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.

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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.

 


Trump to Confront China’s Xi This Week

April 3, 2017

http://www.reuters.com/article/us-global-markets-idUSKBN175025

In the wake of the Obama administration, it still makes me nervous any time the president sits down for talks with a foreign leader.  For Obama, there were no concessions too big for him to make.  Foreign leaders played him like a fiddle.  Americans came out the losers every time.  I say this as one who had big hopes for Obama and voted for him in 2008.

As reported in the above-linked Reuters article, Chinese President Xi Jinping travels to Florida this week to meet President Trump at his Mar-a-Lago resort.  The media will be focused on dealings aimed at reining in North Korea’s nuclear ambitions.  But the real story will be their talks on trade.  America’s failed trade policy is far and away the biggest contributor to our economic decline.  All of our economic problems and virtually every other problem that is impacted by monetary resources allocated to deal with it can be blamed on our trade deficit.  The budget deficit, nearly all of our national debt, our crumbling infrastructure, our health care crisis, homelessness, poverty …. you name it, they’re all directly linked to the drain of our financial resources wrought by the trade deficit.  And no country is more responsible for that drain than China, who accounts for nearly one half of the entire deficit.

On Friday, the U.S. president sought to push his crusade for fair trade and more manufacturing jobs back to the top of his agenda by ordering a study into the causes of U.S. trade deficits and a clamp down on import duty evasion.

If the President is truly interested in the cause of U.S. trade deficits, he need look no further than this blog and can learn all he needs to know by reading Five Short Blasts.   Nations who come to the trading table with nothing to offer but bloated labor forces and markets emaciated by gross overcrowding are the cause of trade deficits.  By this criteria, China is the worst of the worst.  Only tariffs (or a “border tax,” if that term is less onerous) can maintain a balance of trade when dealing with such countries.  Negotiations are pointless since the only possible outcome is to trust the other side to take actions to rein in their appetite for our market.  Decades of experience since the beginning of the failed experiment with “free” trade has proven that they won’t.

So far, President Trump has proven that, for the most part, he can be trusted to follow through on his campaign promises.  No promise was bigger than getting tough with China on trade.  It seems that Germany’s Angela Merkel found him to be a very different president from Obama in her recent meeting with Trump.  Hopefully, he’ll be just as tough on Xi.  It seems that Trump’s “border tax” idea is now becoming more accepted as a crucial element of his upcoming tax reform plan.  Let’s hope he doesn’t negotiate away any of it this week.


Closing the Book on Obama’s Trade Policy

March 8, 2017

The U.S. trade deficit for the month of January was posted yesterday by the Bureau of Economic Analysis.  It was horrible.  President Trump took office on January 20th, but he can hardly be held responsible for any of the January results.  This is all on former President Obama.

How bad was it?  The overall trade deficit rose to its worst level in nearly five years – $48.5 billion.  At $62.1 billion, the deficit in manufactured goods just missed its all-time worst reading of $62.5 billion set in March of 2015.  As you can see from this chart, if the trend in manufactured goods continues, we’ll have a new record very soon and, without the change in trade policy promised by President Trump, it will likely get worse from there:  Manf’d Goods Balance of Trade.

Then there’s the export numbers.  In January of 2010, lacking the courage to take on the problem with imports, President Obama vowed to double exports in five years in an effort to turn the U.S. into more of an export-driven, Germany-like economy.  It never happened and never even came close.  In January of 2017 – seven years after Obama made that promise – total exports, at $192 billion – remained below the October, 2013 level.  Worse yet, exports of manufactured goods were below the level reached in September, 2011 – up only 26% from when Obama made that promise.  And that increase was due entirely to global economic recovery from the 2009 recession and had nothing to do with any real improvement in America’s export position.

So that closes the book on Obama’s trade policy, which was a total failure.  Actually, if President Trump follows through on his promise of tariffs (or border tax, or whatever you want to call it), this closes the book on a seven-decade-long experiment with free trade and globalization, begun in 1947 with the signing of the Global Agreement on Tariffs and Trade that, by any measure of its effect on the American economy, has been a complete disaster.

  • America’s trade surplus dwindled until we ran our last trade surplus in 1976.
  • 41 consecutive years of trade deficits has yielded a cumulative deficit of $14.4 trillion.  During that time, the national debt, which is closely linked to the trade deficit, grew by $19.4 trillion.  In 1976, the national debt was only $0.5 trillion.  Virtually all of our national debt is due to the cumulative trade deficit since 1976.
  • During this period, family incomes and net worth have declined, our infrastructure has crumbled, and our nation has been bankrupted.  The manufacturing sector of the economy has been gutted.  More than ten million manufacturing jobs have been lost.  The United States, once the world’s preeminent industrial power, has been reduced to a skid-row bum, begging the rest of the world to loan us money to keep us afloat.

This is all on you now, President Trump.  You own it.  You’ve promised to straighten out this mess.  America is watching and waiting.


Globalism Establishment Starts to Sweat as their Regime Begins to Crumble

July 26, 2016

These three articles appeared in the news a couple of days ago almost simultaneously in the wake of the Republican convention.

In this first article, finance ministers and central bankers from the G20 nations pledge to “share the benefits of global growth more broadly.”  The article focuses on concerns surrounding “Brexit,” Great Britain’s vote to pull out of the European Union over dissatisfaction with the EU’s open border policies and with being fleeced to prop up the economies of other EU nations.  But the article also takes note of Trump’s vow to pull out of trade agreements.  The G20 is starting to sweat.

In the 2nd article, U.S. Treasury Secretary Lew is reported as saying that it’s time to “redouble our efforts to use all of the policy tools that we have to boost shared growth.” Why is it time to do that now?  Why weren’t we doing this all along?  It’s because it’s now clear that “free trade” policy is becoming more widely opposed, with the political left now opposing the Trans Pacific Trade Partnership (TPP) and with the right going further, vowing to pull out of all existing free trade deals.  The globalist Obama administration is also starting to sweat.

And further evidence comes in this 3rd article about a meeting on Friday between President Obama and his Mexican counterpart.  Don’t be fooled.  This wasn’t just a meeting designed to stress the importance of the relationship between these two countries.  Both are beginning to sense the very real possibility that their trade regime is nearing it’s end.  I predict that, sometime between now and the election, there will be an announcement of some deal, a deal that had its genesis in this meeting, that will move some token manufacturing back from Mexico to the U.S. in an effort to blunt some of the trade anger.

I have written occasionally about cracks that were beginning to appear in globalization – like more and more economists beginning to openly question whether donor countries like the U.S. and Britain were really seeing any benefit at all from these trade agreements and whether they have been, in fact, a net drag on their economies.  The globalization story has been very much like the annual reports that emanated from the now-defunct Enron Corporation.  We were told by Enron that their business was very complicated – too complicated for analysts outside the company to understand.  As it turned out, it wasn’t really complicated.  It was a scam.  People will only buy into such scams for so long.  And so it is with globalization.  The British people could no longer take it.  Nor can Americans.

Without the support of its donor nations and the continued subservient acquiescence of its citizens, the globalization scheme is doomed.  Good riddance.