U.S. Trade Deficit with Germany Soars to New Record

March 21, 2013

The U.S. trade deficit with Germany shattered the record set only one year earlier, soaring from $49.3 billion in 2011 to $59.7 billion in 2012.  The deficit in manufactured goods was $59.9 billion, completely erasing a small surplus in all other categories of goods.  Here’s a chart of the U.S. trade balance with Germany since 2001:  Germany Trade

Economists say that a strengthening currency with our trade partner should improve the balance of trade in our favor.  They also say that low wages cause trade deficits, and that our trade deficit should improve as wages rise, making theirexports more expensive and our exports more affordable.  Here are two charts that plot our exploding trade deficit in manufactured goods with Germany against their currency (Euro) exchange rate and against the change in their per capita purchasing power parity (PPP) – a measure of their wealth and analagous to wages there:  Germany Trade vs Exchange Rate, Germany Trade vs PPP

As you can see, as our trade deficit with Germany has worsened dramatically, the Euro has been rising, from 1.16 Euros per dollar in 2001 to 0.8 Euros per dollar in 2012.  And German PPP has risen by 44% during that same time frame (while U.S. PPP rose 38%).  Clearly, the currency theory holds no water in this case.  Nor does the theory about low wages.  So much for economists’ usual trade scapegoats.  Furthermore, economists, how do you explain the following?

  1. If low wages cause trade deficits, why is our deficit with Germany, when expressed in per capita terms (thus factoring the sheer size of nations out of the equation), the worst among our top five trade partners (Canada, China, Mexico, Japan and Germany) – almost three times worse than our deficit with China – in spite of the fact that they are a wealthy nation, second only to Canada? 
  2. And why is our next worst deficit with Japan (again, almost three times worse than our deficit with China), also a wealthy nation?
  3. Why does Canada have a large trade deficit in manufactured goods with the U.S. when U.S. wages are higher than those in Canada? 
  4. Of these top five U.S. trading partners we’ve examined so far, why has our trade imbalance responded to changes in currency valuation as economists would predict with only one country – Mexico? 
  5. And why has our trade imbalance responded to rising incomes as economists would predict in only one case – Canada?

In contrast to economists’ theories on trade imbalances, the disparity in population density between the U.S. and these top five trading partners has accurately predicted the trade imbalance in every single case.  With the one nation less densely populated than the U.S. (much less), the U.S. enjoys a healthy trade surplus in manufactured goods.  With all four other nations – all of whom are more densely populated than the U.S. – we endure big deficits. 

If you’re new to this blog and don’t understand why population density disparity is by far the single biggest determinant of the balance of trade between the U.S. and other nations, making free trade with badly overpopulated nations tantamount to economic suicide, please read my book, Five Short Blasts, and explore the other data presented on this site. 

My next article will summarize in a similar fashion U.S. trade with our top 15 trade partners.


U.S. Trade Deficit with Germany in Manufactured Goods Soars to New Record in 2011

March 3, 2012

In 2011, America’s trade deficit with Germany in manufactured goods soared to a new record of $48.9 billion – a 42% increase over 2010 and surpassing the previous record of $47.2 billion in 2005.  Here’s a chart of trade with Germany since 2001:

Germany Trade

In per capita terms, the trade deficit with Germany is $596 for every man, woman and child in Germany.  That’s 2.7 times worse than our trade deficit with China in 2011.  So, if large trade deficits are caused by low wages or by currency manipulation, as most economists claim, then how does one explain away such a large deficit with one of the wealthiest nations on earth – whose currency is the Euro? 

Germany is nearly twice as densely populated as China.  This is just further evidence that large trade deficits are caused by large disparities in population density.  We have a trade deficit with Germany not because their wages are low or because they out-compete us or because they manipulate their currency.  We have a large trade deficit with Germany because their consumption is stunted by gross over-crowding, just like in China, Japan and many other densely populated countries.


$US-DEM/EUR Exchange Rate vs U.S. Balance of Trade with Germany

August 17, 2010

Continuing our series of examining the effect of exchange rate on the balance of trade between the U.S. and its major trading partners, we now turn our attention to Germany.  Previously, we have seen that the effect of changes in the exchange rate on the balance of trade has been as economists would predict when the U.S. is dealing with countries roughly equal in population density or less densely populated – countries like Australia, Canada, Brazil and Colombia.  When the dollar falls, our balance of trade improves, and vice versa.  However, the predicted effect seems to break down when dealing with nations far more densely populated – nations like Japan and China.  Changes in the currency exchange rate seem to have no effect whatsoever or, if anything, yield the opposite effect.  That is, a decline in the dollar is more likely to result in a worsening of America’s balance of trade.  Or more likely, a worsening trade deficit yields a decline in the dollar, as economists would predict, but that decline is powerless to offset the effects of population density disparity and reverse the deficit, contrary to what economists would predict.

So let’s see what happens in America’s trade with Germany, another nation far more densely populated than the U.S., by a factor of 7.  Here’s a chart of the U.S. balance of trade with Germany vs. the exchange rate between the dollar and the Deutschmark (prior to 1998) and the dollar and Euro (following the adoption of the Euro in 1998). 

$US-DEM&EUR Rate vs Balance of Trade

In the case of Germany, there is no correlation, positive or negative, whatsoever.  Exactly 50% of the time, the balance of trade responded as predicted by economists in response to changes in the exchange rate.  But the other 50% of the time, changes in the exchange rate yielded the opposite result.  And look at the changes over the full period of time for each currency.  From 1990 to 1997, a small 7% rise in the dollar (from 1.61 DEMs to 1.73 DEMS) resulted in a 62% worse trade deficit – much worse than the small rise in the dollar would predict.  But from 1998 through 2009, a 21% decline in the dollar from .92 EURs to .727 EURs yielded only a 7.6% improvement in the trade deficit.  By far, most of that decline in the deficit was due to the global economic crisis that took hold in late 2008.  If we take away 2009 trade results, a 21% decline in the dollar actually resulted in a 40% worse trade deficit with Germany.  Were it not for the global economic crisis in 2009, we would conclude that the effect of a falling dollar is actually contrary to what economists predict. 

Here’s an update of the correlation tracking mechanism, with these results for Germany now included:

Theory Correlation Score

As you can see, a trend is taking shape.  When dealing with countries of similar population density, the correlation score tends to be greater than .5, indicating that changes in exchange rate produce the changes in trade balance that ecnomists predict.  But, when the trading partner is more densely populated (and the break seems to occur at about 2.0, when nations are at least twice as densely populated as the U.S.), the effect breaks down, and a weakening dollar has virtually no effect on reversing trade deficits. 

On the other hand, my theory of the effect of population density on per capita consumption and on trade imbalances has accurately predicted in all but one case so far (trade between the U.S. and Colombia) whether the trade imbalance would be a surplus or deficit. 

Next up:  Mexico.

*****

Exchange rate data provided by http://www.oanda.com/