October Rise in Manufactured Exports Hints at What’s Possible with a Change in Trade Policy

December 6, 2014


Exports of U.S. manufactured goods rose by $3.5 billion in November to a record level of $115.4 billion.  Unfortunately, imports of manufactured goods offset much of that increase, rising $1.8 billion.  That, coupled with a $1.4 billion decline in petroleum exports, left the trade deficit for November nearly flat at $43.4 billion.  That’s worse than expectations and will drag on 4th quarter GDP.

Still, it’s interesting that this report came on the same day as the announcement that the economy added 321,000 jobs in November, including 28,000 jobs in manufacturing – the first decent increase in many months.  This is just a tiny taste of what would happen to our economy if we got our trade policy right and restored a balance of trade.  If a $3.5 billion boost in manufactured exports has this kind of effect, imagine the impact that a $50 billion improvement would have (the amount it’d take to restore a balance of trade in manufactured goods).

Unfortunately, this November number is clearly just a tiny upward blip in the steep downward trend in manufacturing in the U.S.  Look at this chart of our balance of trade in manufactured goods and tell me that November is evidence of some sort of rebound:  Manf’d Goods Balance of Trade.

By the way, the November increase in manufactured exports still leaves us $50.4 billion short of Obama’ goal to double exports by January of ’15.  In other words, if the president had actually taken any action on trade policy to make it happen, our economy would now be enjoying the kind of explosive rebound that I suggested above that you could only imagine.


Trade Deficit in Manufactured Goods Soars to New Record in September

November 4, 2014


As announced by the Bureau of Economic Analysis this morning, the overall trade deficit rose by $3.0 billion to $43.0 billion in September, driven entirely by a steep rise in the deficit in manufactured goods – which rose by $3.9 billion to $52.1 billion – a new record.  (Check the chart:  Manf’d Goods Balance of Trade.)

The expansion of the deficit in manufactured goods was driven mostly by a sharp decline in exports.  September exports of manufactured goods fell to $111.9 billion.  That’s only $0.2 billion higher than in March, 2012.  Over that same time frame, manufactured exports needed to rise by $48 billion to keep pace with President Obama’s promise (made in January, 2010) to double exports within five years.  Here’s the chart:  Manf’d exports vs. goal.

In September our trade deficit with China soared to $35.6 billion, completely obliterating the previous record of $30.9 billion set only two months earlier.  Imports from China rose by $5.1 billion in September while exports to China fell by $0.3 billion.

The entire trade deficit in September is due to only four countries:  China ($35.6 billion), Germany ($6.1 billion), Japan ($5.3 billion) and Mexico ($4.8 billion).  All four nations are more densely populated than the U.S.  China’s population density is four times that of the U.S.  Germany’s is eight times.  Japan’s is ten times.  Mexico is only about twice that of the U.S.  Take away these four countries and the U.S. actually had a surplus of trade with the rest of the world.

Expressed in per capita terms (which factors out the sheer size of nations), the trade deficit with Germany was the worst of these four nations at approximately $100 per German citizen.  Mexico and Japan were nearly tied at about $43 and $41 respectively.  China was last at $29.   It’s important to note that Germany and Japan are both high wage nations, disproving the theory that trade deficits are caused by low wages.

Today, Americans went to the polls in a sour mood.  They’re unhappy with falling incomes and trumped-up employment reports.  They’re fed up with a president who’s more concerned with illegal aliens than he is with the plight of American workers.  And they’re sick of inaction on trade policy that’s has been a proven loser for decades, stripping them of their ability to make a decent living.  They’re right to be angry.  Since President Obama made his promise to double exports, our trade deficit in manfactured goods has nearly doubled while exports have barely budged.  There’s been no follow-through and there was never a plan.  Just a proclamation and crossed fingers.

Voters are in a “throw-the-bums-out” frame of mind.  If the president had been on the ballot, he’d surely have been the first “bum” to go.

Your vote counts, but does it matter?

November 3, 2014

Tomorrow we’ll all go to the polls to cast our ballots, or at least we should.  Every vote counts.

And it’s true.  We’ve all heard stories of elections and ballot issues decided by a handful of votes, especially on the local level where a total of only hundreds or a few thousand votes may be cast.  Your vote may be the deciding factor in determining which candidate takes office.

But does that really matter?  With each passing election cycle, polls show that more and more voters say that America is “on the wrong track.”  Indeed it is, and that’s exactly the problem – we’ve been on a road to nowhere for decades.  We took a turn down that road in the wake of World War II with our embrace of  free trade as a way to head off such wars in the future.  Add to that our dedication to using population growth to stoke economic growth.  On those two issues – free trade and population growth (driven by immigration), there is absolutely no difference between the Republican and Democratic parties.  Both parties promise to keep us heading down that road.  So does it really matter if you veer left or right on the road to nowhere?  Of course not.

Oh, it may sound like there’s differences.  The Democratic candidate may say that he or she is against unfair trade practices.  The problem is that “fairness” isn’t the problem when trading with badly overpopulated nations.  Fair or not, the results will be the same – a huge trade deficit and loss of jobs, driven by the disparity in population density.*  Fairness, currency manipulation, cheap labor, lax environmental rules – none of these things matter.  Trade imbalances are determined by disparities in population density.  Period.

In the case of immigration, the Republican candidate may rail against illegal immigration and demand more border enforcement, but also supports higher quotas for legal immigration.  The Democratic candidate will tend to oppose those higher quotas, but will sympathize with illegal immigrants in search of a better life.  In the final analysis, does it really matter whether or not that person who just took your job has a green card in his wallet?  Our rate of population growth has remained on exactly the same trajectory for decades, regardless of which party held power.  The net result is the same – a labor force that grows faster than it can be absorbed by the economy, driving down incomes.*

Both parties favor reducing the budget deficit.  Neither party will.  Republicans may cut taxes and Democrats may boost spending, but neither will make any difference in your financial security and the budget deficit won’t change, since it’s a function of the trade deficit.*

By all means, go to the polls tomorrow and vote.  Your vote will determine whether some hare-brained ballot initiative is passed and whether some crook wins some local election.  But don’t expect any change for the better at the national level.  With either party, you’ll get exactly the same thing.  We’ll continue veering left and right down the road to nowhere.

The only thing that will change for the better is that we’ll get a respite from political ads for a little while.


* If you’re new to this site and don’t understand the inverse relationship between population density and per capita consumption and how it drives trade imbalances and unemployment, or how the budget deficit is a function of our trade deficit, I encourage you to read more on this site or to pick up a copy of Five ShortBlasts, available through this web site or from Amazon.

Manufactured Exports Lag Obama’s Goal by Record Margin in June

August 11, 2014


Last week the Bureau of Economic Analysis announced that the U.S. trade deficit fell by $3.1 billion to $44.1 billion.  It was the second monthly decline in a row, but there’s little evidence of a long-term improving trend.  Check out the chart:  Balance of Trade.  The general improving trend that was evident for a couple of years, beginning in early 2012, ended early this year when the rapidly worsening deficit in manufactured goods swamped a decline in oil imports.  Though the deficit in manufactured goods improved by $3.0 billion in June, you can see from the following chart that a quickly worsening trend remains in place:  Manf’d Goods Balance of Trade.

Most of the improvement in the manufactured goods deficit was driven by a decline in imports.  (Such declines are usually followed by a big jump the following month.)  But the improvement was also helped by a small $0.8 billion rise in exports.  In January of 2010, President Obama set a goal of doubling exports within five years.  Though he wasn’t specific about the type of exports, it’s reasonable to believe that the plan was for manufactured exports to contribute their fair share toward that goal.  It didn’t happen in June.  The $0.8 billion rise was less than half of the $1.8 billion it needed to rise in order to keep pace with the president’s goal.

Nothing new there.  That’s been true nearly every month for the past three years.  Exports have risen by only $0.7 billion since March of 2012, while they needed to rise by $42.4 billion to keep pace with the president’s goal.  The result is that manufactured exports now lag the president’s goal by $45.9 billion – a record shortfall that exceeds the entire trade deficit.    Here’s a chart that shows both manufactured exports and imports:  Manf’d exports vs. goal.

Contrary to all the hype about a “manufacturing renaissance,” the decline of the manufacturing sector of our economy has continued unabated during the Obama administration.  It’s not a surprise.  The president has ignored the import side of the trade equation – the side he has the power to affect if only he had the will and courage to do so, and instead took the chicken’s way out, setting a goal for exports, over which neither he nor anyone else in the U.S. has any control, since it’s determined solely by foreign demand.  In effect, he washed his hands of U.S. trade policy, but did it in a way that he hoped would give the appearance of being a champion for American workers.  Shame on him.



Trade Deficit in Manf’d Goods Worsens Again in May

July 9, 2014


I’m still catching up from last week.  On Thursday the Bureau of Economic Analysis announced that the trade deficit in May moderated slightly to $44.4 billion.  (A link to the report is provided above.)  But the real news is that the deficit in manufactured goods set yet another record – $49.5 billion.  Here’s the chart:  Manf’d Goods Balance of Trade.

Manufactured exports rose slightly in May, but not enough to keep pace with the President’s goal of doubling exports by 2015.  Manufactured exports lagged that goal in May by a record margin of $45.0 billion.  In fact, manufactured exports haven’t risen in the past 26 months.  Here’s the chart:  Manf’d exports vs. goal.

Even if we give the president the benefit of the doubt and assume he meant exports of all goods and services, that figure also lagged the president’s goal by $66.3 billion.

Remember the trade deal that President Obama signed with South Korea two years ago, which he hailed as a “big win for American workers?”  Our trade deficit with South Korea set another record in May:  $2.7 billion.  In 2011, our trade deficit with South Korea was $13.2 billion.  Last year it was $20.7 billion.  So far, 2014 is on track to handily beat that record.  Thanks, Mr. President!  Please, if you’re not going to do something to restore a balance of trade, stay out of any further trade negotiations unless you hire someone competent in the subject.

We keep hearing talk of a “manufacturing renaissance” in the U.S., but the facts speak otherwise.  Our trade policy continues to drain ever more from the life of the manufacturing sector of the economy.  Trade policy is just one element of a clear pattern that has emerged over the course of the Obama presidency.  It’s a pattern of zero follow-through.  He very publicly proclaims lofty goals and draws red lines, but then sits back and does nothing toward accomplishing those goals.  He’s become the quintessential “bench-warmer,” filling the seat in the White House until he can be replaced, hopefully by someone with some drive and some competence.

Walmart Suppliers Complain of Obstacles to American Manufacturing

June 4, 2014


In the above-linked Reuters article, Walmart’s suppliers are reported to be complaining of problems in re-establishing American manufacturing to help meet Walmart’s very publicly proclaimed goal of sourcing an additional $250 billion of American-made goods over the next decade.

Their complaints include a lack of domestic suppliers for components, an inexperienced work force and so on.  I have no doubt that their complaints are valid.  There’s hardly anyone left here making anything other than cars and trucks.  (As an aside, have you ever noticed that there are virtually no foreign-made trucks on the road?  Even Toyota and Nissan pickup trucks are made in the U.S.  Why?  Because the U.S. has continued to maintain a 25% tariff on all imported trucks.)  However, these complaints ring hollow when you consider the fact that when these American companies moved production to China, China was completely devoid of all such resources.  Yet, they found ways to overcome those obstacles so fast that, in a few short years, China manufacturing went from zero to the being the world’s dominant manufacturer.

Why?  Because those companies were motivated by a completely untapped, virgin market of 1.3 billion new consumers.  That’s one hell of a big motivation.  But what motivation do they have now to rebuild factories in  the U.S., other than Walmart asking them to do so?  (And I’m sure Walmart isn’t offering to pay them more to do it.)  And, what little motivation that provides is completely offset by the fact that their China plants will now be slowed by reduced exports to the U.S.

A big part of the problem is that Walmart sells end-use products, and not components, sub-assemblies or raw materials.  Those companies have even less motivation to come back – they don’t even have Walmart on their backs.  It’s kind of like the U.S. trying to apply a tariff to some end-use product.  It never works because, ultimately, it puts the companies involved at a disadvantage when trying to obtain materials and components.

Provide real motivation  and they’ll all find a way around these obstacles, just as they did when they moved to China.  Only tariffs, applied across the board to nations incapable of providing the U.S. with an equivalent market (overpopulated nations with emaciated per capita consumption), can provide the profit incentive companies need to make the transition.

I’m no fan of Walmart, but give them credit for trying.  But they need help in the form of trade policy that’s rooted in how the world of trade really works – help that our government lacks the wisdom and courage to provide.  Until that happens, the manufacturing renaissance will remain a myth.


Do Low Wages Cause Trade Deficits?

May 29, 2014

In recent posts we’ve examined the effect of population density upon the U.S. balance of trade in manufactured goods and found a strong correlation.  But when establishing a new cause for some phenomenon, it’s equally important to disprove the previously hypothesized explanations.  Economists are fond of blaming trade deficits on two primary scapegoats – currency valuations (often claimed to be manipulated to favor the offending trading partner) and low wages.

In my last post, we proved that currency valuations actually have no effect whatsoever.  Stronger currencies were no more likely to help America’s trade balance than they were to make it worse, and vice versa.  That’s not to say that currency valuations won’t impact the profitability of companies.  If the dollar gains strength, American companies make less money on exports.  But their reaction is to cut costs and become more competitive.  Have you ever heard of an American company throwing in the towel, closing up shop and moving overseas because of a fluctuation in the value of the dollar?  Of course not.  They stay and compete.

But what about low wages?  On the surface, that sounds like a more plausible explanation for shifting manufacturing off-shore.  Why make widgets here when I could move the factory to China, pay a fraction of the wages, and then import the products and sell them at the same price?  Almost sounds like a no-brainer.  But it’s not that simple.  There are other factors involved – huge factors – like logistics.

So let’s spend a little time examining some hard data on the subject.  While gathering trade data country-by-country for 2012, I also used the CIA World Fact Book to determine “purchasing power parity” (PPP)for each country (analagous to wages paid in each country), and used the “Index Mundi” web site to track how each nation’s  PPP has changed over the years.  Using that data, we can chart America’s balance of trade in manufactured goods relative to the wealth of each nation.

In this first chart, I simply took the 164 nations included in the study and divided them into quintiles – five groups with the same number of nations in each group.  If indeed wages (wealth) play a role in trade, what we should see are small deficits (or even surpluses) with wealthy nations, and progressively larger deficits with poorer nations.  Now, look at the chart:  with nations by quintile.

There is little evidence of any trend or consistency in this chart.  We actually have a relatively large trade deficit with the very wealthiest of nations which include virtually all of Europe, Japan, Taiwan and South Korea, nations which also happen to be very densely populated.  We actually have a small surplus with the 2nd quintile of nations which includes many South American nations and relatively few densely populated nations.  We have a very large deficit with the 3rd quintile of nations for one reason – China is included in this group.  With the 4th quintile – those nations ranked in the bottom 20-40% of wage earners, we have a small trade deficit.  And finally, among the very poorest of nations, heavily represented by African nations – seemingly fertile ground for taking advantage of low wages – the U.S. actually has a small surplus of trade.  To reiterate, among the bottom 40% of wage earners in the world who represent 3.1 billion people – almost half of the world’s population – the U.S. trade deficit is actually quite small.

This flies in the  face of the claim that low wages cause trade deficits.  Why don’t we manufacture more in Africa, where wages are dwarfed by those in China?  And China, not exactly awash in natural resources, actually turns to Africa for its supply of raw materials!  How inefficient is that?  Wouldn’t it make much more sense to build the factories in Africa, close to the supply of raw materials and an even shorter ship ride from the western coast of Africa to the eastern shore of the U.S.?  Something about this claim of low wages causing trade deficits already smells.

But let’s look at things another way.  Dividing countries into quintiles may be a little misleading.  We should actually divide the population of the world into quintiles by wealth, since that’s what we’re actually measuring here.  Otherwise, some nations in one quintile may have huge populations while another quintile of nations may be small and sparesely populated.  So take a look at this chart:  with people by quintile.

I will tell you that even I was blown away when I plotted these results.  Now the data shows a clear trend, but one that is precisely the opposite of what economists claim.  Our biggest trade deficits are with the wealthier people of the world, steadily declining as people become poorer.  How can this be?  The explanation lies in what really causes trade deficits in the first place.  Trade deficits are caused by disparities in per capita consumption, driven by disparities in population density, and nothing else.  And trade surpluses make people wealthier, not poorer.  By running huge trade deficits with nations like Germany, Japan, Korea, Taiwan, China and a host of others, we’re making them richer day-by-day as the U.S. grows poorer.

In fact, from 2001-2o12, of the 164 nations studied, the U.S. ranked near the bottom in terms of growth in PPP.  134 nations experienced growth in PPP that outstripped the U.S.  Only 30 nations lagged the U.S.

In that respect, globalization works.  It’s doing an excellent job of redistributing American wealth to other nations so heavily burdened by overpopulation that their economies would be destabilized if allowed to continue without our assistance.  That’s the goal of globalization – stabilization through spreading the pain, unemployment and poverty of overpopulation.  They cause the problems.  You pay the price.  And yet, the push for more growth – fueled largely by population growth – goes on.  Without that, income inequality would also begin to stabilize and we certainly can’t have that!



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