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.


Are Americans really ready for what’s to come?

November 16, 2016

Some have described the election of Donald Trump as a “political earthquake.”  That doesn’t begin to describe it.  A more fitting analogy would be the asteroid that struck the earth millions of years ago, wiping out the dinosaurs and most other living species.  The world was forever changed.

Sure, the sun came up the morning after Trump’s election and normal life resumed.  People living off the grid would never know that anything had happened. But fasten your seat belts, folks.  You haven’t felt it yet, but the blast wave from that asteroid strike is on its way.  If Trump implements the trade policy he promised during the campaign, we’re in for a very rough ride.  I’m afraid that few people really comprehend what’s coming.

Don’t get me wrong.  It needs to be done.  If Trump doesn’t do it, America will continue to be sucked into the vortex of the poverty-sharing scheme of globalization until we have nothing left.  Incomes will continue to decline.  Health care and college educations will become even less affordable.  Forget any dreams of a secure retirement.  Infrastructure will crumble further while the national debt soars.

So it has to be done, but entire economies – big ones – have been built on manufacturing for export to the U.S.  Globalization won’t go down without a fight.  It’ll begin with sniping from every corner of a vast network of globalization cheer-leaders that support their special interests, including the World Bank, the International Monetary Fund, the World Trade Organization, national leaders, CEOs of global corporations, the U.S. Chamber of Commerce and its local chapters, and economists who can’t come to grips with the notion that everything they’ve learned, taught and fought for was wrong.  Based on past experience with presidents over the past several decades, it’s hard to imagine one that could withstand such withering criticism.

But that’s nothing compared to what will follow.  It seems that Mexico is the first one that Trump has in his cross-hairs.  They may try retaliatory trade sanctions, like big tariffs on food exports.  But they don’t have the wherewithal to present real problems.  China, however – who the Trump administration will turn its sights on next – is another story.  They’ll try retaliatory trade sanctions first but, when you’re the nation with the huge trade surplus, it’s impossible for China to win a trade war.  The thing that Chinese leaders fear the most is not the U.S., but civil unrest among its own people.  Big tariffs on Chinese exports to the U.S. would shift the now-booming Chinese economy into reverse.  Conceivably, it could collapse their economy.

The Chinese people have become conditioned to feel entitled to a booming economy and to preying on the U.S. market.  They’ll be angry as hell and will demand action from their government.  Rioting may break out.  In its death throes and desperate to placate their demands, the Chinese regime may turn to military action.  It’s impossible to predict how something like that might unfold.

There are those already saying that tariffs against Mexico can’t work – that forcing the manufacturing of American cars and parts back into the U.S. will only make them uncompetitive with other auto imports.  And they are right.  In order to succeed, Trump will need to expand the use of tariffs to include other countries like Japan, South Korea, Germany and others.  Now we’ll have more unhappy campers who may be willing to form a new alliance against the U.S.  Are Americans prepared for this?

And are they prepared for some gut-wrenching changes in our own economy?  It’s true that tariffs will drive up prices for U.S. consumers and, in many cases, there are no American manufacturers ready to fill the void.  It’s going to take some time to design, build and start up new plants.  Will Americans have the patience to endure a burst of inflation and very likely a recession until wages catch up and offset the higher cost of goods, or have we become too spoiled for that?

I wonder if even the most strident Trump supporters have anticipated these ramifications and whether they’re willing to endure the pain.  It’s easy to say “make American great again” but making it happen is going to be a long and very difficult process.    It’s going to take a virtual war-footing mentality among Americans.

And what about Trump?  Will he be a strong enough leader to maintain the support of the people through all of this?  Based on what we’ve seen from Trump, we can expect that, when foreign leaders lash out at him, he’ll hit back just as hard.  No one should doubt his ability to win.  It’s the American people I’m more worried about.  Will they be ready to jump ship at the first sign of adversity, or are they tough enough to stand by Trump and see this through?

 


Ford Moving to Mexico; Trump Says He’ll Stop It

September 15, 2016

http://money.cnn.com/2016/09/15/news/companies/donald-trump-ford-ceo-mark-fields/index.html

The above link will take you to an interview conducted by CNN’s Poppy Harlow with Mark Fields, Ford CEO.  If you have the patience to watch it all the way through, it will be immediately followed by further discussion of Trump’s plans to raise tariffs and bring manufacturing jobs back to the U.S.

Trump has long predicted that Ford would be announcing its move to Mexico.  Fields responds that they are only moving its small car production – the Focus and the C-Max (both made at Ford’s Dearborn, MI plant) -to Mexico.  Other models will continue to be made in the U.S.

Ford actually sells six car models:  Fiesta, Focus, C-max, Fusion, Mustang and Taurus.  The Fiesta and the Fusion are already built in Mexico.  Ford’s announcement about the Focus and C-max leaves only two of its six car models that are still made in the U.S. – Mustang and Taurus.  The former is built at its Flat Rock, MI plant and the Taurus is built in Chicago.  Most of its SUVs and trucks are built in the U.S.  There’s a good reason for this.  The U.S. continues to maintain a 25% tariff on all imported light trucks.

The Transit Connect is an interesting exception.  Until 2013, Ford imported the Transit Connect, a vehicle it markets as a commercial van/truck, from Turkey, trimmed out as a passenger van.  It then strips out the passenger interior, removes the windows, and replaces them with metal panels, converting it into a commercial vehicle.  It did all of this to escape paying the 25% import tariff.  In 2013, the U.S. ordered Ford to stop this practice.  Ford still does it, but now it pays the tariff.  It “eats” the cost of the tariff.  It doesn’t pass it on to the consumer.

If elected, Trump has vowed to essentially tear up most trade deals – particularly NAFTA, and will raise tariffs to force companies to re-establish their manufacturing operations in the U.S.  In the case of Mexico, he has suggested a 35% tariff.  During the linked interview, Ms. Harlow asked Mark Shields directly whether he would still move manufacturing to Mexico if that were to happen.  Shields side-stepped the question.  But the answer is obvious.  Of course Ford would not move more production to Mexico if that were to happen.  Quite the opposite.  Production of the Fiesta and Fusion would also return.

Late in the interview, Shields cited the huge savings in labor costs for the move to Mexico, saying that it needed to be done to remain competitive in that segment of the market.  Ms. Harlow failed to follow up with the obvious question:  “So you’ll be reducing the price of the Focus once production has moved to Mexico?”  I would have loved to see him squirm and see the smirk run away from his face when he replied that the price wouldn’t change a bit.

Has any company ever cut the price of any product once its production was moved overseas?  Of course not.  They pocket the extra profit.  Which brings us to one of the arguments employed by economists (and cited in the 2nd CNN segment which starts immediately after the Mark Shields interview) that prices will rise and consumers will be forced to pay the tariffs, hurting the economy and cutting deeply into consumer spending.

That’s absolute nonsense.  Consumers don’t pay the tariffs.  The importing companies pay the tariffs.  Whether or not they elect to pass that extra cost along to the consumer is entirely up to them.  As we saw above with the Transit Connect, Ford doesn’t pass it along.  Sure, that would cut deeply into profits.  By far, the smarter alternative is to move manufacturing back to the U.S.

During the course of the interview, Ms. Harlow repeats a myth about tariffs and their role in the Great Depression.  “… the last time a big tariff was instituted in the United States back during the Great Depression, all the economists agree that it made the Great Depression worse.”  I’ve said it many times but it bears repeating here:  that’s factually false and is absolute nonsense.  First of all, no new, big tariff was implemented during the Great Depression.  The Smoot-Hawley Tariff Act of 1930 was a very slight tweaking of the  Fordney-McCumber Tariff Act of 1922, raising tariffs overall from 38.5% to 41.4%.  Following enactment of Fordney-McCumber, the economy boomed during the “roaring ’20s.”

By the time Smoot-Hawley was enacted, the Great Depression had already been underway for a year.  During the Great Depression, America’s balance of trade declined by less than $1 billion while GDP fell by $33 billion.  To blame tariffs for the Great Depression is ludicrous.  But that didn’t stop economists from doing it, eager to make a case for their new, untested theory about “free” trade.

In the CNN piece following the Mark Shields interview, CNN reports on dire warnings by economists that Mr. Trump’s tariffs would have disastrous consequences for the economy, cutting GDP by up to $1 trillion and would result in the loss of 4 million jobs.  Such claims are really puzzling, given the fact that economists know very well that a trade deficit is actually a subtraction in the calculation of GDP.  It’s impossible that bringing back manufacturing would do anything other than boost GDP dramatically.  Merely balancing trade in manufactured goods would be an $800 billion boost to the economy.  That would be a 4% jump in GDP which, not coincidentally, is what Trump has targeted for economic growth.  Any further surplus in trade in manufactured goods would boost the economy even more.  And instead of cutting 4 million jobs, it would actually create approximately 10 million jobs.

Free trade advocates claim that manufacturing jobs don’t matter any more, that most manufacturing is automated and there are few jobs there to be had.  If that’s true, then why do so many badly overpopulated nations with huge, bloated work forces cling so desperately to the manufacturing that they do for the American consumer?  Certainly, automation has improved productivity in manufacturing, but not nearly to the extent that free traders would have you believe.  Consider the production of the supposedly high-tech cell phones like the i-phone.  Their manufacture is about as low tech as you can get – thousands of people assemble the circuit boards by hand in China.

During one of the CNN segments, the reporter comments that “cars aren’t really built from scratch any more.  They’re assembled.  Those plants in Mexico will be assembling them from American-made parts.”  As if the process of assembly requires no effort, and as if cars haven’t been built that way since Henry Ford invented the assembly line.  I can tell you from personal experience, having toured the Dearborn plant where Ford builds the Focus, that it takes a lot of workers to make an assembly plant “tick.”  Watching a stack of sheet metal being turned into a finished automobile in less than 24 hours is truly awe-inspiring.  Having toured both auto assembly plants and electronics manufacturing, I can tell you that an auto assembly plant is far more “high-tech” than electronics production.

Trump’s plans to use tariffs to return manufacturing back to the U.S. is exactly what the American economy needs – and is exactly the thing that globalists fear the most.


Trump

July 22, 2016

So disillusioned was I with Obama’s broken promises to address the problems with our trade policy, his broken promise to double exports in five years, his signing of the awful trade deal with South Korea and, more recently, his pursuit of bigger, more expansive trade deals with Pacific rim nations and with Europe, I vowed to myself that I would stay out of politics on this blog going forward.  However, as discoverer of the inverse relationship between population density and per capita consumption, as author of the book Five Short Blasts that explains the relationship and its ramifications and, consequently, as an advocate of policies that would restore a balance of trade and move us toward a stable population, and in the wake of Donald Trump’s acceptance speech at the Republican National Convention last night, I feel I can no longer ignore the elephant in the room.

Now more than halfway through my seventh decade on this planet, I have spent my whole life watching our country being sucked into the vortex of “globalism” in which the United States has evolved from a beacon of hope and prosperity into a host upon which overpopulated nations, unable to sustain themselves, could feed and thrive.  Our political parties evolved into one “Republicrat” party, supporting the trade and open-border policies that are central to making “The New World Order” tick.  The “hope and change” that Obama spoke of, especially his promise to fix our trade policy, I thought, might be our last chance to stop that madness.  In the wake of his betrayal, I figured that was it – that I’d never live to see an America again that was something other than the hollowed-out shell we’ve become.

On more than one occasion, I have called Donald Trump a “buffoon.”  We’ve seen him dip his toe into politics before, only to self-destruct through outlandish pronouncements and behavior.  He got my attention with his vow to “build the wall,” but I figured the same thing would happen again.  He’d soon self-destruct.  I thought that those who gave him a 1% chance of winning the nomination were being generous.  He was just grand-standing and having fun, enjoying another brief stint in the spotlight like he’s done before.

Then he vowed to rip up our trade deals and start over on trade, making new deals that actually worked for us.  He got my attention again.  I wanted to get my hopes up, but figured that, surely, his antics during the primary race would sink his chances.  To my amazement, they didn’t.  He was saying the right things about illegal immigration and about trade, but I was dismayed with the personal attacks.

Finally, last night, I saw the Trump I’d been wanting to see.  He was still Trump and, defying predictions that he’d back away from earlier promises in order to broaden his support, he actually doubled down on each one.  But gone were the personal attacks.

Trump was exactly right when he pointed out that our trade and immigration policies have done more harm to the poor, to the inner cities, to blacks and Latinos than to anyone else. I hope the folks from these demographics paid attention and kept open minds.

Unlike the Trump I’ve seen in the past, he seems truly sincere in his desire to turn the country in a very different direction.  At least that’s the way he came across last night.  It’s hard to imagine that a man 70 years old would subject himself to everything that goes with winning this nomination and waging the campaign to follow unless he really has a fire in his belly to do what he says.

But can he?  Can he get the political establishment to go along with with his plans – plans that seem radical and dangerous to many of them?  Can he back us out of trade deals in the face of threats from these other countries that will probably scare the hell out of people?  I have said that restoring a balance of trade would not be without pain, driving up the cost of goods until our own domestic manufacturing can get re-established.  Can he, a total Washington outsider, do this without mucking it up and perhaps forever sinking any hope that it will ever be tried again?   Will he be brain-washed into joining the ranks of the globalists as Obama was?  (That would seem unlikely with Trump.)  Does he really have the energy and drive to make all this happen?

Or am I just being suckered again?  I hope not.  As one who understands that the effects of our enormous trade deficit and our immigration policies on our economy dwarf all other factors – including currency valuations, Fed policy, stimulus programs, and so on – I have to at least give the benefit of the doubt to candidates who are at least claiming that they’ll tackle these issues.  Only time will tell.

In the meantime, I’ll keep doing my small part to convince you and others of the perils of our free trade and open border policies.

 


America’s Best Trade Partners, 2015

May 25, 2016

In my previous post, we examined the list of America’s worst trading partners in 2015 and found that it was heavily dominated by nations that are much more densely populated than the U.S.  Additionally, we saw that low wages, often blamed by the ill-informed for our trade deficit, played no role whatsoever.  In fact, the very top of the list was populated with wealthy nations – some even wealthier than the U.S.

If, in fact, population density is what really drives global trade imbalances, then we should see the same effect at the opposite end of the spectrum.  That is, we should find a list of nations with whom we have the largest surpluses dominated by low population densities.  Let’s take a look.  Here is the list of America’s twenty largest trade surpluses in manufactured goods in 2015:  Top 20 Surpluses, 2015.

At the very top of the list is Canada, by far and away America’s best trading partner.  At $50.2 billion, our surplus with Canada is more than 2-1/2 times larger than the next biggest surplus on the list.  In the past ten years, our surplus with Canada has exploded by 245%.  With a population density of only ten people per square mile, Canada is one of the least densely populated nations on earth.

But as you scan down the list, you see a mix of nations with both low and high population densities.  At first glance, this would seem to cast doubt on the whole population density theory, until you realize the role that oil plays in landing some of these nations on this list.  Oil is universally priced in American dollars, regardless of the nation that is exporting the oil.  American dollars are legal tender only in the United States so, ultimately, all of those dollars must be returned to the U.S.  This happens predominately through either the purchase of American goods or through the purchase of American debt – bonds issued by the government or by American corporations.  So it’s almost automatic that net oil exporters like Qatar, Kuwait and Nigeria, among others, appear on this list in spite of their high population densities.

Actually, Canada is America’s biggest source of imported oil, which helps to explain their position on the list.  That, coupled with their low population density, is what has driven them so far to the top.

If we discount the seven nations on the list who are net oil exporters, of the remaining thirteen only three have population densities that are above the world median:  the Netherlands, Belgium and Egypt.  Seven of the thirteen are less densely populated than the U.S. (at 87 people per square mile).  Regarding the Netherlands and Belgium, these tiny nations share the only deep-water port on the Atlantic coast of Europe and use that to build their economies around trade, importing American goods and redistributing throughout Europe.  Egypt appears on the list because they are a big recipient of foreign aid.  All foreign aid is booked as exports at face value even though it is given away.

The average population density of these twenty nations is 240 people per square mile, in contrast to the average population density of 737 people per square mile on the list of our worst trade partners.  But it’s a little misleading to average the figures in this way, since the population density of a few tiny nations can skew the data.  If we calculate the population density of the list by dividing their total population by their total land mass, the population density drops to 45 people per square mile – half that of the U.S.  For the list of our twenty worst trading partners, that figure is 503 people per square mile – more than ten times as densely populated.

Look at the purchasing power parity of this list of nations.  Take away tiny, inordinately rich Qatar, and the average wealth of the remaining nineteen nations is $32, 268 – almost identical to the average wealth of the nations on the list of our twenty worst trading partners.  So wealth – roughly analogous to wages – plays no role on these two lists whatsoever.

Now let’s look at this from another perspective.  If we factor out the sheer size of nations, which nations’ citizens, man-for-man (in per capita terms), are our best trading partners?  If population density is a factor in determining trade imbalances, we should once again see a list that is dominated by less densely populated nations and, probably, net oil exporters.  So here’s the list:  Top 20 Per Capita Surpluses, 2015.

Though the list is a little different now, we see the same thing.  There are seven net oil exporters on the list.  Of the remaining thirteen, all but three – the Netherlands and Belgium again, and Costa Rica – have population densities less than the global median.  Of the remaining ten, all but one – Panama – is less densely populated than the U.S.  The average density for these twenty nations is 206 people per square mile.  But the population density of the group as a whole – the total population divided by their land mass – is down to 20 people per square mile.  For our worst trade partners, that figure is 372 people per square mile.  It bears repeating.  The population density of our twenty worst trade partners is more than 18 times that of our best trade partners.

The data that I’ve presented here in my last few posts is absolute, undeniable proof that population density is what drives global trade imbalances.  Not wages.  Trade policy that fails to recognize this relationship and fails to employ some mechanism (like tariffs) to maintain a balance of trade is doomed to yield the huge trade imbalances that have been growing and eroding our economy for decades.

 


America’s Worst Trading Partners in 2015

May 19, 2016

It’s time for my annual ranking and analysis of America’s best and worst trading partners for 2015.  No surprise, it was another dismal year for American manufacturers, racking up the 40th consecutive year of trade deficits and setting a new record in the process – a deficit of $648 billion.  That surpasses last year’s record deficit by a whopping $109 billion.

Since the surpluses of trade with our best trade partners is overwhelmingly swamped by the deficits with our worst partners, let’s begin there.  This year I’m going to first present the list in the most basic terms – a list ranked in order of the sheer size of the deficits. Check out this list of America’s twenty worst trade partners in terms of our deficit in manufactured products:  Top 20 Deficits, 2015.

The nations at the top of this list should come as no surprise to anyone.  Trade with China dwarfs them all with a deficit of $367.5 billion – more than four times larger than our second largest deficit with Japan.  That’s not surprising when you realize that China has ten times as many people as Japan.  China actually accounts for about one fifth of the entire world’s population.  The following are some other key observations about this list:

  • Look at the population density of these nations.  The average population density is 737 people per square mile.  That’s eight times the density of the United States.  With only one exception – Sweden – every nation on this list is more densely populated than the U.S.  Most are much, much more densely populated.
  • Eight of these nations are wealthy European nations.
  • Over the past ten years, our trade deficit has worsened with 17 of these nations.  Most have worsened dramatically.  The nation with whom our balance of trade has improved the most (that is, with whom the deficit has declined the most in the past ten years) is Sweden – the only nation on the list less densely populated than the U.S.
  • Our trade deficit with Japan has actually declined by 18% over the past ten years.  Why?  Simple.  South Korea is “eating their lunch.”  Imports of South Korean cars – Hyundais and Kias, along with imports of South Korean appliances like those made by LG, Samsung and others – has cut into Japan’s market share.  Remember when President Obama signed a new trade deal with South Korea in 2012, proclaiming it a “big win for American workers?”  In three short years our trade deficit with South Korea jumped 50%.
  • Our fastest growing trade deficit is with Vietnam, growing by 440% in the last ten years.  Some may point to the fact that at $6100 per person, Vietnam has the lowest purchasing power parity of any nation on this list – only slightly better than India – and that this is the reason for the explosive growth in our trade deficit with them.  However, our second-fastest growing trade deficit is with Switzerland, a nation that is actually more wealthy (with higher wages) than the U.S.  What Vietnam and Switzerland do have in common is a high population density.  It’s the one thing that (nearly) all of these diverse nations have in common.

Many people will look at this list and quickly conclude that, when it comes to our trade deficit, the problem is China and so that’s where we should focus.  Somehow, some way, they’re obviously not playing fair with us.  They’re manipulating their currency, they’re ignoring workers’ rights.  They’re trashing the environment.  And so on.  So let’s get tough with China.

The problem is that China can legitimately complain that of course our deficit with them is big, simply because they are a big nation.  Person-for-person, our trade deficit with Japan is worse.  OK, so in an effort to be fair, let’s broaden our efforts to include Japan.  “Not so fast!” the Japanese will complain.  “What about Germany?  Their surplus with you is nearly as large and they have only half as many people as we do!”

The point is that in determining the root cause of these enormous deficits in order to formulate an effective trade policy, we need to factor out of the equation the sheer size of these nations.  Let’s determine who are really our worst trade partners on a person-for-person basis.  So here’s a list of our worst trade partners in terms of the per capita trade deficits:  Top 20 Per Capita Deficits, 2015.

Now we can see what a mistake it would be to simply conclude that China is the problem.  In per capita terms, they barely make the list of the top twenty worst deficits.  In fact, there are now ten European nations on this list and, in per capita terms, our trade deficit in manufactured products is worse with all ten of them than it is with China.  Here are some more key observations about this list:

  • Once again, all but two of the nations on this list – Sweden and Finland – are more densely populated than the U.S.  Most are far more densely populated.  Only three have population densities less than the median population density of the world, which is 184 people per square mile.  One – Ireland – is right on the median.  The other 80% of the nations on this list are much more densely populated.
  • Most of these are wealthy nations, with an average purchasing power parity of $44,370 per person.  In fact, the top of the list is dominated by the wealthiest.  Clearly, the argument that low wages cause trade deficits doesn’t hold water.  If anything, the cause and effect is exactly the opposite.  Running large trade surpluses makes nations wealthier.
  • There is one nation on this list that is a net oil exporter – Mexico.  I point this out because oil is priced in U.S. dollars, and every dollar spent on oil produced by foreign countries must be repatriated to the U.S., since that is ultimately the only place where they are legal tender.  Those dollars are repatriated in several ways, primarily through the purchase of American bonds or through the purchase of American goods.  The latter tends to make net oil exporters strong buyers of American products, which usually means that the U.S. enjoys a surplus of trade in manufactured products with such nations.  But not Mexico.  What this means is that the large trade deficit in manufactured goods that we have with Mexico is actually even worse than it appears.  For a nation whose population density is one of the lowest on the list – less than twice that of the U.S. – it means that something beyond population density – such as some unfair trade practice – is at work here.  Ditto for Ireland, which has fashioned itself into a tax haven for manufacturers, virtually bankrupting itself during the “Great Recession” of a few years ago.

If you are seeing such data for the first time, it may be a little early, based on this data alone, to conclude that population density is the driving force behind trade imbalances.  More proof is needed.  If such a relationship exists, then we should see exactly the opposite at the other end of the spectrum.  We should see a list of America’s best trade partners – those with whom we have trade surpluses – loaded with nations with low population densities.  We’ll take a look at that list in my next post.

If you’re already acquainted, however, with the relationship between population density and trade imbalances, which I explored thoroughly in Five Short Blasts, then this data is just further proof that population density is, in fact, the driving force behind these trade imbalances.  Such deficits are inescapable when applying free trade theory, which fails to account for large disparities in population density, to such nations.  It will only get worse with each passing year, exactly as we have seen.

 


Overpopulated Nations Sucking the Life out of American Manufacturing

May 11, 2016

I’ve finished my analysis of trade in manufactured goods for 2015 and the news isn’t good.  The effect of attempting to trade freely with nations that are much more densely populated than our own intensified yet again in 2015, dragging our deficit with those nations to a new record.

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 166 nations and separated out those product codes that represent manufactured products.  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 166 nations evenly into two groups:  those 83 nations with a population density greater than the median (which, in 2015, was 184 people per square mile) and those 83 nations with a population density below the median.  I then totaled our balance of trade for each group.

As you can see, in 2015, 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 $74 billion.  This is down from $132 billion in 2014 and is less than half of the record high of $153 billion in 2011.

Conversely, our balance of trade in manufactured goods with the more densely populated half of nations was a huge deficit, plunging to a new record deficit of $722 billion, beating last year’s record by $53 billion.

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 $74 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 $722 billion deficit!  Population density is the determining factor.  Not wages or wealth.  Wealthy nations were just as likely to appear among the deficit nations as among the surplus nations.  Not currency valuations.  Virtually ever currency in the world weakened against the dollar in 2015.  Population density is the key factor that drove these trade imbalances.

Some may point to the increase in the trade deficit as proof that currency values and manipulation are driving the imbalance.  But the data from previous years has shown that no such relationship exists.  A much more likely explanation is that American exports are declining and imports are rising because as more and more manufacturers lose ground to foreign competition, there are fewer and fewer products available for export or for purchase by domestic consumers.  Like a horde of mosquitoes, the overpopulated nations of the world are literally sucking the life out of American manufacturing and, with it, the American economy in general.

So what’s to be done?  “Give free trade enough time to work,” free trade advocates say, “and these imbalances will even themselves out.”  Wrong.  Free trade policy has had decades to work, beginning with the signing of the Global Agreement on Tariffs and Trade (GATT) in 1947 and the result has been that the trade deficit with densely populated nations just gets worse and worse.  This happens because free trade theory doesn’t account for the inverse relationship between population density and per capita consumption.

The only remedy that would restore a balance of trade is the same trade policy that the U.S. employed until 1947 to maintain such a balance – tariffs.  The use of tariffs to compensate the U.S. for nations’ inability to provide us access to equivalent markets – markets that have been emaciated by overcrowding – would restore a balance of trade and breathe life back into the American economy.