  But, make no mistake, although expressed in per capita terms the deficit with China is unremarkable, when multiplied by its population – one fifth of the entire world – the result is an enormous trade deficit for the U.S.
  6. The deficit with this group of nations has nearly tripled over the past ten years (when Estonia is factored out of the calculation due to its flip-flop from surplus to deficit).  Whatever the factor that drives trade imbalances – and from the data we’ve looked at so far it certainly appears to be population density – it has a very powerful effect.

The real take-away from this list is that population density appears to be a powerful factor in driving trade imbalances, while low wages appear to have little or no influence.  But that’s just one end of the spectrum – our trade deficits.  We’ll next take a look at our trade surpluses to see what effect population density may have at that end of the spectrum.  If high population densities cause trade deficits, we should see the list of our top per capita trade surpluses dominated by nations with low population density.  Stay tuned.


America’s Biggest Trade Surpluses in 2018

October 23, 2019

In my previous post, we examined the list of America’s biggest trade deficits.  Of the top 20 trade deficits, all but one were with nations more (usually much more) densely populated than the U.S.  It appears that population density may be a factor in driving these deficits.  But what will we find at the other end of the spectrum?  Will a list of our top 20 trade surpluses be dominated by more sparsely populated countries?  Well, let’s see.  Here’s the list:  Top 20 Surpluses, 2018.

We do see more sparsely populated nations on the list, but we also see a half dozen very densely populated nations.  At first glance, there doesn’t appear to be much correlation with population density.  But let’s take a closer look at those densely populated nations.  Do they all have something in common?  Indeed they do.  Most of them, but not all, are net oil exporters.  Canada, United Arab Emirates (UAE), Saudi Arabia, Qatar, Kuwait, Norway and Nigeria are all net oil exporters.  Why is that significant?  Because all oil is priced and sold in U.S. dollars.  And, ultimately, there is only one place where those U.S. dollars can be spent as legal tender – in the United States itself.  So those oil exporters use their “petro dollars” to buy products from the U.S.

Consider an example.  If China buys oil from Saudi Arabia, they have to pay for it with U.S. dollars.  No problem for China.  They’re rolling in dollars that Americans spent on their exported manufactured goods.  So now Saudi Arabia has a bunch of dollars.  They have no choice but to use it to buy American goods or American investments, like U.S. bonds.  But their economy is built around oil.  They don’t manufacture anything else to speak of.  So they have dollars to spend on manufactured goods and the only place they can spend those dollars is in the U.S.  Thus, the U.S. has a trade surplus in manufactured goods with Saudi Arabia and, for the same reason, with virtually every nation that is a net oil exporter.

That leaves two other very densely populated nations on the list that are thus far unexplained – Belgium and The Netherlands.  They’re 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.

Now, back to the subject of population density.  With all of the above said, the list of our top 20 trade surpluses is still dominated by eleven nations that are less densely populated than the U.S., and three more that are only slightly more densely populated.  The average population density of these twenty nations is 239 people per square mile, compared to the average population density of 629 for the nations that represent our biggest trade deficits.  The combined population density of all twenty nations on the surplus list (total population divided by total land surface area) is  43 people per square mile, compared to 502 for the deficit list.  It certainly appears that population density is a real factor in driving trade imbalances.

A few more observations about this list of our biggest trade surpluses is in order:

  1. 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.
  2. Are you surprised to see Russia on the list?  It’s less surprising when you look at their population density.
  3. 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 almost 1200%.  Which do you think is more likely to be the real driver of trade imbalances – wages or population density?

When it comes to the sheer size of trade imbalances, of course our deficit with China is bigger than our deficit with other, much smaller nations.  And of course our trade surplus with Canada is much larger than, say, our surplus with New Zealand.  Does that mean that Canada should enjoy more favorable trade terms than New Zealand, or that China should be punished with harsher trade terms than, say, Japan or Germany?  Hardly seems fair.  Trade policy should be formulated to address the factor that actually drives trade imbalances, regardless of the size of the nation in question.  That factor is population density.  In order to factor sheer size out of the equation, let’s now look at our trade deficits and surpluses in per capita terms, starting with our biggest per capita trade deficits.  The results are fascinating.  Stay tuned.


America’s Worst Trade Deficits in 2018

October 22, 2019

With little more than two months left in 2019, I’ve finally finished compiling and analyzing America’s trade data for 2018.  Why the delay?  Thanks to the government shutdown early this year, the trade data wasn’t released this year until nearly July – four months later than usual.  And 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, 2018.

It comes as no surprise that China once again has topped the list with a whopping $416 billion deficit – up from $385 billion the year before.  It’s more than four times as large as the next biggest deficit – Japan.  But Japan is less than one tenth the size of China, making the deficit with Japan nothing to scoff at.  Look at our deficit with Ireland.  It’s one tenth that of China, but China is 200 times as large as Ireland.

There are many other 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 629 people per square mile.  Compare that to the population density of the U.S. at 92 people per square mile.  On average, the nations on this list are seven 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 two cases – Ireland and Switzerland, 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 conventional wisdom 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 166% 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 India, rising by 428% in ten years.  India is the 2nd poorest nation on the list.  Perhaps low wages do play a role here?  On the other hand, nearly tied with India (in terms of the rate of growth in the deficit, not the deficit itself, which is actually larger) is 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.  So if productivity is an issue, why are we losing out to nations who are much less productive?
  6. In 2018, the U.S. had a total trade deficit of $816 billion in manufactured goods.  Of the 165 nations in this study, the top nine deficits on this list account for more than that entire total.  The U.S. actually has a small surplus of trade with the other 156 nations of the world combined.

Trade deficits matter.  As noted above, our overall deficit in manufactured goods in 2018 was $816 billion.  On a per capita basis, that’s a deficit of $2,500 for every man, woman and child in the U.S., or a deficit of nearly $10,000 for an average household of four.  That’s how much poorer you are than if we had a balance of trade.

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 – a list peppered with rich and poor nations alike.  So stay tuned.  You won’t find this in-depth analysis of trade or the factor that actually drives it anywhere else.


EU threat on auto tariffs

July 31, 2019

https://www.reuters.com/article/us-usa-trade-eu/eu-redoubles-threat-to-retaliate-if-us-raises-auto-tariffs-idUSKCN1UH1N5

The above-linked report was published a few days ago, but I can’t let it pass without comment.  It’s reported that the EU is threatening to retaliate with tariffs of its own if Trump were to push ahead with tariffs on EU auto imports.

“We will not negotiate under WTO illegal action. Nor will we go down the road of managed trade,” she (Sabine Weyend, the EU’s director general of trade) said.

If Washington pushed ahead with its threat to raise auto tariffs to 25%, Brussels would respond with tariffs of its own, resulting in a “lose-lose” situation for all involved, she said.

This is exactly the same approach taken by China, and the EU should consider how well that’s working out for them.  And the EU is in a far weaker position than China.  Unlike China, who supplies electronics and other consumer products for which new supply chains will have to be re-established in the U.S., the EU competes with the U.S. in products that are still manufactured here, like autos and parts.  A full one third of our trade deficit with the EU – approximately $43 billion – is in autos.  If tariffs make such EU imports more expensive, American consumers can instantly and painlessly switch to American brands.  The same is true for pharmaceuticals, chemicals, plastics and virtually everything else imported from the EU.  We don’t need their imports – we have it all right here.

The notion that a tit-for-tat tariff battle with the EU would be a “lose-lose” situation is laughable.  When you’re already losing, as the U.S. is with a $150 billion/year trade deficit with the EU, the only possible outcome for the U.S. – even if a balance of trade with the EU were reached through a total cessation of trade with them – would be a $150 billion boost to the U.S. economy, a huge win by any measure.

If the EU wants to avoid the loss it’d suffer, it’d be better for them to boost their domestic consumption instead of relying on manufacturing for export – the same remedy that experts have recommended for China.  Of course, with a population density nearly the same as China, they face the same problem:  per capita consumption that’s depressed by over-crowding.

Trump is continuing his “slow turkey” approach to restoring a balance of trade through the use of tariffs.  It won’t be long before he levies the long-promised 25% tariffs on the remaining half of Chinese imports.  I suspect that the EU will then be his next target.


Economist Ivanovitch Calls for China to “Get Out of its Huge U.S. Trade Problem”

March 18, 2019

https://www.cnbc.com/2019/03/18/china-should-quickly-get-out-of-its-huge-us-trade-problem-commentary.html

In the above-linked opinion piece, economist Dr. Michael Ivanovitch calls for China to “get out of its huge U.S. trade problem.”  It’s significant that economists of Dr. Ivanovitch’s ilk, a former economist for both the OECD (Organization for Economic Cooperation and Development) and the New York Federal Reserve, are beginning to recognize the unsustainability of China’s reliance on its massive trade surplus with the U.S. and the threat it could ulitmately pose to peace between the two nations.

Ivanovitch argues that China’s surplus with the U.S. is unsustainable and the longer it attempts to sustain it with endless talks and negotiations, the more it runs the risk of the U.S. seeing China as an existential threat for which it must prepare militarily.

Like all excesses, this one too can badly backfire on China. And it’s not clear what China’s economic and political interests are served as Beijing keeps deliberately pushing the U.S.-China trade relationship into a growing and unsustainable imbalance.

No, China should know that, at some point, the abused party wants out — sometimes violently.

It’s great that economists are beginning to see a danger here, but what they fail to understand is that reducing its surplus with the U.S. isn’t a choice China can make without devastating its economy.  China is no different than other badly overpopulated nations – like Japan, Germany, South Korea and many others – in that they either depend on manufacturing for export in order to sustain their bloated labor forces, or they are doomed to abject poverty.  Economists don’t recognize the inverse relationship between population density and per capita consumption, and the role it plays in driving up unemployment and poverty.  They don’t recognize it because they refuse to even ponder the ramifications of human population growth out of fear of being labeled “Malthusians,” a virtual death sentence for an economist’s career.

China may not understand it either, but they do understand how heavily dependent they are on the export market – especially the U.S. – and they understand that, for reasons that may escape them, it’s proving impossible to transform to an economy driven more by growth in their own domestic consumption.

China will never willingly cede any of its surplus with the U.S.  If the U.S. wants to move toward a balance of trade with China, it must take matters into its own hands, and the use of tariffs is the only tool at its disposal.  It’s time for Trump to stop being suckered by China’s willingness to engage in talks that drag out forever.  Lay down the law, slap 25% tariffs on all Chinese imports, and tell China they will only be reduced when a balance of trade has been established, and even then by just enough to assure that such a balance is maintained.


Why is hate on the rise?

October 31, 2018

In the wake of the mail bombs sent to Democratic critics of Trump and the deadly mass shooting at the synagogue in Pittsburgh, many are raising alarm about what seems to be a dramatic increase in hate crimes and speech.  I was thinking about this and these lyrics came to mind:

“… The whole world is festering with unhappy souls.
The French hate the Germans, the Germans hate the Poles.
Italians hate Yugoslavs, South Africans hate the Dutch,
And I don’t like anybody very much.

… They’re rioting in Africa.
There’s strife in Iran.
What nature doesn’t do to us
will be done by our fellow man.”

Those lyrics are taken from a song titled “Merry Minuet,” released by the Kingston Trio in 1959.  Six decades have passed since then.  In spite of the strides we’ve made in being more tolerant of people who are different from us in terms of race, creed and sexual orientation, it does seem as though hate is more prevalent than ever before.  Maybe it is; maybe it isn’t.

The millenial generation now blames Trump and like-minded boomers for the rise in hate.  In 1959, the boomers were blaming their parents.  Hate and the primeval instincts that fuel it, like fear, distrust, envy, greed, and our territorial instincts, have always been with us.  Those instincts are critical to our survival.  One who wanders down a dark alley, oblivious to potential danger, ends up dead.  One who does so with an appropriate degree of fear and distrust is more likely to survive.

When driven to irrational extremes, however -as they can be when fed by false information, those instincts may cause us to unjustifiably hate others.  I and my fellow Christians believe that Christ came into this world to teach us to rein in our demons, to love our neighbor and to forgive those who wrong us.  Often, it’s not easy.  I see a couple of factors, beyond the political, that are making it much harder.

Number one is “social” media.  Not until the past few years have those beset with irrational fears and hatred had such a place to turn to for reinforcement, where their fears and suspicions could be stoked by gross propaganda designed to pull them in and exploit them.  There’s another factor, however, that few recognize – that high population densities are breeding grounds for hatred.  You can see it everywhere you look.  It’s not hard to understand.  Those who live in close quarters are more easily irritated by those around them.  Throw in obvious differences like race and creed and you have an explosive mixture.  “Good fences make good neighbors,” as the saying goes.  The point is that we can all more easily coexist when we have some separation.

I like to use what I call the “monkeys in a cage” effect as an analogy.  Build an enormous, beautiful cage – perhaps acres in size – with flowing streams and trees full of fruit and nuts.  Now put a monkey in the cage.  Will he be happy?  No, he’ll be lonely.  Put in another monkey.  Are they happy?  They’re happier, but still long for more companionship, being very social animals.  So put in some more.  And then more.  At some point, some monkeys will be driven out of the group, where they’ll move to the opposite side of the cage and form their own group.  Now put in more monkeys, and more and more.  At some point, the monkeys will turn on each other and you’ll return to the cage in the morning to find many of them dead, casualties of an enormous fight that broke out overnight.

Any child whoever had an aquarium or terrarium understands that their bowl  or cage will only support just so many fish or animals, in spite of their best efforts to keep them fed.  And so it is with us.  Our country and our planet is twice as densely populated as it was fifty years ago, and is many times more densely populated that it was just a century ago.  While mankind may be clever enough to overcome many obstacles to never-ending population growth, it’s becoming increasingly obvious that there are also many factors that are escalating beyond our ability to control them.  Rising hatred, fed by worsening over-crowding is one that shouldn’t be ignored.

 


Low Wages Don’t Cause Trade Deficits!

July 31, 2018

Now that we’ve established (in previous recent posts) that it’s disparities in population density between the U.S. and its trading partners that causes our enormous trade deficit, let’s take a closer look at what role low wages might play.  Judging by the data we saw in the lists of America’s best and worst trade partners, there appeared to be little difference in the “purchasing power parity,”  or “PPP,” between the lists, suggesting that low wages (which track PPP) play no role.

Let’s begin by looking at America’s balance of trade with the twenty poorest nations in the world.  Here’s the list:  20 Poorest Nations.  First of all, you’ll notice that this list is dominated by poor African nations, with a few others like North Korea and Afghanistan thrown in.  The U.S. actually has a small trade surplus of just over a million dollars (an almost perfect balance of trade) with this group.  If low wages cause trade deficits, why doesn’t the U.S. have a huge trade deficit with this group of nations?  In the interest of fairness, I should point out that all foreign aid is booked as exports from the U.S., and the nations on this list are nearly all heavy recipients of U.S. foreign aid.

Let’s move on.  At the other end of the scale we have the twenty richest nations.  Since U.S. PPP is about $50,000, the U.S. would fall somewhere in the middle of this list.  So wages shouldn’t be much of a factor with this group.  Look at the list:  20 Richest Nations.  As you can see, we have a small trade deficit of $9 billion with this group of nations – virtually insignificant when compared to our total trade deficit in manufactured goods of $724 billion.

What we need to do is divide all of the world’s nations in half according to PPP and compare our balance of trade with the poorest half of nations to the richest half.  If we do that, the results are pretty startling.  With the poorest half of nations, the U.S. has a trade deficit in manufactured goods of $60.7 billion.  But with the richest half of nations, the deficit explodes to $663.5 billion!

How can we explain that?  First of all, to be honest, even the richest half of nations is made up almost entirely of nations that are poorer than the U.S.  Only about a dozen nations are richer than the U.S.  So one could argue that the low wage theory still holds.  Not true.  If it did, then it should be the poorest half of nations that we have the biggest trade deficit with, not the opposite.

The real explanation is that there is a relationship between trade and wages, but the cause and effect are quite the opposite of the “low wage theory.”  Low wages don’t cause trade deficits.  Instead, large trade surpluses like China, Germany and Japan have with the U.S., cause higher wages.  Manufacturing for export sops up excess labor supply and drives wages higher.

When the U.S. trades with poor but sparsely populated nations, they become wealthier but soon run out of labor.  Their now-wealthier populace becomes good customers for American products and trade levels off in a state of balance, more or less.

But when the U.S. trades with poor, badly overpopulated nations, wages rise but their overcrowded conditions leave them unable to consume products at anywhere near the rate needed to become customers for imported products.  Their oversupply of labor persists and a trade deficit with such a nation grows steadily worse.

America’s trade imbalance can never be resolved as long as it pursues policies that don’t target the real problem – disparities in population density.