Population Density Disparities Drive Global Trade Imbalances

July 14, 2018

In recent posts, we looked at lists of America’s best and worst trading partners in terms of the balance of trade in manufactured goods, and found strong evidence of a link to population density.  The lists of our biggest trade deficits, in both absolute and per capita terms, was dominated by densely populated nations like Germany, Japan and China.  The lists of our biggest trade surpluses was dominated by low population density nations, and by net oil exporters (caused by the fact that oil is traded in American dollars).

Now let’s include all nations*, dividing them equally around the global median population density (which is 194 people per square mile).  Look at this chart:  Balance of Trade Above & Below Median Pop Density.  With those half of nations below the median population density, the U.S. enjoyed a small surplus of trade in manufactured goods of $36 billion in 2017.  However, with those half of nations above the median population density, the U.S. suffered an enormous deficit of $761 billion.  Also, note how the disparity has dramatically worsened over the 14-year time period from 2005 to 2018.  The longer the U.S. attempts to engage in free trade indiscriminately, ignoring the role of population density, the worse the effects become.

One may argue that perhaps dividing the nations of the world around the median population density skews the results, since the more densely populated half of nations includes far more people than the less densely populated half.  Fine.  Let’s divide the world in a way that compares the half of people who live in more densely populated conditions vs. the half of people who live in less densely populated conditions.  If we do that, in 2017 the U.S. had a trade deficit in manufactured goods of $510 billion with the half of people living in more densely populated conditions, and a deficit of only $214 billion – less than half – with the half of people living in less densely populated conditions.  Still a strong correlation to population density.

But maybe that’s not the right way to look at it either.  Perhaps we should divide the world in half according to land mass – that is, the half of the world’s surface area that is less densely populated vs. the half that is more densely populated.  (No, Antarctica is not included in this analysis.)  If we do that, the results are even more dramatic.  With the half of the world’s surface that is more densely populated (accounting for 6.6 billion of the world’s 7.1 billion people), we had a trade deficit in manufactured goods in 2017 of $831 billion.  With the less densely populated half of the world, we had a trade surplus of $107 billion.  (It’s worth noting here that the split occurs at a population density of 56 people/square mile.  That is, the less densely populated half of the world has a population density of 56 or less.  The more densely populated half is greater than 56.  The population density of the U.S. is about 90.)

Think about that.  This means that the U.S. economy would fare much better if the population of the more densely populated half of the world were no greater than the less densely populated half – which would yield a world population of about 1 billion people instead of 7.1 billion.  Instead of a net trade deficit in manufactured goods of $724 billion, we’d have a trade surplus of $214 billion (double the trade surplus that we currently have with the less densely populated half of the world).  One can debate what would be an optimum population density in economic terms, but there’s no question that this is a powerful argument for factoring population density into our trade policy.  Beyond that, it also debunks in a strong way the contention of economists that an ever-growing population is essential to sustaining a healthy economy.  It does nothing of the sort.  Instead, the crowded conditions that characterize a dense population stifle consumption – and thus employment – making people dependent on manufacturing for export to escape poverty.

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* Not all nations are included in the study.  Tiny island nations have been omitted since they don’t factor into the trade equation and, while such nations tend to be densely populated, they also enjoy unique economies, based primarily on tourism.

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EU Scared to Death by Trump’s Tariff Threat

July 5, 2018

Precisely as I recommended he do in response to EU (European Union) tariffs on Harley-Davidson motorcycles, President Trump has threatened to impose stiff tariffs on European auto imports.  In return, the EU responded much like the cartoon cockroaches in the RAID insect killer commercials – full blown panic.  The end of the world is at hand!  Their world, for sure, but they want you to believe it’ll be the end of yours too.  Prices will rise, they say.  Sales will decline.  So too will GDP (gross domestic product), a measure of the overall U.S. economy.

Perhaps their most interesting warning was in regards to BMW production at their Spartanburg, SC plant that produces their SUV models.  (They call them “SAVs”, or “Sports Activity Vehicles.”)  They claim that most of the cars made there are exported, and it’s true.  As other nations respond with their own tariffs on American cars, they say, exports of those American-made BMW SUVs will decline and production will be cut, costing jobs.

Let’s look at the facts.  That Spartanburg BMW plant does export about 75% of the vehicles it builds, with those exports having a value of about $10 billion.  Is it really the loss of those BMW exports the EU is worried about, or is it something else?

Here are some more facts.  In 2017, Germany exported approximately $30 billion worth of cars and parts to the U.S., while importing only about $10 billion from the U.S., resulting in a $20 billion surplus for Germany.  The EU as a whole enjoyed a surplus of $44.1 billion in cars and parts with the U.S.

So what is the EU worried about most?  The American economy and BMW’s $10 billion in exports, or their $44.1 billion surplus?  The answer is obvious.  They’re making a killing in the U.S. market, and Trump’s tariffs threaten to put an end to it,

And it’s not just the EU.  Other globalist organizations have used similar scare tactics.  General Motors made similar warnings, but are they more worried about domestic auto sales or their China operations?

Every day, the news is filled with stories about how trade war fears are weighing on global markets.

Will car prices go up?  Probably.  But they didn’t mention to you that your wages will rise faster.  Will car sales decline?  No, the opposite will happen.  Sales of American-made models will rise faster than the decline in sales of EU cars as Americans grow more prosperous and opt for the less expensive American cars over the tariff-laden EU imports.

So don’t fall for the Chicken Little scare tactics.  It’s impossible for the U.S. to do anything but win a trade war, since a trade deficit is what defines a loser in global trade and the U.S. has the biggest deficit by far.  Anything that reduces that deficit makes America the winner.

If raising tariffs on imports were going to hurt the U.S. economy, then how do you explain that the economy is on a tear, putting up the best numbers in a long time – especially in the manufacturing sector of the economy?  Investors seem to understand.  While foreign markets – especially in Asia – have been taking a beating in the past few months, American markets are holding just below their record highs.  Like the saying goes – money talks and BS walks.  The big money knows that Trump’s tariff plan is good news for the American economy.

 

https://www.cnbc.com/2018/07/04/eu-considering-international-talks-to-cut-car-tariffs-report-says.html


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.


America’s Worst Trading Partners

May 17, 2018

Earlier this month, I posted a list of America’s twenty biggest trade deficits in manufactured goods in 2017, and noted that the list was dominated by nations with very dense populations.  But it also included some very large nations, like China, and some very small ones as well.  It’s only natural that any trade imbalance will be exaggerated by the sheer size of a country.  In order to determine which countries are our best and worst trading partners, it’s only fair to express the trade imbalance in per capita terms.  Which countries, on a man-for-man basis, are the worst and best trading partners for the U.S.?  Will these lists also be affected by population density?

In this post, we’ll take a look at the twenty worst trade partners in manufactured goods for 2017.  Why the emphasis on manufactured goods?  Because that’s where the jobs are, and trade in natural resources (food, oil, minerals, lumber products, etc.) has more to do with nations’ geography than anything else.  With that said, here’s the list:  Top 20 Per Capita Deficits, 2017.

With only two exceptions – Finland and Sweden, every other nation on this list is more densely populated than the U.S.  With one exception – Mexico – the remaining eighteen nations are at least twice as densely populated.  Of the remaining seventeen nations, all but Ireland are at least three times as densely populated.  The average population density on this list is 551 people/square mile – more than five times the U.S. population density.

In most cases, our trade deficits with these nations are rapidly getting worse, nearly doubling in ten years.  It’s also very important to note that the average “purchasing power parity” (or “PPP”), a measure of wealth that’s roughly analogous to wages, is $50,700, compare to the U.S. PPP of $59,000.  In other words, for the most part, these are not poor nations with low wages.  In fact, our two worst per capita deficits are with wealthier nations – Ireland and Switzerland.

Speaking of Ireland, with one of the lower population densities on the list, there’s clearly more at play here than population density.  Ireland is essentially a tax haven for companies – creating an unfair trade situation.

Note that China barely makes this list, ranked at 19th.  Our deficit with China is so huge because it holds one fifth of the entire world’s population.  But it’s a big country and so, in terms of the average population density on this list, its population density is fairly unremarkable.  The density of many others who rank higher on the list is much worse.

The fastest growing deficit is with Finland, the least densely populated nation on the list.  It’s an anomaly I can’t explain, except to note that the import of cars from Finland – a nation where there is little to no auto production – has exploded in the past ten years, while the export of American cars to Finland – once robust – has completely collapsed.  Can it be that Germany is funneling exports through Finland’s seaports?  I don’t know.  It’s worth noting that Germany has actually dropped one position on this list in the past year.

The next fastest growing deficit is with Vietnam, a nation more than eight times as densely populated as the U.S., but also the poorest nation on this list.  It’s possible that low wages are playing a role there.  Low wages do play a role in attracting manufacturing but, as wages rise, the trade imbalance levels off and then disappears in nations with low population densities, as they quickly exhaust their labor supply.  But that doesn’t happen with nations that are very densely populated.  China is a good example.  In spite of its wages rising dramatically, our trade deficit with them has only worsened.

Trinidad and Tobago is another anomaly on this list.  It reappeared on this list after a couple of years of not making the list, in spite of the fact that our deficit with them has declined by 81% over the past ten years.  That’s because in spite of the fact that our deficit with them spiked in 2017, putting them back on the list, it’s still far lower than it was ten years ago.

The take-away from this list is that population density is clearly a factor, while low wages aren’t.  Low per capita consumption, fostered by an extreme population density, turns a nation into one that comes to the trade table with a bloated labor force desperate for work, and with nothing but a stunted market to offer in return.  Trade policy that fails to account for this effect by using tariffs to maintain a balance of trade is doomed to failure and virtually guarantees massive job-killing trade deficits.

Next we’ll look at the other end of the spectrum – our twenty biggest per capita trade surpluses.


America’s Worst Trade Deficits in 2017

May 2, 2018

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

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

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

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

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

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

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


Red China Runnin’ Scared

April 18, 2018

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

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

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

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

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

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

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

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


First Evidence of Chinese Impotence in Trade War

April 9, 2018

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

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

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

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

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

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

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

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

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

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

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

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