Trade Deficit in Manufactured Goods Hits Another Record in July

September 6, 2018

Yesterday the Commerce Department announced that the overall trade deficit rose to $50.1 billion in July – bad, but still in the $37-55 billion range where it has hovered for years.  Only by doing a deep dive in the data – removing services, food and oil – can you arrive at the really bad news in the report – that the trade deficit in manufactured goods shot to yet another all-time high in July of $69.3 billion, beating the previous record of $68.4 billion set in February earlier this year.  Here’s the chart:  Manf’d Goods Balance of Trade.

Over the past few months, we’ve heard a lot about the Trump administration’s “trade war” with the rest of the world in an effort to restore a balance of trade.  But so far, there’s no evidence of any positive results to be found in the trade data.  What’s going on here?

Several things.  First of all, it’s important to note that, for all the talk we’ve heard about this issue, so far it’s been mostly talk.  There’s been talk of slapping tariffs on another $200 billion of imports from China.  More recently, that’s escalated to include all $500-some  billion of their imports.  There’s been talk of imposing tariffs on all auto imports from the European Union.  There’s been a lot of talk about tough negotiations to revise the North American Free Trade Agreement with Mexico and Canada.  But the reality is that, so far, the Trump administration has imposed small tariffs on aluminum and steel imports and on about $50 billion of Chinese imports.  That’s a small drop in the bucket compared to the $3 trillion of imports from around the world.  In essence, the trade war really hasn’t started yet.  The U.S. and the rest of the world have simply been exchanging steely stares across the battlefield.  The only shots fired have come from BB-guns.

If anything, other Trump economic policies may actually have exacerbated the deficit.  The tax cut that went into effect this year has boosted the economy by as much as 4% (according to the most recent GDP data), but the trade deficit in manufactured goods has worsened by 18% since the tax cut went into effect.  It’s clear that much of the tax cut has been spent by Americans on more imports.  It’s actually boosted the global economy much more than the U.S. economy.

However, all that may soon change.  The tariffs on an additional $200 billion of Chinese imports has been on hold during a public comment period.  That period actually ends today.  So the tariffs may very soon be implemented.  The Chinese will begin feeling the pain and, admittedly, so too will American consumers.  They’ll feel that pain until manufacturing begins to return to the U.S. and drive up wages.

The talk of tariffs has so far had little effect on corporate supply-chain strategies.  Corporate leaders still think it’s all a bunch of bluster by Trump, and that all will return to normal if he manages to win some token concessions from other countries.  They’re not going to revise their sourcing strategies and investments in foreign countries until they really start to feel pain from the tariffs.  But there is evidence that it’s beginning to happen.  Earlier this week, Ford announced that it was cancelling plans to begin importing a car model from China, explaining that the expected tariffs on those cars would wipe out what was already a thin profit margin.  GM already imports the Buick Envision model from China.  If Ford sees importing cars from China as a losing proposition, surely GM is considering similar action.

Then there’s the new trade deal between the U.S. and Mexico which promises to shift some car and parts production back to the U.S.  It’s not a signed deal yet, but it’s coming.

So the message here is to be patient.  But at the same time, the Trump administration needs to feel some sense of urgency to start producing results.  The tax cut will only carry the economy so far and for so long.  Real economic reform is totally dependent on a re-balancing of trade that hasn’t actually begun yet.

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Red China’s Finance Minister All but Admits U.S. Will Win Trade War

August 24, 2018

https://www.reuters.com/article/us-usa-trade-china-finmin/exclusive-china-to-keep-hitting-back-at-u-s-over-trade-to-boost-government-spending-finance-minister-idUSKCN1L90HF

In the above-linked interview with Reuters yesterday,  Red China’s finance minister, Liu Kun, all but admitted that China is losing the trade war with the U.S., and the losses are expected to worsen.

For now the impact of the China-U.S. “trade frictions” on the Chinese economy has been small, but he is concerned about potential job losses and lost livelihoods …

… the Chinese government will increase its spending to support workers and the unemployed who are hurt by the trade conflict, and also predicted bond issuance by local governments to support infrastructure investment this year will pickup and blow past 1 trillion yuan ($145.48 billion) by the end of the current quarter.

So far, China has either imposed or proposed tariffs on $110 billion of U.S. goods, representing most of its imports of American products. Crude oil and large aircraft are key U.S. goods that are still not targeted for penalties.

“We’re responding in a precise way. Of course, the value of U.S. imports of Chinese goods isn’t the same as the value of Chinese imports of U.S. goods. We’ll take tariff measures in accordance to this situation,” … “When we take measures, we try our hardest not to harm the interests of foreign businesses in China. That’s why our tariff measures are targeted to avoid affecting them as much as we can,”

That’s a rare admission that China is already out of ammo in this war.  Although the U.S. is poised to slap tariffs on at least $200 billion of Chinese imports – still just a fraction of Chinese imports – China has targeted only half that amount because that’s all it imports from the U.S.  In a tit-for-tat trade war, Red China is already out of “tits.”

Some American businesses and industry lobbies, including the U.S. Chamber of Commerce, have criticized U.S. President Donald Trump’s imposition of punitive tariffs on Chinese goods

This statement can’t be allowed to stand without comment.  The “U.S. Chamber of Commerce” is not an “American” lobbyist.  The Chamber of Commerce is a foreign-based organization, established in France, to promote global trade regardless of its negative impact on the United States.  It opposes Trump’s trade policy because global trade will suffer as the U.S. returns to more domestic manufacturing.  The “U.S.” Chamber of Commerce is its U.S.-based branch and every local Chamber of Commerce in the U.S. is dedicated to the mission of the parent organization – promoting global trade regardless of its impact on Americans.

The U.S. tariffs have affected China’s economic growth – albeit modestly – and their impact will become even more pronounced if the trade frictions persist, Liu said.

“From my perspective, I’d pay more attention to the impact that the China-U.S. trade frictions has on jobs in China. After all, some firms will be affected, exports will be reduced and production will be cut,” …

China’s urban survey-based jobless rate rose to 5.1 percent from 4.8 percent in June. The government aims to keep the rate below 5.5 percent this year.  China plans to increase its fiscal spending to support workers or jobless hurt as higher tariffs kick in.  “We will make adequate preparations in terms of fiscal policy, and help unemployed workers find new jobs and ensure their basic social security,” Liu said.

China’s already feeling the pain.  They’re losing this trade war, and it’ll get worse for them.  In the meantime, the U.S. economy has been going gangbusters, led primarily by big gains in manufacturing, and this is only a taste of things to come if Trump continues to use tariffs to re-establish a balance of trade for the U.S.

 


Low Wages Don’t Cause Trade Deficits!

July 31, 2018

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

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

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

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

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

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

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

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

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


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.


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


Harley-Davidson’s Response to EU Tariffs

June 27, 2018

In response to European Union (EU) tariffs on Harley-Davidson motorcycles, Harley-Davidson announced on Monday that it would shift production of its motorcycles for the EU market overseas in order to avoid $90-100 million in tariffs.  (It wasn’t clear if it planned to move production to the EU or somewhere else.)  The tariffs imposed by the EU were in response to the Trump administration’s tariffs on imported steel and aluminum.  In addition to the tariffs on Harley-Davidson motorcycles, the EU also imposed tariffs on Kentucky bourbon and Levi’s jeans.  (Apparently, the EU isn’t aware that Levis are no longer made in the U.S.)

In response to Harley’s announced move, Trump attacked Harley-Davidson on Tuesday:  https://www.reuters.com/article/us-harley-davidson-tariffs/trump-threatens-harley-davidson-over-european-production-move-idUSKBN1JM1AF.

So what does this all mean?  Is this proof that tariffs don’t work, as free-trade advocates claim?  Hardly.  It is proof, however, that in order to be effective, tariffs must be applied across-the-board to all of the manufactured products from the country or region in question.  Rather that attack Harley-Davidson, the president’s next move should be a reciprocal (or larger) tariff on all motorcycle imports from the EU.  No more BMW’s.  No more Triumphs or Nortons or Ducatis.

Harley-Davidson has a right to move production overseas, just like the above-mentioned EU motorcycle manufacturers would then have a right to move production to the U.S. to avoid its tariffs.  Better yet, Harley-Davidson would suddenly find itself in a better position to begin manufacturing motorcycles in the U.S. to compete in those segments of the market.  Harley-Davidson would come out the winner, and EU motorcycle manufacturers would be the losers.  Net employment in motorcycle manufacturing would actually rise in the U.S.

No doubt, the EU would respond with more tariffs on U.S. products, though it’d be hard-pressed to find ones that it imports from the U.S. in greater measure than it exports.  But why wait for that?  Let’s hit them where it really hurts and put a 25% tariff on EU auto exports.  No more VW’s.  No more Mercedes Benzes.  No more Audis, Jaguars, Land Rovers, Fiats, Alfa Romeos and Volvos.

The EU will respond with tariffs on U.S. auto imports, you might say.  What imports?  Imports of American cars to the EU are virtually non-existent.  Oh, there are a few, but they’re dwarfed by European imports into the U.S.  The net result would be soaring employment in the U.S. auto industry as American consumers shunned the now-more expensive European imports.

Come on, President Trump.  You’re off to a good start in fixing our trade mess.  It’s time to go “all in” and apply tariffs across-the-board on all European imports.  When you’re done with that, you can have an even bigger impact in Asia.


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.