February 18, 2012
Who cares about the U.S. trade deficit with a tiny country like Denmark? You should, as should anyone concerned about our much larger trade deficit with China and our even larger overall trade deficit. Because, though Denmark is a tiny country, it’s a perfect example of what’s wrong with our trade policy. It’s a perfect example of the inverse relationship between population density and per capita consumption at work driving global trade imbalances. Here’s a chart of U.S. trade with Denmark:
Our trade deficit with Denmark – almost all of which is in manufactured goods – climbed to a new record in 2011, just as our trade deficit with China did. What do Denmark and China have in common? Their population densities are nearly identical, with each more than four times as densely populated as the U.S.
In per capita terms, our trade deficit with Denmark in manufactured products is three times worse than our deficit with China. And that’s in spite of the fact that Denmark is a very wealthy nation. In 2011, Denmark’s GDP per capita rose by roughly 10% to over $40,000 per person – close to that of the U.S. It’s one more bit of proof that what economists say about low wages causing trade deficits is flat wrong. The opposite is true: that wages in densely populated nations rise as their trade surpluses with the U.S. grow – just as we also see happening in China.
You may wonder what Denmark exports in order to have such a large trade surplus with the U.S. Their major manufactured exports are machinery and instruments, pharmaceuticals, furniture and wind generators.
Trade with Denmark is a microcosm of what’s wrong with American trade policy. Free trade with densely populated nations, big or little, rich or poor, is a consistent, sure-fire loser.
March 25, 2011
Here’s one that always raises eyebrows whenever I bring it up: on a per capita basis, our trade deficit in manufactured products with Denmark is three times worse than the deficit with China. Though our trade deficit in manufactured goods with China (at $294 billion) is 83 times worse than the deficit with Denmark ($3.53 billion), China is 242 times larger. Here’s a chart of our trade results with Denmark:
Pretty similar to the chart of our trade with China, except that the numbers on the y-axis are smaller due to the smaller size of the country in question.
What do we import from Denmark? The biggest category of products is pharmaceuticals. The next biggest category is “generators, transformers and accessories,” made up largely of wind turbine equipment. (Remember the president’s promise that green jobs would stay in America? What a joke!) Beyond that there’s household goods, medical and hospital equipment, industrial machinery and telecommunications equipment. In return, we export to them a little of this and a little of that. Nothing much.
So how do you explain this trade deficit? If you blame low wages for our trade deficit with China, how do you explain a deficit that’s three times worse (in per capita terms) with a wealthy nation like Denmark where GDP per capita is $37,000 per person? If you blame Chinese currency manipulation for our deficit with China, how do you explain the deficit with Denmark?
The fact is that both low wages and currency manipulation have virtually nothing to do with determining the balance of trade. The explanation for our deficit with Denmark is the same as the explanation for China: both are very densely populated. At 331 people per square mile, Denmark is only slightly less densely populated than China at 360 people per square mile. By comparison, the U.S. has only 85 people per square mile. The disparity in population density between the U.S. and these “trading partners” is the explanation. The markets of both Denmark and China are emaciated by over-crowding that causes low per capita consumption. Attempt to trade freely with such a country, long on labor and short on market, and you’ll end up with a trade deficit virtually every time.
The question then becomes why we focus all of our attention on China’s trade deficit when it’s exactly what we should have expected based upon trade results with other nations like Denmark. How much sense does that make? U.S. trade policy will remain a disastrous mess until population density is factored into efforts to restore a balance of trade.