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.

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America’s Biggest Trade Surpluses in 2017

May 4, 2018

In my last post, we looked at a list of America’s twenty worst trade deficits in manufactured goods in 2017 and saw that the list was dominated by nations much more densely populated than the U.S.  We also saw that, contrary to conventional wisdom, low wages don’t seem to be a factor in driving these deficits.

Now let’s examine the other end of the spectrum – America’s twenty biggest trade surpluses in manufactured goods in 2017.  Here’s the list:  Top 20 Surpluses, 2017

There are actually a couple of factors that jump out on this list.  Most importantly, notice that this list is peppered with nations with low population densities.  The average population density of the twenty nations on this list is 209 people per square mile, compared to 734 people per square mile on the list of our twenty worst deficits.  However, the difference is actually much more dramatic when you account for the fact that four of the nations on the list of surpluses are very tiny nations with small (but dense) populations – the Netherlands, Belgium, Kuwait and Qatar.  If we calculate the population density of the twenty nations on this list as a composite – the total population divided by the total land area – we arrive at a population density of only 34 people per square mile.  Doing the same with the twenty nations on the deficit list yields a population density of 509 people per square mile.  Thus, the nations with whom we have our largest trade deficits are fifteen times more densely populated than the nations with whom we have our largest trade surpluses.

Why do the aforementioned nations – the Netherlands, Belgium, Kuwait and Qatar – seem to buck the trend?  The first two nations are tiny European nations who take advantage of their deep sea port – the only one on the Atlantic coast of the European Union – to build their economies around trade, importing goods from the U.S. for distribution throughout Europe.  These surpluses offset somewhat the much larger trade deficit that the U.S. has with other European nations.  Even with the Netherlands and Belgium included, the trade deficit with the European Union is still enormous – second only to China.

The presence of Kuwait and Qatar on the list of trade surpluses, in spite of their dense populations, illustrates the other factor that drives trade surpluses.  Both of these nations, along with the other nations highlighted in yellow on the list, are net oil exporters.  Since all oil is priced in U.S. dollars, it leaves these nations flush with U.S. dollars that can only be used to buy things from the U.S.  It makes a trade surplus with an oil exporter almost automatic.

Now, look at the “purchasing power parity” (or “PPP,” roughly analogous to wages) for the nations on this list.  The average is just under $40,000, compared to an average PPP on the deficit list of $35,000.  However, that average is skewed significantly by tiny Qatar, who has a PPP of $124,900.  Take Qatar out of the equation and the average drops to $35,500 – almost exactly the same as the nations on the list of our biggest deficits.

So, of these two factors – population density and wages – which do you now think is the real driver of trade imbalances?  Is it the one that differs by a factor of fifteen between the two lists, or the factor that is virtually the same on both lists?  Clearly, population density seems to be a much more likely factor in driving trade imbalaces, at least from what we’ve seen from these two lists.

But both lists contain nations that are very large and very small.  It seems only natural that, if we’re going to have a trade imbalance with any particular nation, it will be a much bigger imbalance if that nation is very large.  We need to factor the sheer size of nations out of the equation.  That’s what we’ll do next in upcoming posts.  Stay tuned.

 


America’s Worst Trade Deficits in 2017

May 2, 2018

I’ve finished compiling and analyzing America’s trade data for 2017, which was released by the Bureau of Economic Analysis in late February.  Why the delay?  Tabulating the results for hundreds of 5-digit end use code products for 165 nations is no small feat.  What we’re looking at here are the deficits in manufactured goods as opposed to services and various categories of natural resources.  Why?  Because manufacturing is where the jobs are.  Yes, there are jobs associated with the harvesting and mining of natural resources but, pound for pound, those jobs pale in comparison to the number generated by manufacturing.

And it should be noted that there are more than 165 nations in the world.  The CIA World Factbook lists 229.  Nearly all of the 64 nations that I left out of this study are tiny island nations with whom combined trade represents only a tiny fraction of America’s total.  Also, their economies tend to be unique in that they rely heavily on tourism and their manufacturing sectors are virtually non-existent, if for no other reason than a lack of space to accommodate manufacturing facilities.

It should also be noted that I’ve “rolled” the results for tiny city-states into their larger surrounding nations – states like Hong Kong, Singapore, San Marino, Luxembourg, Liechtenstein, Monaco and others.  They too tend to have unique economies, heavily dependent on services like financial services, and mostly devoid of manufacturing for the same reason as small island nations – a lack of space.  There is no room for sprawling manufacturing complexes.

So, with that said, let’s begin with a look at America’s biggest trade deficits.  Here are the top twenty:  Top 20 Deficits, 2017

It comes as no surprise that China once again has topped the list with a whopping $384.7 billion deficit.  But there are many interesting observations that can be made about this list:

  1. There’s a lot of variety on this list – nations big and small, rich and poor, Asian, European and Middle Eastern nations.  But there’s one thing that all except one have in common – a high population density.  The average population density of this list is 734 people per square mile.  Compare that to the population density of the U.S. at 91 people per square mile.  On average, the nations on this list are eight times more densely populated than the U.S.
  2. With a few exceptions, these are not poor countries where wages are low.  Half of the top ten nations have a “purchasing power parity” (or “PPP,” a measure of wealth that is roughly analogous to wages) near or, in one case (Ireland), above that of the U.S. ($59,500).  Only one nation in the top ten – Vietnam – has a PPP of less than $10,000.  So, the claim that low wages cause trade deficits isn’t supported by this list.
  3. Two nations on this list – China and India – represent 40% of the world’s population.  On the other hand, there are others that, combined, make up less than 1% of the world’s total.  Naturally, if we have a trade deficit with a big nation, it tends to be really big.  In order to identify the factors that influence trade, we need to factor sheer size out of the equation.
  4. On average, the U.S. trade deficit in manufactured goods has risen by 81% with this group of nations over the past ten years.  Whatever it is that drives trade deficits has a very potent effect.  The fastest growing deficit is with Vietnam, rising by 335% in ten years.  Vietnam is the 2nd poorest nation on the list.  Perhaps low wages do play a role here?  On the other hand, the 2nd fastest growing deficit is with Switzerland, the 2nd wealthiest nation on the list – wealthier than the U.S. – debunking the low wage theory.
  5. It’s often said that America needs to be more productive in order to compete in the global economy.  Yet we see nations like France and Italy on this list – nations notorious for long vacations, short work weeks, etc. – not exactly bastions of productivity.
  6. In 2017, the U.S. had a total trade deficit of $724 billion in manufactured goods.  Of these 165 nations in this study, the top eight deficits on this list account for more than that entire total.  The U.S. actually has a small surplus of trade with the other 157 nations of the world.

In my next post, we’ll take a look at the other end of the spectrum – America’s top twenty trade surpluses in manufactured goods.  If population density is a factor, then we should see that list comprised of nations with low population densities.  And if low wages aren’t a factor, we shouldn’t see anything much different than what we saw on this list presented here.  So stay tuned.


Red China Runnin’ Scared

April 18, 2018

https://www.reuters.com/article/us-usa-trade-china-eu-exclusive/exclusive-china-seeks-trade-firewall-with-u-s-allies-in-rush-of-ambassador-meetings-sources-idUSKBN1HO1Y0

It all began with Trump’s tariffs on steel and aluminum.  Red China responded with tariffs on about $3 billion of American exports.  Trump upped the ante with a proposal for tariffs on $50 billion in Chinese imports.  Red China responded in kind, including tariffs on American soybeans, and they promptly began buying their soybeans from Brazil.  No dummies, the Brazilians.  They raised their prices.  And the EU, now unable to buy from Brazil, placed big orders for American soybeans.  No skin off the noses of American soybean farmers.

Trump then responded with a proposal for tariffs on another $100 billion of imports from Red China, whose tit-for-tat strategy was now exhausted since they import so little from the U.S.  Instead, they threatened severe retaliation in some form that remains unspecified.  But their rhetoric was threatening.  Not Islamist “rivers of blood running through your cities” threatening, but scary enough to those who don’t really understand international trade.

Now it’s looking a whole lot like a bluff.  As reported in the above-linked article, the Chinese are now running scared, trying to drum up support for “free trade” (their version of it) with the EU (European Union).

Some of the western diplomats involved in the meetings with Fu Ziying, who is also a vice-commerce minister, have viewed the approaches as a sign of how anxious Beijing is getting about the expanding conflict with Washington, the sources said.

The rush of meetings last Thursday and Friday with ambassadors from France, Germany, the United Kingdom, Spain, Italy, and the European Union, may be a signal that China is trying to build a firewall against Trump’s aggressive trade measures, the severity of which some foreign diplomats said Beijing had miscalculated.

“China is showing confidence, but internally they appear quite concerned. They have apparently underestimated Trump’s resolve on trade,” the diplomat said, adding that Beijing is nervous about China’s major trading partners siding with Washington.

It’s not likely they’re getting much sympathy from the EU.  In 2016, the EU had a $175 billion trade deficit with Red China.  If anything, the EU is probably realizing that America’s new get tough policy has Red China running scared and, just maybe, they ought to try a little of that tariff medicine themselves.


First Evidence of Chinese Impotence in Trade War

April 9, 2018

https://www.reuters.com/article/us-usa-trade-china-soybeans/as-u-s-and-china-trade-tariff-barbs-others-scoop-up-u-s-soybeans-idUSKBN1HF0FQ

A key component of Red China’s response to America’s initial threat to impose tariffs on $50 billion worth of Chinese goods was to impose its own tariffs on one of America’s biggest exports – soybeans.  Their goal was to stir up angst among American farmers in the hope that they would apply pressure on Trump to back off.  In my post titled “A Trade War?  Let’s Get it On!”, I predicted that their strategy was doomed to failure:

“Oh, by the way, the threat of tariffs on American soybeans would hurt the Chinese more than Americans.  Does Chairman Xi think that his people will simply eat less?  Of course not.  He’ll have to get his soybeans somewhere else, like Brazil, and now those countries who imported soybeans from Brazil will turn to the U.S., probably bidding up the cost of soybeans.  No skin off of our noses, Chairman Xi.”

Now comes the first evidence that this exact scenario has already begun to play out.  In the above-linked article, Reuters reports that America has suddenly begun getting huge orders for soybeans from the EU, who now finds the price of American soybeans more attractive than the rising prices in Brazil.

“Escalating tensions between the United States and China have triggered a flurry of U.S. soybean purchases by European buyers … helped to underpin benchmark Chicago Board of Trade soybean prices after U.S. President Donald Trump threatened to slap tariffs on an additional $100 billion of Chinese goods.

The USDA said 458,000 tonnes of U.S. soybeans were sold to undisclosed destinations, which traders and grains analysts said included EU soybean processors such as the Netherlands and Germany.

If the entire volume is confirmed to be going to the European Union, it would be the largest one-off sale to the bloc in more than 15 years, according to USDA data. The USDA could not immediately be reached for comment.

“We’re seeing a realignment of trade,” largely because the politics is driving up Brazilian soybean prices, said Jack Scoville, analyst with the Price Futures Group.”

I’ve said it before and I’ll say it again over and over.  There is absolutely nothing to fear from America’s efforts to restore a balance of trade with Red China.  Since we are the ones with the huge trade deficit and they are the ones with a huge trade surplus, it’s impossible for America to lose, and impossible for Red China to win.  They are absolutely impotent in this fight.  China’s goods become too expensive?  No problem!  They’re not the only game in town.  We’ll buy them from someone else.  Better yet, we’ll begin making them ourselves.  China provides us absolutely nothing that we can’t make ourselves more efficiently, using cleaner, more environmentally sound processes, and more ethically in terms of worker rights.  And, truth be told, we can make them cheaper.  The logistics involved in shipping things halfway around the world isn’t cheap, you know.  (Did you know that container ships that move goods all over the world, goods which could just as easily be made locally, consume five billion barrels of oil per year?)

And China buys nothing from us that can’t be sold to other customers around the world.

They’ll stop buying our debt, or sell off what they have?  Go ahead.  U.S treasuries are priced in dollars.  Whoever they sell them to has to pay for them with dollars.  So now they’re stuck with dollars which have probably dropped in value – the very situation that necessitated them buying the bonds in the first place.  And, just as we’re seeing with soybeans, there’ll be other investors eager to snap them up.  Heck, if American households switched just a small part of their savings into U.S. bonds, that demand alone would sop up every single bond that China owns.  I won’t take credit for this quote, but I can’t remember where I read it recently, that Red China’s threat to dump its U.S. treasury holdings is like a man holding a gun to his head and saying, “I have a hostage.”

There is nothing to fear here.  America is going to come out a big winner.  It’s a slam dunk.

 


U.S. Trade Deficit with EU Rises to New Record in 2017

April 5, 2018

The U.S. trade deficit in manufactured goods with the EU (European Union) rose to a new record of $148.2 billion in 2017.  Here’s a chart of that deficit, dating back to 2001:  EU.  After falling slightly in 2016, it rose again to eclipse the record 2015 deficit by $0.3 billion.

This deficit is a lot less than our deficit with Red China, but some perspective is in order.  The population of the EU is 556.6 million people.  The population density of the EU is 327 people per square mile.  The population of Red China is 1.38 billion people and their population density is 383 people per square mile.  Our trade deficit in manufactured goods with Red China in 2017 was $405 billion.  In per capita terms, our trade deficit in manufactured goods with Red China was $294.  In per capita terms, our trade deficit in manufactured goods with the EU was $246.

So the only reason that our deficit with the EU is that much less than our deficit with Red China is that the EU is that much smaller.  If the EU were the same size as China, our deficit with the EU (in manufactured goods) would have been $367.4 billion – only 9% less than our deficit with Red China.  The reason for this is that the EU is nearly as densely populated as Red China – only 14.6% less densely populated.

Some say that our huge trade deficit with Red China is due to low wages.  Then how do you explain that, in per capita terms (which factors out the sheer size of a country), the trade deficit with EU, where wages are about 2-1/2 times higher than Red China,  is nearly as bad as the deficit with Red China?  In fact, almost half of our trade deficit with the EU is with Germany, where wages are nearly on a par with those in the U.S.   How do you explain that?  It’s because trade imbalances are caused not by low wages, but by disparities in population density.  The EU is more than three times as densely populated as the U.S.  China is four times as densely populated.  Germany is six times.  Trade deficits with such nations are virtually assured because their over-crowded conditions drive down their consumption while they produce just as much.  They can’t absorb their own output, much less consume imports from America.

Trade negotiations with nations that are so badly overpopulated are utterly futile because it’s impossible to negotiate down the disparity in population density.  The only thing the less densely populated nation (the U.S., in these circumstances) can do to restore a balance of trade is to levy tariffs or set quotas.  It’s the only way.

If still not convinced, my next posts will take a broader look at U.S. trade results with the world as a whole, and you’ll see that the population density effect is absolutely undeniable.


Red China Fires Back, but Now Low on Ammo

April 4, 2018

https://www.reuters.com/article/us-usa-trade-china/china-retaliates-slaps-duties-on-u-s-soybeans-planes-markets-skid-idUSKCN1HB0G6

As reported in the above-linked article, Red China has now matched Trump dollar-for-dollar with tariffs on American exports in the escalating “trade war.”  But now it finds itself critically low on “ammo.”  If Trump responds with tariffs on another $50 billion of Chinese imports, Red China will be able to match those tariffs again.  But then they’re done.  Trump could continue to slap tariffs on $50 billion of Chinese imports eight more times and Red China would be unable to respond because there would be no more American exports to attack.  That’s how bad the trade imbalance is and why Red China has such a losing hand.

In spite of Wall Street getting its panties in a wad over this situation, there’s really nothing to fear.  So Chinese goods become more expensive.  So what?  Americans then have a choice.  Spend more money to get them or use their money for something else.  For example, suppose Apple iPhone X’s go up in price from $1,000 to $1,250.  Maybe it’ll be just the catalyst Americans have needed to ponder whether all the money they spend on these gadgets is money well-spent.  Given the high cost of the phones and the contracts for data plans, and given that social media has now been exposed as a scheme for mining away your privacy, maybe the money would be better spent on other things, like homes and cars, for example.  The point is that less money spent on Chinese imports is money now available for spending on other things.  The impact on the U.S. economy will be a positive one – not a negative.

What Trump needs to do is take this trade war to the next level.  He needs to apply tariffs across the board to every Chinese import.  Beyond that, he needs to take on our other big trade deficits with the likes of the European Union, Japan, Mexico and a few others.  Any country that has a sustained trade surplus with the U.S. needs to be in his cross-hairs but, at the same time, he needs to lower barriers for our good trade partners like Canada, Australia, most all of South America, and others.  This isn’t a war against trade.  It’s a war for balanced trade – a war from which we should never have withdrawn.