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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The Good Half of NAFTA

March 11, 2013

This article marks the beginning of my annual update of trade data for 2012, about a month behind schedule.  Sorry about that, but it’s not my fault.  I’ve been waiting for the Foreign Trade Division of the Census Bureau to publish its annual update of country-by-country trade broken down by the 5-digit “end use code” for all products.  After waiting a month beyond that time when it’s usually published, it became apparent that, for whatever reason (budget cuts, perhaps?), it’s not happening. 

So I’ve had to adjust, switching to data broken down by the 6-digit NAICS code (North American Industry Classification System).  It classifies products in much finer detail than the 5-digit end use code – more detail than necessary for my purposes.  So it’s ballooned my spreadsheets and made my data gathering more difficult.  But for me, at least, it’s fascinating data and interesting work, and so it goes on.

As in the past, I’ll begin with America’s top trading partner, the nation that accounts for 16.1% of all of our exports and imports.  Some may be surprised that it’s not China.  The title of this article should tip you off.  The North American Free Trade Agreement (NAFTA) went into effect in 1994 and established a trilateral free trade zone encompassing the United States, Canada and Mexico.  In terms of total imports and exports, Canada is our biggest trading partner, beating China by $80 billion per year who, in turn, beats Mexico (the other half of NAFTA and our 3rd largest trading partner) by $42 billion. 

Our trade results with Canada stand in stark contrast with our balance of trade with the rest of the world in the critical category of manufactured products.  Here’s a chart of the data for the past twelve years, broken into five categories –  food, feeds and beverages; energy resources (oil, gas, coal & nuclear); metals & minerals; forestry products (lumber, logs, etc.); and manufactured products:  Canada Trade.

Our trade deficit with Canada improved slightly in 2012, declining to $32.5 billion from $35.7 billion in 2011.  The reason for the deficit is no mystery; Canada is, by far, our largest source of imported oil.  Our deficit in that category alone was $83 billion in 2012.  In the category of manufactured products, it’s an entirely different story.  In 2012, we had a trade surplus of $66 billion in manufactured goods with Canada – much larger than with any other nation.  Why do we have such success with Canada when the U.S. suffers a trade deficit in manufactured goods of over $500 billion with the rest of the world?  It’s a matter of population density.  Canada’s is one tenth of the U.S.’s. 

Especially when it comes to our trade deficit with China, economists are fond of blaming low wages in China and a Chinese currency that is kept artificially weak by Chinese manipulation.  But, just as the laws of physics must be valid regardless of one’s frame of reference (the foundation of Einstein’s theory of relativity), so too must the laws of economics.  They should apply to trade with every nation or, if it appears that they don’t, there should be a good explanation.  So let’s see how these claims hold up in the case of trade with Canada.  The following is a chart of our balance of trade with Canada vs. the exchange rate between the Canadian and U.S. dollars:  Canada Trade vs. Exchange Rate.

If economists’ claim that a stronger currency makes imports cheaper for our trading partner and makes their exports more expensive, thus helping our balance of trade, then what we should see is an “X” pattern in this chart.  As the exchange rate drops, the U.S. balance of trade should rise.  (The exchange rate can be a little tricky to understand.  A drop in the rate means that the other country’s currency has gotten stronger.  If it once took two Canadian dollars to buy an American dollar, and now it only takes one, then the Canadian dollar has become twice as strong.) 

In this case, the claim is valid.  As Canada’s dollar has strengthened, from 1.53 in 2001 to being equal to the U.S. dollar in 2012, our balance of trade with Canada (including manufactured goods, as we saw in the previous chart), has improved.  Our deficit has shrunk from $53 billion per year in 2001 to $32 billion in 2012.  But is this improvement really due to the change in exchange rate, or is it due to Canada’s low population density?  The answer to that question will become evident as we explore our trade results with more countries in upcoming articles.

As for the claim that trade deficits are caused by low wages – that is, that manufacturers will move production to where the labor is cheapest –  here’s a chart of our balance of trade with Canada vs. Canada’s purchasing power parity (PPP), a good measure of wage rates relative to our own:   Canada Trade vs. Canada PPP.  As you can see, as incomes have risen in Canada, our balance of trade has improved, just as economists suggest would happen.  But one data point doesn’t validate the theory.  Again, has our balance of trade with Canada improved because of their rising incomes and stronger currency, or has it improved because of Canada’s low population density?

And consider this:  it’s not as though our suplus in manufactured goods with Canada is purely a matter of exporting goods to them while importing nothing.  The U.S. imports more manufactured products from Canada – a high-wage nation – than from any other nation except China.  (We import slightly more from China.)  But China has 40 times more people than Canada.  When expressed in per capita terms, our imports of manufactured goods per Canadian dwarfs those from China!    How do you explain that?  How would economists explain it?  It’s because Canada’s low population density makes them capable of having a high rate of per capita consumption – perhaps even higher than that of Americans.

Free trade with this half of NAFTA – Canada – has indeed been very beneficial to the United States.  This is one situation where it works very well.  There are others, too. But free trade doesn’t always yield such results.  There are situations – as when trading with badly overpopulated nations – when free trade is tantamount to economic suicide. 

So stay tuned.  My next article on our number two trading partner – China – will paint a very different picture.


Study Reveals Unexpected Relationship Between Wages and Trade

December 20, 2010

Low wages in other countries, especially China, is one of the factors often cited as the cause our enormous trade deficit.  If you’ve followed this blog, you’ve heard me often counter that, in fact, low wages have virtually nothing to do with the balance of trade.  After all, if low wages are to blame, how does one explain even larger trade deficits (in per capita terms) with high-income nations like Japan and Germany?

But I was going by gut feel more than anything else.  For some time now, I’ve been promising a complete study on the subject to find out what the truth might really be.  I’ve completed that study and can report to you that both I and the economic experts are wrong about the relationship between wages and balance of trade.  There is, in fact, a relationship, but one you’d not expect.

Methodology: First, some explanation of my methodology is in order.  It’s simply not possible to compare actual wages from one nation to the next for the full range of manufactured products, so I did the next best thing and utilized per capita “Purchasing Power Parity” (or “PPP”) for each nation.  Per capita PPP is roughly the gross domestic product (or GDP) of a given nation divided by its population, and it tends to track pretty closely with average income.  For example, U.S. GDP of about $14 trillion, divided by a population of 300 million, yields a figure of about $46,700 per capita – pretty close to the average family income.

On the trade side, I tabulated by SIC code the imports from and exports to each of 163 U.S. trading partner nations.  I then identified each manufactured product by SIC code and totaled them to arrive at a balance of trade in manufactured products.  By dividing that figure by the population of that nation, I arrived at a per capita balance of trade in manufactured products.  It’s important to track only manufactured products, since that’s where jobs are concentrated.

I then constructed “scatter charts” of the data, looking for any relationship that might be evident.  By having the computer generate an equation that describes the relationship (if any), along with a coefficient of correlation, it became easier to determine the existence of any relationship.  A scatter chart that yields a shotgun-like pattern shows that no relationship exists, while a scatter chart that has the data points more or less organized along a line does show a relationship.  It’s important to note that a relationship isn’t necessarily evidence of cause and effect.  For example, just because your alarm clark happens to coincide more or less with the rising of the sun doesn’t mean that the sunrise causes your alarm clock to go off or vice versa.

Summary: When all 163 nations are taken as a whole, there is a relationship between PPP and the U.S. balance of trade.  As PPP increases from a very low level (near zero), the U.S. balance of trade in manufactured products tends toward a surplus that grows larger as the PPP of its trading partners rises.  Lower PPP tends to drive the balance of trade toward zero.

On the one hand, this intuitively seems to be correct.  Higher PPP nations produce more and consume more, creating greater opportunities for trade and thus the potential for greater imbalances.  Lower PPP nations produce and consume little.  Thus, there’s little opportunity for trade, and little chance of running a large surplus or deficit.

However, the fact that higher PPP tends to drive the balance of trade toward a surplus seems counter-intuitive.  How can this be, when the U.S. actually has an enormous trade deficit?  Closer examination of the data points reveals that 116 of the 163 data points fall on the trade surplus side of the chart, while only 47 fall on the trade deficit side.  Regardless of whether one looks at only the trade surplus nations or the trade deficit nations, PPP has the same effect – it tends to amplify an imbalance in trade.  Among the trade surplus nations, the surplus tends to grow with rising PPP.  The same is true among the trade deficit nations.  The deficit tends to grow larger with rising PPP.

There is only one possible explanation for the seeming contradiction between the fact that the U.S. has a trade surplus with 71% of nations but overall has an enormous trade deficit in manufactured goods:  the latter category of nations represents a far higher proportion of the world’s population.  Those 47 trade deficit nations, while representing only 20% of the earth’s populated land surface area (Antarctica is excluded), represent 65% of the world’s population.  The average population density of the 116 nations with whom the U.S. has a surplus of trade in manufactured goods is 58 people per square mile.  The average population density of the 47 nations with whom the U.S. has a trade deficit is almost eight times greater at 440 people per square mile.

Analysis: The following scatter chart plots the PPP for each of 163 nations vs. the per capita U.S. balance of trade in manufactured goods (the balance of trade divided by the population of each nation).  Tiny island nations were excluded from the analysis for the sake of simplicity and because their economies are almost universally based upon tourism.  Tiny city-states like Singapore, Luxembourg, Vatican City, Monaco, etc. are also excluded.

Total Chart

As you can see, the data points hug the zero point at the low end of the PPP scale, but steadily fan out as PPP increases.  There is a very strong correlation coefficient (0.57) with the trend line equation describing the relationship.  (“0” is no correlation while 1.0 is perfect correlation.)  And, as you can see, the trend line lies on the surplus side of the chart.  That’s because there are more data points (116 vs. 47) that fall on that side of the chart.  But aside from the number of points, the trade deficit side of the chart is virtually a mirror image of the surplus side.  Trade deficits tend to increase with rising PPP, just as trade surpluses tend to do.

I then split the data into two groups – trade surplus nations and trade deficit nations – to try to understand this dichotomy.  The following is a scatter chart for the trade deficit nations:

Trade Deficit Chart

For those nations with whom the U.S. runs a trade deficit, there is a definite relationship between PPP and the size of the trade deficit, but it’s exactly the opposite of what you’d expect.  The trade deficit in per capita terms tends to grow with rising PPP, and trends toward zero as PPP declines.  This flies in the face of what is said by those who blame our trade deficit on low wages.  Consider China.  In per capita terms, our trade deficit with China is relatively low, falling right in line with other trade deficit nations with similar PPP.  But the overall deficit with China is large, not because of low wages but because it’s such an enormous country.  Take Thailand as another example.  Their PPP is very similar to that of China’s, as is our per capita trade deficit in manufactured products with Thailand.  If Thailand were twenty times larger (like China), our trade deficit with them would be the same.  Yet no one cares about Thailand.  In per capita terms, our trade deficit with wealthy, high-wage countries like Japan, Germany, Switzerland and others is significantly worse than our deficit with China.

On all of these charts, I had to turn off the data labels to make them more legible.  But I’ve identified a few of the more notable data points on this chart – nations that are significant trade partners with the U.S.  As I scanned down the list of 47 nations that appear on this trade deficit side of the scatter chart, one common characteristic quickly stood out:  these are very densely populated nations.  In fact, of the 47 trade deficit nations, only four are less densely populated than the U.S.:  Armenia, Laos, Finland and Sweden.  In addition to those data points I’ve identified on the chart, also included in this group are Bangladesh, El Salvador, Hungary, India, Italy, Malaysia, Mexico, Pakistan, the Philippines, South Korea, Taiwan, the U.K. and Vietnam among others – all far more densely populated than the U.S.  This group of 47 nations represents 65% of the world’s population, but only 20% of its land surface area (uninhabited Antarctica excluded from the calculation).  The population density of this group of nations as a whole is 440 people per square mile.

Now let’s take a look at the trade surplus nations and see what common characteristics they might share.  The following is a scatter chart of those 116 nations with whom the U.S. had a surplus of trade in manufactured goods in 2009.

Trade Surplus Chart

Once again, we see that as PPP increases, the trade surplus tends to grow.  The surplus trends toward zero as PPP declines.  The correlation to a linear, upward-trending equation is very strong at 0.61.

I’ve identified some of the more significant trading partners in this group – some very large countries like Canada, Australia and Brazil.  This group of 116 nations represents 80% of the world’s land surface area, but only 35% of its population.  The population density of these 116 nations taken as a whole is only 58 people per square mile.

Conclusions:

Low wages do not cause large trade deficits.  Low wages tend to result in small trade imbalances when expressed in per capita terms.  High wages tend to result in large trade imbalances – both surpluses and deficits.  China is no exception.  With a relatively low per capita PPP, the trade deficit with China expressed in per capita terms is relatively low – exactly as the chart would predict.  Our trade deficit with China is large because of its sheer size.  If China were a cluster of many small nations, our deficit with each would be relatively small.

Population density is clearly the overriding factor in determining whether the U.S. will experience a surplus or deficit in trade with any particular nation.

The reason for the relationship between PPP and balance of trade being similar (but opposite) for surplus vs. deficit nations is a matter of speculation.  It is my belief that, among the surplus nations, higher PPP tends to produce a greater surplus of trade for the U.S. because these nations are wealthy in natural resources and they trade those resources for manufactured products.  Thus, their wealth is the cause of the U.S. trade surplus.  Conversely, among the deficit nations, higher PPP produces a larger trade deficit for the U.S. because these nations use manufacturing for export to generate their wealth.  Thus, their wealth is the result of the U.S. trade deficit and a surplus with the rest of the world as well.

Further discussion of the evolution of the trade deficit with China and the implications for U.S. trade policy will be covered in subsequent posts.