The High Cost of Misguided Trade Policy

http://money.cnn.com/2012/11/29/news/economy/unemployment-benefits-cost/index.html?hpt=hp_t2

Just catching up on some things following a trip last week.  You’ve heard me say repeatedly that our deficit spending is a direct result of our trade deficit – that it’s essential to return to the economy those dollars that were drained away by imports, offsetting the negative consequences.  Unemployment benefits are a perfect example and the above-linked article details just how massive that program is:  over a half trillion dollars in the past five years. 

Legislators are desperately seeking ways to cut spending to avoid the “fiscal cliff.”  If they want to cut spending, they’re looking in the wrong place.  All they need to do is fix our idiotic trade policy, now responsible for a cumulative trade deficit of nearly $12 trillion since our last trade surplus in 1975, and the spending will take care of itself.  Spending on unemployment benefits would melt away, as would spending on a myriad of other safety net programs designed to maintain an illusion of prosperity.

An Interview with the Leader of the World Trade Organization

http://www.cnbc.com/id/44352671

Here’s something rich!  Yesterday, the leader of the WTO (World Trade Organization) stated that there’s no way that the world can return to “protectionism.”  (See the above link.)  If only the CNBC reporter who took the interview was well-versed enough to know that the WTO is the world’s biggest practitioner of protectionism, the interview could’ve gotten interesting.  Perhaps it’d have gone something like this:

CNBC:  But Mr. Lamy, doesn’t the WTO actually use protectionist policies to the benefit of undeveloped and developing nations, including China?

Lamy:  No, no.  Those policies are what we refer to at the WTO as “developmentism.”

CNBC:  So “developmentism” works well for these nations?

Lamy:  Oh, very well, indeed!  Just look at how successful it has been in China.  Millions of people have been lifted out of poverty.

CNBC:  But “developmentism” isn’t applied evenly.  What do you call the policies applied to other nations, the U.S. being the prime example?

Lamy:  That’s free trade.  Free trade is a marvelous thing that has been very beneficial for the U.S. in many ways.

CNBC:  In what ways, exactly?

Lamy:  Many ways.  Ways that are difficult to quantify and thus difficult for the average American to comprehend. 

CNBC:  So developmentism works well for some nations while free trade is better for others?

Lamy:  I guess you could put it that way.

CNBC:  So when does “developmentism” stop being the right trade policy for a nation as opposed to free trade?  Have any nations developed yet to the point where they graduate from “developmentism” to free trade?

Lamy:  No.

CNBC:  I’m confused.  If “developmentism” helps a nation develop, then wouldn’t the continued use of “developmentism” by wealthy nations allow them to develop even further? 

Lamy:  No.  The use of “developmentism” by wealthy nations is actually “protectionism.” 

CNBC:  How does that work?  How does “developmentism” morph into “protectionism” when it’s actually the same set of trade practices? 

Lamy:  Oh, look at the time.  I’ve got to run.  I’m late for a dinner with Chinese trade delegates.  We must talk more again some time. 

There are actually a couple of aspects of this article that I found encouraging.  First, that Lamy is jittery enough about the potential for a return of protectionism in the U.S. that he feels it necessary to speak out against it.  Secondly, read the comments by readers.  (My own is amongst them.)  With one exception, readers were unanimous in their criticism of Lamy and the WTO. 

I also found it interesting that, shortly after I posted my comment, the article was yanked from CNBC’s front page and I actually had to do a word search to find it again.  Not that my comment alone was responsible, but the tidal wave of negative comments. 

As I wrote my comment, a thought occurred to me that will be the subject of an upcoming post.

We Have a Label!

Of all the labels attached to various political/economic philosophies – conservatism, liberalism, libertarianism, capitalism, socialism, communism, fascism, mercantilism, protectionism, globalism, consumerism, etc. – none ever seemed to fit my/our philosophy precisely.  Elements of each can be found in the approaches I’ve advocated.  I think I lean much more heavily toward capitalism than communism; more toward protectionism than globalism.  But none is a good fit.

Yesterday I came across one so obscure that I’d never heard of it, but prominent enough to be defined in Wikipedia.  It’s “producerism.”  Here’s a link to the Wikipedia article:

http://en.wikipedia.org/wiki/Producerism

And here’s Wikipedia’s description of the general position of “producerism”:

Producerism sees society’s strength being “drained from both ends”—from the top by the machinations of globalized financial capital and the large, politically connected corporations that together conspire to restrict free enterprise, avoid taxes and destroy the fortunes of the honest businessman, and from the bottom by members of the underclass and illegal immigrants whose reliance on welfare and government benefits drains the strength of the nation. Consequently, nativist rhetoric is central to modern producerism (Kazin, Berlet & Lyons). Illegal immigrants are viewed as a threat to the prosperity of the middle class, a drain on social services, and as a vanguard of globalization that threatens to destroy national identities and sovereignty. Some advocates of producerism go further, taking a similar position on legal immigration.

In the United States, producerists are distrustful of both major political parties. The Republican Party is rejected for its support of corrupt Big Business and the Democratic Party for its advocacy of the unproductive lazy waiting for their entitlement handouts (Kazin, Stock, Berlet & Lyons).

The Reform Party of the United States of America often uses producerist rhetoric. Populist producerism (and nativist policies) are also seen in the rhetoric of Jean-Marie Le Pen in France, Jörg Haider in Austria, and similar dissident politicians across Europe (Betz & Immerfall, Betz).

Producerism is sympathetic to the idea that labor is an end in itself, inherently ennobling, and thus should be protected at least to some extent from the chaotic forces of consumer choice and market competition. In some Commonwealth of Nations countries, this position is used as an abstract definition of producerism, which is then held as the opposite of an abstract consumerism, the position that the free choice of the consumer should dictate the economic activity of a society. In other parts of the world, especially the United States, such a clear-cut definition is not feasible.

As described above, producerists seem to be a bit xenophobic and a bit over-nationalistic.  So I’d prefer to describe myself as a “producerist with a rationale.”  It’s not illegal immigrants’ over-reliance on welfare and government benefits that concerns me.  (They may very well be less of a drain on benefits than American citizens.)  It is, of course, their contribution to worsening overpopulation that concerns me – their contribution to eroding per capita consumption and, thus, worsening unemployment.  And it’s the role of population density disparities in driving trade deficits that makes free trade with badly overpopulation nations bad trade policy – not a fear of competition.

It’s interesting that the Wikipedia article describes “producerism” as “widespread, but rarely commented-upon.”  I suspect that a significant fraction of people would identify with this philosophy, but I doubt that many have ever heard of it.

You’ll probably hear me use this term more frequently in future posts.

Time to Label China a Currency Manipulator

http://www.reuters.com/article/idUSTRE62F0HT20100316

The U.S. Treasury Department is due to report to Congress by April 15th on whether or not it considers China to be a “currency manipulator.”  (See the above-linked Reuters article.)  Such a determination could be tantamount to an economic declaration of war.  Under World Trade Organization rules, a nation who determines that another is manipulating the exchange rate is then free to impose tariffs to rectify the situation.  Such a move by the U.S. to restore a balance of trade would threaten China with economic collapse. 

Nevertheless, the time has come.  With its policy of pegging the yuan to the dollar instead of allowing market forces to determine the exchange rate, China clearly is a currency manipulator.  Of course, so too is virtually every other nation, including Japan and the Euro zone.  The only difference is that they’re much more subtle about it, leaving their exchange rate to the whims of market forces, but then manipulating those market forces.  It’s not as effective as China’s policy, but they’re able to compensate for any erosion in exchange rate by using other tactics to maintain their trade surpluses with the U.S.  So the end result is the same with one exception.  It strips the U.S. of the ability to label them as currency manipulators. 

Will the Obama administration make such a move?  I doubt it.  They’ve yet to show any real backbone in international trade, failing to respond to huge, new Mexican tariffs on American exports or to blatant dumping by Japanese auto manufacturers.  However, as the economic stimulus plan winds down and as the Federal Reserve ends its programs to pump trillions of dollars into the economy, Obama faces the reality that it simply hasn’t worked.  Though they’ve been trumpeting the growth in GDP, they know very well that the effect is temporary and that the economy is likely to sink back into recession as the stimulus spending is exhausted.  And there’s no appetite for more deficit spending.  With credit dried up and without phony economic bubbles (the housing bubble being the most recent example) to create the illusion of prosperity, Obama knows that real improvement in the economy depends on a rebound in the manufacturing sector, which has had the life sucked out of it by the trade deficit. 

The jobs temporarily salvaged by the stimulus plan have only carried him so far, and its effects are waning.  So with a 2nd term now hinging on a restoration of private sector manufacturing jobs, we may yet see the administration grow a spine in international trade.  Why not label China a currency manipulator?  There’s really nothing to fear.  Will China dump its U.S. treasury holdings, which some fear may drive interest rates sky-high in the U.S.?  Perhaps, but the threat of higher interest rates is way over-blown.

  First of all, the rest of the world will see any move by the U.S. to restore a balance of trade as a huge boost to the U.S. economy, driving strong demand by other countries for U.S. treasuries.  Those sold by the Chinese will be quickly snapped up.  If anything, interest rates may even fall.  Secondly, in the past year, the Federal Reserve has purchased more U.S. treasuries than the total of Chinese holdings.  Whatever slack there might be in demand for the U.S. treasuries sold off by China can easily be made up by the Federal Reserve.   And finally, since China will still be dependent on exports to the U.S. to prop up their economy, they will still be left with a lot of dollars looking for a home.  What else can they do except use them to purchase treasuries?  I suppose they could also use them to buy oil, but then the oil exporters will have to purchase treasuries.  In the final analysis, the demand for U.S. treasuries will remain strong regardless of what China does. 

There is the possibility of an unintended consequence.  A move by the U.S. to restore a balance of trade with China may be perceived as such a positive for the U.S. economy and such a negative for China’s that, once unpegged from the dollar, the yuan may actually rise very little  or could even fall against the dollar.  Imagine the laughter and gloating that would be coming from China then!

I do find it a little awkward supporting the branding of China as a currency manipulator because exchange rates really aren’t the problem.  Currency exchange rates tend to stabilize not at a level that restores a balance of trade but at a level where unemployment equalizes, leaving a permanent trade imbalance between nations grossly disparate in population density.  When has a change in exchange rate ever reversed a trade imbalance?  Never.  Since the 1970s, the dollar has fallen by over 300% vs. the Japanese yen.  Yet, during that time, our trade deficit with Japan has actually exploded.  More recently, when the yuan was allowed by the Chinese to rise by 20% a couple of years ago, our trade deficit with China only grew worse.  And, as the dollar has fallen in the past year vs. the yen and euro, the prices for imports from those regions at the retail level have actually declined.  Japanese automakers have aggressively cut prices in spite of the falling dollar. 

The problem is that badly overpopuated nations will never let something so trivial as currency exchange rates erode their share of the U.S. market.  They know very well that their economies are utterly dependent on manufacturing for export and that subsidizing their manufacturers in order to maintain U.S. market share is a very, very small price to pay.

So, while there’s no hope that an end to the blatant currency manipulation by China can reverse our trade deficit, labeling China as a currency manipulator will place into our hands the one weapon that can – tariffs.  And, once successfully employed against China, resulting in an economic renaissance in the U.S., the advocates of unfettered free trade and protectionism bashers will be exposed as liars and fools.  And it will beg the question:  if it’s successful with China, why not Japan and Germany and Mexico and others?  How much sense would it make to remain a member of the World Trade Organization at all? 

So, in the end, we may owe a big thanks to China for their clumsiness with the currency issue if it turns out to be the first crack in America’s golden idol of free trade.  Perhaps this will be the first nudge in a turn away from the far left end and back toward a more centrist trade policy that makes sensible use of both free trade and protectionism as necessary to maintain a balance of trade.  I’m skeptical, but we’ll soon see.

Another Study Corroborates Link Between Population Density and Global Trade Imbalances

Last week I reported on a study of global trade balances, using data published by the CIA in its World Fact Book, which showed a clear link between population density and the per capita balance of trade in manufactured goods.  The following is the final chart from that article which shows the correlation:

Manf’d Goods vs Pop Density2

Today we’ll look at this from a different angle.  If population density is a factor in international trade, then what’s really important is not a nation’s population density relative to the rest of the world, but relative to those countries with which it actually engages in trade.  No country trades equally with every other nation.  Most countries’ trade is concentrated with just a handful of other nations.  This is important because a nation with a high population density relative to the rest of the world might actually have a trade deficit in manufactured goods instead of a trade surplus if it trades mostly with other nations who are even more densely populated. 

So I’ve used the CIA data for each nation’s major trading partners to calculate the difference (or disparity) in population density between each nation and a weighted average of its trading partners.  For example, over half of all U.S. exports are sent to only six nations:  Canada (20.1%), Mexico (11.7%), China (5.5%), Japan (5.1%), Germany (4.2%) and the U.K. (4.1%).  And well over half of all of U.S. imports come from these nations too.   In the case of the U.S., the difference (or disparity) in population density is -79.8 people/sq km.  That is, while the U.S. has a population density of 31.26 people per square kilometer, the weighted average population density of its major trading partners is 111.06.  So the density of the U.S. is less than that of its trading partners by 79.8.

My expectation was that this approach would reveal an even stronger correlation between population density and per capita trade balance in manufactured goods.  But this approach is not without problems.  First of all, the CIA data on trade partners includes all trade – not just manufactured goods.  Also, the CIA only provides data for each nation’s top trade partners, accounting for 50-75% of trade for each nation.  Also, it should be remembered that free trade is not universally practiced around the world.  The World Trade Organization (WTO) actually enforces protectionist trade practices in favor of two thirds of its member states for the purpose of helping undeveloped and developing nations.  (The United States is not one of them.)  Such uneven trade practices will tend to obscure the effects of other parameters like population density. 

So what did I find?  Here’s a scatter chart of the results for all nations with per capita purchasing power parity greater than $25,000 per year (in other words, for all developed nations). 

Disparity vs PC Balance

Once again, we see that Qatar is a statistical outlier.  Also, Ireland is nearly one as well.  If we remove these two data points, the relationship between population density and per capita balance of trade in manufactured goods becomes quite strong.

Disparity vs PC Balance2

Here we can see that the data points conform more closely to the trend line, indicating a stronger relationship.  A couple of other interesting observations can be made:

1. Note that the trend line, which was generated by the computer and not drawn in by me, intersects exactly the zero point of both the x and y axes.  This means that the data indicates that trade between nations equal in population density will, in all likelihood, yield a perfect balance of trade in manufactured goods. 
2. Nations that are more densely populated than their trading partners can, on average, expect a trade surplus in manufactured goods of about $700 per person for each increment of 100 people/sq km by which their population density exceeds that of its trading partners.  The numbers are reversed for nations less densely populated than their trading partners by that amount.  Returning to the U.S. as an example, our population density disparity of -79.8 would predict a per capita trade deficit of about $560 per capita.  The actual figure is $1,344 per capita.  This deviation from the prediction is likely due to U.S. trade with China, who benefits from WTO-enforced tariffs. 

So what does all of this mean for trade policy in general?  Clearly, if you’re a very densely populated nation, it’s in your best interest to advocate free trade with nations less densely populated, which would be nearly everyone.  Such a policy will almost guarantee a surplus of trade.  (Note that, of the ten developed nations that are more densely populated than their trading partners, only one has a trade deficit in manufactured goods.) 

On the other hand, for more sparsely populated nations, while free trade with other sparsely populated nations is just fine, free trade with more densely populated nations is almost a sure-fire loser.  (Only seven of nineteen nations in this situation have a trade surplus.)  If such nations are interested in maintaining a balance of trade, some mechanism is needed to to counter-act the population density effect:  either import quotas or tariffs.

Conclusion:

The effect of disparities in population density between a nation and its trading partners is real and significant.  For nations engaged in trade with others more densely populated, some mechanism to counteract this effect must be factored into their trade policies if trade deficits are to be avoided.

U.S. Chamber of Commerce Betrays Its Membership

 

http://www.reuters.com/article/domesticNews/idUSTRE58E4MH20090915?sp=true

President Obama finally makes one small foreign trade policy move in support of American business and workers, imposing tariffs on Chinese tires in an attempt to prevent the complete collapse of the American tire industry, and the U.S. Chamber of Commerce is all over him.  As reported in the above-linked Reuters article,the Chamber takes Obama to task not just for the tire tariffs, but for keeping Mexican trucks off our roads and for not rubber-stamping free trade deals with Colombia, Panama and South Korea. 

In every case, the Chamber has sided with foreign countries eager for access to the American market, all in the belief that we are missing out on huge increases in American exports.  This, in spite of the fact that our trade results for the past three decades have proven that free trade with overpopulated nations only erodes business for American companies by surrendering our domestic market in greater measure than is ever recovered with exports.  It boggles my mind that, when it comes to trade, American economists, business leaders and organizations see no value to our domestic market, eager to give it away, while every other nation on earth salivates at the opportunity to sell their products here.

“A major surge in exports is our best path out of a recession, out of double-digit unemployment and the exploding deficits we’re now experiencing,” Donohue (Chamber President) said.

The emphasis is always on exports, never accounting for imports.  The Chamber would have us believe that only exports create sales opportunities for American businesses, and that no business is lost to imports.  Such inability to perform the most simple math stretches credulity, and one can’t help but believe there’s something more sinister going on here – that perhaps the U.S. Chamber of Commerce has become a puppet of foreign countries eager to prey on the American market.  There’s simply no other explanation. 

In fact, the article offers some confirmation that that is exactly what’s going on here, with the Chamber’s position formulated by an international trade consulting firm :

Trade Partnership Worldwide, an economic consulting firm that specializes in estimating the impact of trade policies, prepared the report for the business group.

Throughout the article, the Chamber wrings its hands over the potential for others to cut off imports from America in response to any move by the U.S. to preserve domestic market for our own manufacturers.  Never does it consider that we too could retaliate out of proportion and cut off even more of their imports.  Do they not understand that, in this game of tit-for-tat, the nation with the huge trade deficit – the U.S. – holds all the cards? 

A trade war in manufactured goods is nothing to fear.  We can just as easily manufacture any and every product here as anywhere else.  And, while a trade war in natural resources certainly would be something for the U.S. to fear, it’s no coincidence that we don’t rely on the same nations who prey upon our markets for manufacturing jobs as a source for our natural resources. 

The exclusive use of unfettered free trade is stupid trade policy, as proven by thirty-three years of consecutive trade deficits.  The backing of such policy by a powerful and prestigious organization like the U.S. Chamber of Commerce doesn’t confer legitimacy upon it.  Rather, it only makes the Chamber look stupid as well.  The hard-earned money spent by member companies for the purported benefits of this organization would be far better spent with other organizations who understand the value of balance  in trade deals and who demand that others buy as much from us as we buy from them.

Obama Imposes Tariffs on Chinese Tires

 

http://news.yahoo.com/s/ap/20090912/ap_on_go_pr_wh/us_us_china_trade

President Obama, after eight months in office, has made his first trade policy move in support of American workers, imposing stiff tariffs (though lower than the tariffs recommended by the U.S. International Trade Commission) on imports of tires from China. 

Subsequent whining by the Chinese about protectionism and violation of World Trade Organization rules was predictable.

“China strongly opposes this serious act of trade protectionism by the U.S.,” a statement posted on China’s Ministry of Commerce Web site said. “This act not only violates the rules of the World Trade Organization but also violates the relevant commitments made by the U.S. government at the G-20 financial summit.”

Obama’s move will harm U.S.-China economic and trade relations, the statement said.

One could only hope. 

Obama had until Sept. 17 to accept, reject or modify a U.S. International Trade Commission ruling that a rising tide of Chinese tires into the U.S. hurts American producers. The United Steelworkers blames the increase for the loss of thousands of American jobs.

The federal trade panel recommended a 55 percent tariff in the first year, 45 percent in the second year and 35 percent in the third year. Obama settled on slightly lower penalties — an extra 35 percent in the first year, 30 percent in the second, and 25 percent in the third, White House press secretary Robert Gibbs said.

… Governments around the world have suggested the United States talks tough against protectionism only when its own industries are not threatened. U.S. rhetoric on free trade also has been questioned because of a “Buy American” provision in the U.S. stimulus package.

What the rest of the world criticizes as “protectionism” is any tariffs imposed by the U.S. on their imports – any violation of the “free trade” spirit of WTO rules.  The fact is this:  while the WTO talks about “free trade,” it actually enforces protectionist tariffs in favor of two thirds of its member states, including China, but not the U.S.  These nations eagerly cry “foul” and deride the U.S. as “protectionist” any time we even consider moves to support our own industries, while they are, in fact, the biggest beneficiaries of WTO-enforced protectionism. 

… Roy Littlefield, executive vice president of the Tire Industry Association, which opposes the tariff, said it would not save American jobs but only cause tire manufacturers to move production to another country with less strict environmental and safety controls, less active unions and lower costs than the United States.

The Tire Industry Association is an international organization representing all tire manufacturers of the world.  Gee, let’s see.  95% of the world’s tire manufacturers are foreign, but the biggest market is the U.S.  Is it any wonder that the Tire Industry Association is opposed to U.S. tariffs?  And notice how these industry associations all adopt American-sounding names and have American presidents.  That way, it sounds like these are American businesses supporting free trade and criticizing American tariffs.  There’s no shortage of these American executives who, for the right price, are perfectly willing to take up the cause of foreign interests to the detriment of their own countrymen. 

Littlefield makes a valid point, though.  What’s to stop the tire imports from shifting to Japan, Korea, Mexico or some other nation where labor is in a gross state of over-supply?  We need import tariffs on tires from all such countries, not just China.  But we need even more.  Domestic auto manufacturers are being put at a competitive disadvantage without access to cheap Chinese tires.  What we need are tariffs on all manufactured products imported from all overpopulated nations.  It’s the only way to eliminate the global trade imbalances that have wrecked our economy, trade imbalances driven by huge disparities in population density.   

For the Chinese government, the tire dispute threatens an economic relationship crucial to China’s economic growth. There was speculation before the decision that new tariffs could produce public pressure on Beijing to retaliate, potentially sparking a trade war.

Let’s see, what’s the worst that could happen in a trade war with China?  A total cessation of trade.  The net result is that $250 billion worth of manufacturing returns to the U.S., boosting GDP by $500 billion.  Sounds like an outcome we could live with!  Bring it on!  So what if China threatens to dump its U.S. Treasury holdings?  Such a boost to the U.S. economy would send the dollar soaring, making other nations eager to buy up every bond the Chinese sold! 

There’s a lot more work to be done on our badly-broken trade policy.  Let’s hope this is a start of that process and not just a token gesture.  Let’s hope it’s a sign of impatience within the administration with the lack of progress by nations who have promised to rely less on exports and to expand their domestic economies.  Maybe they just need a little help in keeping that promise.

Globalization Giving Way to the “Deglobalization Paradigm?”

 

http://www.fpif.org/fpiftxt/6399

In the above-linked article (one I strongly encourage you to read) Philippine economist Walden Bello, who the Economist magazine credits with coining the term “deglobalization,” advances what he calls the “deglobalization paradigm,” a new economy that he proposes to replace the failed model of globalization.  His article includes what he calls “11 pillars of the alternative” – key features of this new economy.  First and foremost among them is domestic manufacturing. 

At the same time, an article in the Economist (see 

http://www.economist.com/world/international/displaystory.cfm?story_id=13145370) observes that globalization seems to be in full retreat on all fronts.  Of course, this is a source of great consternation for the Economist, since the failure of globalization would be an indictment of the economic theories at the foundation of the Economist’s core beliefs.  What hope would there be for a magazine peddling what has been proven to be utter nonsense? 

Bello is right on in his observations of the current state of economics.  All major economies of the world have acknowledged the need to depend less on exports and more on domestic consumption as the foundation of their economies.  But none have taken any concrete steps to move in that direction.  Toyota isn’t closing any dealerships in the U.S.  LG Electronics isn’t pulling TVs from the shelves to make room for American-made alternatives.   And China hasn’t told any of its ships to turn around.  Nor has the U.S. taken even the smallest step toward tariffs designed to make domestic manufacturing the logical choice.  Instead, our government is desperately trying to resume the force-feeding of debt for the American consumer.  Like a comatose patient kept alive with feeding tubes and breathing machines, our economy is sustained with an IV drip of printed money by economic doctors who have no clue as to what to try next.  They heave a collective sigh of relief at seeing the vital signs stabilized, but know very well that it’s all an illusion – that the patient is surely dead if that life support is removed. 

Although Obama has publicly disavowed any moves toward protectionism and has, until now, pinned all his hopes on promises by export-dependent nations to boost domestic consumption and rely less on those exports, Monday’s move by Obama to name Ron Bloom a sort of manufacturing czar for the economy may be the first hint that he’s beginning to hedge his bets.  Perhaps it’s a sign that he’s losing patience with the current approach and recognizes the need for a real strategy for boosting domestic manufacturing.  Surely it hasn’t escaped his attention that the economies that have fared best in recent years, most notably China, are those that have been built on a backbone of manufacturing, while those that have eschewed manufacturing in favor of financial wizardry, as the U.S. has done, are now paying a heavy price.  And it was probably no small source of irritation that countries like Korea and Japan, who have promised to rely less on exports, pounced on his “cash-for-clunkers” program, siphoning sales away from domestic auto manufacturers, further eroding their market share and turning the program into a GDP-destroying boost in the U.S. trade deficit. 

The “deglobalization paradigm” is coming, and not a moment too soon.  But before we write the epitaph for globalization, it’s critically important to understand why, instead of boosting all economies, it produced persistent trade imbalances that finally brought the global economy to its knees. Otherwise, there will be constant attempts to re-start the process again.

The hopes for globalization were rooted in a free trade theory that all nations benefit when each specializes in what they do best, trading that product for those of other nations. But this theory failed to account for the relationship between population density and per capita consumption, and what happens when nations grossly disparate in population density attempt to trade freely with one another. When one understands this relationship, it becomes easy to predict that a nation like the U.S. would experience large, persistent trade deficits with nations like Japan, Germany, China and others that are all far more densely populated. And it becomes easy to predict the trade imbalances that finally ground the global economy to a halt.

Nations like Japan, Germany, China, Korea and others didn’t become so heavily dependent on exports out of choice or out of neglect of domestic consumption. Their extreme population densities make them incapable of domestic consumption at a rate that will gainfully employ their bloated labor forces. Globalization allowed their economies to thrive through manufacturing for export, siphoning jobs away from the U.S. and other less densely populated markets. Efforts to boost domestic consumption in such overpopulated nations will fail and without the exports that they’ve come to rely upon so heavily, unemployment in those nations will soar. And it’s just as easy to predict that, unless nations are given the freedom to set tariffs aimed at maintaining a balance of trade, nothing will change and global trade imbalances will persist.

For some period of time, the new “deglobalization paradigm” will spell huge problems for economies now dependent on exports. But in the long run, they’ll be far better off, as long as they recognize that a sustainable economic strategy is one that includes reductions in population densities to a level where domestic consumption isn’t choked off by over-crowding.

Morici Blames Trade Deficit for Economic Flop, but Offers No Solutions

 

http://www.realclearmarkets.com/articles/2009/08/24/look_for_an_x_shaped_economic_recovery_97373.html

The above link will take you to an article by Dr. Peter Morici, University of Maryland professor and former Chief Economist at the U.S. International Trade Commission.  The gist of Morici’s article is that while Wall Street is experiencing a rebound, there will be none for Main Street.  I found Morici’s comments on the trade deficit most significant:

Dollars spent on imports that do not return to purchase exports can’t be spent on American products. That saps demand for American-made products, keeps factories and offices shuttered, and idles workers.

The trade deficit is mostly oil and Chinese consumer goods. Export more, import less, or the economy flops.

Although I take issue with his emphasis on China, since our trade deficit in manufactured products with China, when put into per capita terms, is dwarfed by those with many other countries like Japan and Germany – this last sentence says it all:  “export more, import less, or the economy flops.”  In other words, get rid of the trade deficit.  Actually, Dr. Morici, a small correction is in order.  The economy has already flopped.  It’s been in a state of “flop” for a long time and will remain there until your advice is heeded. 

As former Chief Economist at the U.S. International Trade Commission, Morici shares some of the blame for trade policy that got us into this mess.  It would be nice if he would now offer ideas for changes to trade policy that will get us out.  It’s easy to say, “export more, import less,” but saying it doesn’t make it happen.  Obviously, some move toward protectionist policy is required to drive such a shift.  We need economists with the guts to come out and say it.

French Work the Least, but Beat U.S. in Trade

 

http://www.cnbc.com/id/32472876

Here’s an interesting little article that supports my economic theory that trade imbalances are driven by population density, and not by cheap labor.  It seems that France is the least productive nation on earth, working fewer hours than anyone. 

The French spend the least amount of time at work, a new survey of 73 cities around the world by Swiss bank UBS shows, while the most hours are worked in Cairo and Seoul.

Our leaders tell us that we need to be more productive to compete globally.  Yet France, the least productive nation on earth, kicks our butts in trade.  In 2008, we had a $15.2 billion trade deficit with France, worse than our trade deficit with China on a per capita basis.  And with a GDP per capita of $32,700, they’re also one of the wealthier nations and have a well-paid labor force.  So why do we lose out to France?  They’re more than three times as densely populated as the U.S.

The richest workers are in New York and Zurich, where they would have to work nine hours to buy an iPod nano, while workers in Mumbai needed to work 20 nine-hour days – nearly one month’s salary – to buy the gadget.

Oh, speaking of rich workers, how about Zurich, Switzerland?  If their workers are so rich, surely we don’t lose to them too, right?  Think again.  Although we have a slightly positive balance of trade with Switzerland, thanks to exports of metals and minerals to Switzerland, we have a large per capita trade deficit with them in manufactured goods.  In 2006 it was our 6th worst per capita deficit in manufactured goods at $657 – four times worse than our per capita deficit in manufactured goods with China.  Why?  Because Switzerland is four times as densely populated as the U.S.

Copenhagen, Zurich, Geneva and New York were the cities where employees had the highest gross wages.

And speaking of Copenhagen, Denmark, the story is exactly the same.  In spite of Denmark having some of the highest-paid workers in the world, our per capita trade deficit in manufactured products with Denmark in 2006 was our 11th worst at $522 – three times worse than China.  Why?  Because Denmark is four times as densely populated as the U.S.

Low wages isn’t what drives our trade deficit.  It’s the gross disparity in population between the U.S. and so many of our trade partners.  In 2006, of our top 20 trade deficits in manufactured goods, only seven were with relatively poor nations.  (China was number 19 on the list.)  But thirteen were with nations much more densely populated than our own. 

As a trade policy, the blind application of free trade is even dumber than a blanket application of protectionism.  Each is nothing more than the two opposite ends of a spectrum of trade policy available to us.  America’s trade policy will continue to be an abysmal failure until it takes into account the population density effect.