Low Wages Play Little Role in Trade Imbalances

July 20, 2017

In my previous two posts in which we examined the lists of America’s worst trade deficits and best trade surpluses in manufactured goods, it seemed clear that low wages were not a factor.  Many of our worst trade deficits were with wealthy nations like Germany, Ireland, Switzerland, Denmark, France, Japan and South Korea.  The list of our best trade surpluses was also dominated by wealthy nations.

Let’s take a closer look at the issue.  If we sort a list of nations by purchasing power parity, or “PPP” – a factor roughly analogous to wages, and divide them equally into five groups, ranging from the wealthiest nations to the poorest, here’s what we find:

  • Among the 33 wealthiest nations, whose PPP ranged from $129,700 (Qatar) to $34,400 (Cyprus) in 2016, the U.S. had a trade deficit in manufactured goods with 15 of them.
  • Among the next 33 nations, whose PPP ranged from $33,200 (Czech Republic) to $16,500 (Iraq), the U.S. had a trade deficit with 13 of them.
  • Among the next 33 nations, whose PPP ranged from $16,100 (Costa Rica) to $8,200 (Ukraine), the U.S. had a trade deficit with 10 of them.  China is near the top of this group.
  • Among the next-to-last poorest group, whose PPP ranged from $8,200 (Belize) to $3,100 (Lesotho), the U.S. had a trade deficit with 13 of them.
  • Among the very poorest nations, whose PPP ranged from $3,100 (Tanzania) to $400 (Somalia), the U.S. had a trade deficit with only 4 of them.

So if low wages cause trade deficits, why aren’t our trade deficits concentrated among the poorest nations instead of that group actually representing the fewest deficits by far.  And why does the richest group of nations include the most (and some of the biggest) deficits?

There’s no denying the fact that, among the poorest nations, the U.S. had a deficit in manufactured goods with 17 of them.  Included in that group are Vietnam and India.  But both rank among the top 25 nations with the fastest growing PPP (146% and 145% relative to the U.S., respectively) over the past ten years.  Since incomes are rising so fast in those countries, then if low wages are a factor in driving trade imbalances, shouldn’t our deficits with those countries be declining?  They’re not.  Quite the opposite is happening.  Our deficits with both have exploded over the past ten years, by 349% with Vietnam and 250% with India.  Our trade deficit is making them wealthier.

It’s difficult to argue that low wages play no role whatsoever.  Mexico is an obvious example of where American companies are setting up shop there, just across the border, for no other purpose than to save on labor.  Everything made there comes back into the U.S.  Virtually none of those products are sold into the Mexican market.  While many of the other manufacturing operations built in other countries like China are put there primarily in pursuit of those markets, that’s not the case with Mexico.  And mysteriously, the increased demand for labor in Mexico doesn’t seem to do much to raise wages there.  Mexico is being used as a virtual slave labor camp and, by all appearances, there must be some collusion between American companies and the Mexican government to keep it that way.

Aside from the glaring example of Mexico, low wages play no role whatsoever in creating our massive trade imbalance in manufactured goods, as proven by the fact that the vast majority of our worst trade imbalances are with wealthy nations.  Instead, trade imbalances are caused by high population densities that make our trading partners incapable of consuming products anywhere close to their productive capacity.


America’s Best Trading Partners in 2016

July 12, 2017

In my previous post we found that the list of America’s worst trade partners in 2016 – those with whom the U.S. has the biggest trade deficit in manufactured goods – in terms of both total dollars and in per capita terms – was dominated by nations whose population densities were far above the world median.  Only two of the twenty worst nations had population densities below the world median.

So what about the other end of the spectrum – the nations with whom the U.S. enjoyed trade surpluses in manufactured goods in 2016?  If there is a relationship between population density and trade imbalance, we should see the opposite effect – that the list is dominated by nations with low population densities.  Here’s the list of America’s twenty biggest trade surpluses in manufactured goods in 2016:  Top 20 Surpluses, 2016

It isn’t as clear as you might expect, and here’s why.  The fact that all oil around the globe is priced in U.S. dollars makes oil exporters float to the top of the list, regardless of population density.  Those nations with whom the U.S. has a trade deficit in oil are high-lighted in yellow.  Of these twenty nations, eleven were net exporters of oil to the U.S.  Why does this matter?  Because American dollars, aside from being legal tender for purchasing oil anywhere in the world, can only be used as legal tender in the U.S.  That means that all those “petro-dollars” have to be used to buy something from the U.S. – primarily two things:  U.S. government bonds and products made in the U.S.  While eleven net oil exporters appear on this list, only one appeared on the list of our top twenty worst trade deficits – Mexico.

Still, the population density effect is in play, even among these net oil exporters.  Believe it or not, Canada (not Saudi Arabia or some other Middle Eastern country) is our biggest source of imported oil.  With Canada, our trade surplus in manufactured goods is bigger than our deficit in oil by about $6 billion per year.  With Saudia Arabia, trade in oil and manufactured goods was almost perfectly balanced.  The same with New Zealand.  With Norway, our surplus in manufactured goods exceeded the deficit in oil by over $3 billion.

In addition, there are two very densely populated nations that appear on this list who are not oil exporters – the Netherlands and Belgium.  There’s a reason for this also.  Both are tiny European nations who happen to share the only deep water port on the Atlantic coast of Europe.  They use this to their advantage, buying American exports and then re-selling them to the rest of Europe.  Taken as a whole, the trade deficit with the European Union in 2016 was $138 billion, which would rank it 2nd on the list of our worst trade deficits, just after China.  The population density of the EU is 310 people per square mile – a little less than China.  And, in per capita terms, our trade deficit in manufactured goods with the EU was $274, a little worse than China.

Now let’s look at a list of our top twenty trade surpluses in per capita terms in 2016:  Top 20 Per Capita Surpluses, 2016.  This results in some small nations floating up onto the list:  Brunei (an oil exporter), Iceland, Belize, Guyana (an oil exporter), the Falkland Islands, Suriname, Oman and Equatorial Guinea (the latter two also being net oil exporters).  But in terms of population density, both lists are pretty similar.  The average population density of the nations on both lists are 213 people per square mile and 197, respectively.  Compare that to the lists of nations with whom we have the largest trade deficits where the population densities were 729 (our largest deficits in dollar terms) and 522 (our largest deficits in per capita terms).  But let’s look at those lists another way.  Let’s calculate the overall population density (the total population divided by the total land area) for the nations with whom we had the twenty largest per capita trade deficits vs. the nations with whom we had the twenty largest per capita surpluses.  Those figures are 372 people per square mile vs. 20 people per square mile.

Oh, and by the way, look at the purchasing power parity of both lists.  They’re remarkably the same.  Clearly, wealth (or wages) play no role in determining the balance of trade whatsoever.

The data couldn’t be more clear.  While other factors may come into play in trade, their effects are dwarfed by the role of population density in determining the balance of trade.  Free trade with densely populated nations is almost assured to yield terrible results for the U.S. – a huge trade deficit in manufactured goods, the loss of manufacturing jobs, and the ruination of the manufacturing sector of our economy.  Because of the role of over-crowding in eroding per capita consumption, those nations consume little but are very bit as productive.  So they come to the trade table with a bloated labor force hungry for work, and a wilted market, unable to consume our exports in equal measure.  Free trade with more sparsely populated nations, on the other hand, is likely to yield the opposite result.  Any trade policy that doesn’t use tariffs to maintain a balance of trade with densely populated nations is doomed to failure, as decades of America’s free trade policy has proven.

We’ll look at even more data from 2016 in upcoming posts.  Stay tuned.

 


America’s Worst Trade Partners in 2016

July 6, 2017

America’s trade policy is a disaster.  There’s just no other way to describe it.  In 2016, our trade deficit rose to almost $505 billion, beating the old record set in 2015.  We can’t continue on this path.  An economy that has that much money drained from it can only avoid a permanent state of recession through deficit spending, which is exactly what we’ve done for decades, and it’s bankrupting us.  Our infrastructure is crumbling.  The Social Security trust fund is on a path to bankruptcy.  Medicare is already there.  Household incomes and net worth are declining.  And the government can’t come up with a scheme that makes health care affordable.

But what to do?  How did “free trade,” the darling of economists, back-fire so badly for the U.S.?  A quick glance at the balance of trade data, which is broken into “services” and “goods,” reveals a nice surplus in services.  It was in this category that the U.S. economy was really expected to shine, and it has.  But the “goods” part of the equation has run completely off the rails, with the deficit in goods dwarfing the small surplus in services.

What’s the problem with “goods?”  Is it oil?  There was a time, decades ago, when the deficit in goods was due almost entirely to oil imports.  But no more.  It has shrunk dramatically and now accounts for less than 25% of the goods deficit.  The vast majority of our deficit in goods is due to manufactured products.  So let’s focus there.

Let’s begin with a look at which nations account for our biggest trade deficits in manufactured goods.  Here’s a list of the top twenty in 2016:  Top 20 Deficits, 2016.  China is at the top of the list, yielding a trade deficit that’s more than four times as large as the next nation on the list, Japan.  In fact, so large is the trade deficit with China that it is larger than all of the nations of the rest of the world combined.  It would seem that China must be doing something underhanded.  Some say that the problem is low wages in China.  Others claim that China manipulates its currency, keeping it artificially low, thus making its exports cheaper for American consumers and making American imports too expensive for Chinese consumers.  Or maybe it’s just the sheer size of China, a big country with one fifth of the world’s population.

What is it about this list of nations that they have in common?  The list includes nations from Asia, Europe, the Middle East and Central America.  It includes some of the wealthiest nations on earth – like Germany, Switzerland and Ireland – casting doubt on the “low wage” theory.

I mentioned China’s size.  But geographic size can’t be much of a factor.  Without any people, we wouldn’t even have trade with any particular country or region.  Take Antarctica.  It’s bigger than China, but we have no trade with that continent at all.  People are what’s important.  It’s their consumption of products that drives trade.  So maybe that’s where we should start looking.  Perhaps the number of people in a country – or their population density – is a factor.  So let’s take a look.  Let’s express the trade deficit with each one of those countries in per capita terms.  Now look at the list:  Top 20 Per Capita Deficits, 2016.

The median population density of the 165 nations* included in this study is 184 people per square mile.  The population density of the U.S. is apprximately 90 people per square mile.  Seventeen of the twenty nations on this list have population densities above the median.  The odds against that happening are 128:1.  Conversely, the chances of that happening are only 0.7%.  Clearly, population density is a factor.  The average population density of these nations is 522 people per square mile – almost three times the world median and more than five times the density of the U.S.

In per capita terms, China barely even makes the list, ranking 19th out of these twenty nations. Eleven of the twenty nations are European Union nations.

And what about the claim that low wages are to blame for trade deficits?  That’s clearly nonsense.  The average “purchasing power parity” (roughly analogous to wages) is just over $46,000 – on a par with the U.S.

On average, the per capita trade deficit with these nations has risen by 88% in the past ten years.

The fact that America’s deficit with Ireland, with a population density close to the world median, is almost three times that of Switzerland, the number two nation on the list, is an indication that something else is going on that tilts trade in favor of Ireland, and indeed there is.  Ireland is a tax haven and America is a fool to tolerate it.

Why is population density such a dominant factor in determining the balance of trade?  It’s because of the inverse relationship between population density and per capita consumption.  It’s because people living in crowded conditions consume less but are just as productive.  The result is that they come to the trade table with a bloated labor force and an emaciated market.  To understand more about why this happens, read Five Short Blasts.  It’s also the theme of this blog.

Any trade policy that fails to account for the role of population density in driving trade imbalances and fails to employ tariffs to maintain a balance of trade with overpopulated nations is doomed to failure.  America’s free trade policy is blind to this factor.  The resulting trade deficit is inevitable.

Next we’ll take a look at the list of America’s twenty best trade partners.  If population density is a factor, we should see the opposite results on that list.  It should be dominated by nations with low population densities.  Stay tuned.

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  *  There are 229 nations in the world.  Tiny island nations and city-states have been excluded from the study.  Trade with these nations is minuscule, accounting for less than 1% of U.S. trade.  The U.S. tends to have a surplus with such nations, regardless of their population density, since their economies are primarily based on tourism and not manufacturing.


Population Density Drives Trade Imbalances Again in 2016

June 26, 2017

I’ve finished my analysis of trade in manufactured goods for 2016 and, as expected once again, the news isn’t good.  The overall deficit in manufactured goods soared to yet another new record in 2016 of $680 billion, beating the previous record set one year earlier by $32 billion.  A thorough, country-by-country analysis of the data reveals one overriding factor that’s driving this deficit- population density.  Since the signing of the Global Agreement on Tariffs and Trade in 1947, the U.S. has systematically lowered barriers to its market for all countries, as required by that treaty and by the World Trade Organization that it spawned.  But that policy has yielded vastly different results.  While the U.S. enjoyed a surplus in manufactured goods of $34 billion with the half of nations with population densities below the world median, it was clobbered with a deficit of $704 billion with the other half of nations – those with population densities above the median.  Same number of nations.  Starkly different results.

Check out this chart:  Deficits Above & Below Median Pop Density.  First, some explanation of the data is in order.  I studied our trade data for 165 nations and separated out those product codes that represent manufactured products.  That’s no easy task.  There are hundreds of product codes.  While the Bureau of Economic Analysis makes it easy to track what’s happening with “goods” in general, that includes such things as oil, gas and agricultural products – goods that aren’t manufactured.  You’d think that they’d be interested in tracking manufactured products, given the level of political rancor on that subject, but they don’t.  The only way to arrive at that data is to sift it out, product code by product code.  Subtracting imports from exports, I was able to determine the balance of trade in manufactured goods for each.  I then sorted the data by the population density of each nation and divided these 165 nations evenly into two groups:  those 83 nations with a population density greater than the median (which, in 2016, was 191 people per square mile, up from 184 in 2015) and those 82 nations with a population density below the median.  I then totaled our balance of trade for each group.

As you can see, in 2016, our balance of trade in manufactured goods with the less densely populated half of nations was once again a surplus, but a smaller surplus of $34 billion.  This is down from $74 billion in 2015, is the third consecutive decline, and has fallen by almost 80% from the record high of $153 billion in 2011.  Why?  As the manufacturing sector of our economy is steadily eroded by huge trade deficits, we simply have fewer products to offer for sale to other nations.  Exports fell by $44 billion in 2016.  (Remember Obama’s pledge to double exports?  What a laugh.)

Conversely, our balance of trade in manufactured goods with the more densely populated half of nations was a huge deficit of $704 billion, down slightly from the record level of $722 billion in 2015.

Some observations about these two groups of nations are in order.  Though these nations are divided evenly around the median population density, the division is quite uneven with respect to population and land surface area.  The more densely populated nations represent almost 77% of the world’s population (not including the U.S.), but only about 24% of the world’s land mass (again, not including the U.S.).

Think about that.  With the people living in 76% of the world’s land mass, the U.S. enjoyed a surplus of trade of $34 billion in manufactured products.  But with the rest of the world – an area less than a third in size – the U.S. was clobbered with a $704 billion deficit!  Population density is the determining factor.  It’s not low wages.  The average purchasing power parity (or “PPP,” a factor roughly analogous to wages) of the densely populated half of nations – those with whom we have the huge deficit – is almost $20,000.  The average PPP of the less densely populated nations with whom we enjoy a trade surplus was about $18,000.  Wealthy nations were just as likely to appear among the deficit nations as among the surplus nations.

Nor is the other popular scapegoat – “currency manipulation” – a factor.  Nearly every currency in the world weakened against the dollar in 2016.  (Only 19 nations experienced an increase in the value of their currency.)  Among the 19 nations whose currencies rose, we had a deficit in manufactured goods with 8, and a surplus with 11.  On average, the deficits worsened by 115%, driven by a huge increase with Madagascar.  Remove that anomaly and the deficits actually declined by an average of 8.4% – in line with the currency theory.  Among the 11 nations with whom we had a surplus, the surpluses improved on average by 14% – again, in line with the currency theory.

However, among the 85 nations who experienced a decline in their currency vs the dollar, we had deficits with 27 of them.  On average, those deficits fell by 13.4% – exactly the opposite of what the currency theory would predict.  Among the remaining nations with whom we had a surplus, the surplus rose by an average of 33% – again, exactly the opposite of what currency theory predicts.

Therefore, we can conclude that our trade deficit in manufactured goods behaved exactly the opposite of what the “currency theory” would predict 80% of the time.  Why?  As noted earlier, most currencies fell vs the dollar last year.  This happened because the U.S. economy was in better shape than the rest of the world, at least in the minds of investors.  That’s what determines currency valuations.  Not manipulation.  Currency valuation has almost nothing to do with trade imbalances.  It affects the profitability of companies operating in different countries, but rarely makes any difference in the balance of trade.

This is absolute proof positive that trade imbalances in manufactured goods are driven by population density and almost nothing else.  Any trade policies that don’t take this factor into account are doomed to failure as evidenced by the destruction of the manufacturing sector of America’s economy.  The only remedy that offers any hope of turning this situation around is tariffs (or a “border tax,” as the Trump administration likes to call it).  Preferably, such tariffs would target only high population density nations like Japan, Germany, China, South Korea and a host of others.  Why apply tariffs to low density countries with whom we enjoy surpluses and anger them unnecessarily?

Trump was elected due in large part to his promises to tear up NAFTA and withdraw from the World Trade Organization and begin imposing a “border tax.”  It’s time to follow through on those promises while we still have a shred of a manufacturing sector left to build upon.

 


Trade Deficit in Manufactured Products Hits Record in April

June 2, 2017

The Department of Commerce released the April figures for international trade in goods and services this morning, and the trade deficit rose again to its worst reading since January – $47.6 billion.  Imports were up and exports were down.  But you can’t even find the worst news in the report – the deficit in manufactured goods.  The Commerce Department doesn’t even bother to calculate it.  But I do.  By subtracting from the overall deficit the figures for services, foods, feeds, beverages and petroleum products, you can arrive at a pretty good estimation of trade in manufactured goods.  The news is bad.  The deficit in manufactured products rose to $63.4 billion, beating the previous record set in March, 2015 by $0.1 billion.  Imports rose to a record level and exports fell to their lowest level in five months.  Here’s a chart:  Manf’d Goods Balance of Trade.  As you can see, the deficit in manufactured goods continues to worsen at the same pace that it has since 2010, more than doubling in seven years.

Separately this morning, the Bureau of Labor Statistics released a weak employment report for the month of May.  Unemployment dropped, but thanks only to the old “mysteriously vanishing labor force” trick used so often during the Obama administration.  The employment level actually fell by 133,000 workers.  An accurate reading of unemployment would have had it actually worsening by two tenths of a percent.  Manufacturing employment fell yet again by another 1,000 jobs.  No surprise, in light of what’s happening with the trade deficit.  Add this data to the extremely weak first quarter GDP and you have a picture of an economy that’s stalled and might be on the brink of something worse.

So President Trump now owns the worst performance in manufactured goods of any president.  He vowed to “Make America Great Again.” The first step in that process is to stop it from getting worse.  That hasn’t happened yet.  Talk and optimism will only carry you so far.  There’s been little action.  There’s no border tax.  NAFTA still stands.  Jobs are still heading to China and Mexico.

To be fair, it’s still early in his administration, and the Republican congress has done nothing either.  But I fear that the opportunity to “make America great again” is being frittered away.


Weak Headline Number Masks Strong March Employment Report

April 8, 2017

The Bureau of Labor Statistics yesterday released its employment report for the month of March.  The headline jobs number was weak.  “Only” 98,000 jobs were added in March – about half of what was expected.  But unemployment dropped by two tenths (a fairly big drop) to 4.5%.  The data underlying the unemployment figure was quite strong.  The “employment level” (the number of people reporting being employed in the household survey portion of the report) rose by 472,000 in March.  (It rose by 447,000 in February.)  And the labor force grew by 145,000 – outpacing the growth in the general population for the fourth month in a row.

Last month, Trump hailed the strong February employment report as “real,” as opposed to the “fake” reports produced by the Obama administration.  (The Obama administration did lean heavily on claims of a shrinking labor force to prop up its unemployment figures.)  Was that claim just bluster or has the reporting methodology actually changed for the better?  It’s two early to tell but, at least for the second month in a row, the BLS claims that the labor force grew (as it actually does, of course) and the numbers seem plausible.  Time will tell.

Per capita employment (the employment level divided by the population) climbed above 47% for the first time since November, 2008.  (Here’s the chart:  Per Capita Employment.)  The “detachment from reality index” – my measure of how much the unemployment figures were distorted by the “mysteriously vanishing labor force” tactic used by the Obama administration – fell to its lowest level since January, 2013.  (Here’s the chart:  Detachment from Reality Index.)

This is great news, but it has more to do with a burst of confidence among consumers (likely driven by a burst of confidence among investors which has driven the stock market higher) in the wake of Trump’s election.  The fundamentals of the economy haven’t changed.  The trade deficit is as bad as ever.  And interest rates are on the rise which will pull the economy down if Trump isn’t able to make headway with tax and trade reforms.  And the jump in stocks that have propelled the economy has already stalled, now waiting to see if expectations of Trump policies actually materialize.

I hope that what appears to be honesty with the factors that make up the employment report (based on a scant two months’ of data) continues.  But without the “border tax” that Trump promised, the good numbers won’t.

By the way, for some time now, the Federal Reserve and others have been proclaiming the economy to be at full employment.  If that were true, then how does the economy continue to add jobs at a faster rate than the growth in the labor force, and how does the unemployment rate continue to fall?  It’s because they were all sucked in by the “detached from reality” employment reports produced by the Obama administration.  The fact is that an honest reading of unemployment (one that grew the labor force in proportion to population growth) has unemployment at 7.3% – nowhere even remotely close to “full employment.”


February Trade Report: New Administration, Same Old Deficit

April 4, 2017

OK, I know it’s not reasonable to expect anything different.  After all, Trump hasn’t yet had a chance to implement new trade policies that would have any meaningful impact on our trade results.   What he has done is meet with some leaders of nations who are among the worst offenders in terms of their trade surplus with the U.S.:  Mexico, Japan and Germany, most notably.  He meets with Chinese president Xi Jinping in a couple of days.  Reportedly, he hasn’t pulled any punches so far in expressing his displeasure with the trade deficit and has vowed to take tough action (like a “border tax”) to change the situation.  So, one thing we can say about the early evidence provided by the February trade results is that tough talk has absolutely no effect on trade results.  (As if the trade results of past administrations aren’t sufficient evidence.)

In February, the deficit dipped slightly.  Here’s a chart of the deficit in manufactured goods:  Manf’d Goods Balance of Trade.  As you can see, though the deficit dipped slightly from January, it remains stuck in the $55-62 billion range it’s been in for two years.

As time goes on, I grow more nervous that Trump will cop out on the trade issue just as Obama did, as more and more meetings with world leaders and business leaders try to convince him of the intangible, unquantifiable benefits of free trade.  It worked on Obama.  Hopefully, they’ll find Trump a tougher nut to crack.  Time will tell.  If there is no border tax in Trump’s tax overhaul plan, we’ll know that he caved to the pressure.  We’re watching, President Trump.  You can kiss your supporters goodbye if you don’t come through on this campaign promise.