$US-JPY Exchange Rate vs U.S. Balance of Trade with Japan

July 29, 2010

Continuing the series of posts dedicated to exploring the effect of currency exchange rates on the U.S. balance of trade, we now turn our attention to Japan.  Of the countries we’ve examined so far – Australia, Brazil, Canada, China and Colombia – only China has broken the mold, exhibiting a tendency for their trade surplus to grow in spite of a falling dollar.  But China is also the only one of this group that is far more densely populated than the U.S.  Is it possible that the effect of exchange rate breaks down in the face of a far more dominant effect on trade – a big disparity in population density?  We need more data from the ranks of densely populated countries.  So now let’s take a look at Japan.  Here’s the chart:

$US-JPY Rate vs Balance of Trade

In this case, I went back to 1985 and also adjusted the trade data for inflation, expressing the balance of trade in 2005 dollars.  Unlike the less densely populated nations of Australia, Brazil and Canada, this chart exhibits the same tendency that we saw for China – that a falling dollar has had no effect on the balance of trade.   If anything, there is a slightly negative correlation between exchange rate and the balance of trade.  The only exception has been in the last three years, when our balance of trade with Japan improved markedly.  The deficit in manufactured goods shrank by 42%.  However, our total trade deficit with the whole world shrank by about that much in the same time frame, not because of dollar weakness but because of the global near-depression.

A second factor working to erode Japan’s trade surplus with the U.S. is the emergence of China in the global economy.  Beginning in the early part of this decade, the Chinese have been steadily muscling in on Japan’s export business.  This will be an interesting dynamic to watch in the coming years.  If Japanese exports to the U.S. and Europe continue to slide, their economy will be in a world of hurt.  The deficit spending required to keep their economy from sliding into deep recession will make Greece look like a penny-pincher.  And Japan already has a serious deficit and debt problem.

Here’s an update of the theory score sheet:

Theory Correlation Score

So far, exchange rate theory has failed the test when large population density disparities were involved.  But, with the exception of tiny Colombia, the population density disparity theory has accurately predicted whether or not the U.S. would have a trade surplus or deficit.  Still, we only have two data points with big population density disparities.  Next up:  Germany.


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

U.S. Trade with Japan: Predictable Results with a Parasistic Economy

March 16, 2009

Returning to our analysis of trade with America’s major trading partners, we now turn our attention toward Japan. 

There hasn’t been much focus on our deficit with Japan lately, since our exploding deficit with China sucked up all the attention.   In 1994, President Clinton granted MFN (Most Favored Nation) trade status to China, essentially establishing a unilateral free trade relationship with China (unilateral because China was under no obligation to reciprocate).  At that point in time, the theory presented in Five Short Blasts was already taking shape in my head and I was positively horrified at this development, fearing it would lead to economic collapse.  Our relationship with Japan was already slowly moving us in that direction.  Now that process would be put into warp drive.  It was easy to envision a trade deficit with China that was ten times worse than our deficit with Japan at the time, something that was difficult to comprehend, and which no one else anticipated.  Check out this article from 1994.  You can see just how naively it was believed that China represented a huge opportunity for exports.  Clinton’s move was clearly one of the most collosal foreign trade blunders in American history. 

Until China took over as the trade deficit king, Japan was the focus of the same kind of concerns.  They were constantly accused of subtle protectionist trade policies and currency manipulation, just as China is today.  What changed?  Nothing.  The results of trade with Japan are as egregious as ever, but China has diverted our attention.  The fact is that, when our trade deficit is translated into per capita terms (adjusting for the size of the nation in question), our balance of trade in manufactured goods with Japan is almost 3-1/2 times worse than our deficit with China.  The following graph depicts our balance of trade with Japan, broken into several major categories.


Given that Japan is ten times as densely populated as the U.S., none of this is surprising.  This is exactly what my theory predicts.  In 2008, our trade deficit in manufactured goods with Japan was just shy of $90 billion.  Of that deficit, nearly half is due to auto imports.  In 2008, we imported over $43 billion worth of cars, while exporting only about $0.5 billion.   This is the predictable consequence of attempting to trade freely with a nation that is badly overpopulated, where over-crowding has decimated per capita consumption and, thus, their domestic market.  It has made them utterly dependent on exports to gainfully employ their glut of labor, rendering them a parasitic economy, feeding on the U.S. market and sapping it of jobs and wealth.  Japan exports the unemployment and poverty that their gross overpopulation would otherwise force them to bear. 

Because much of the deficit with Japan is in products where we still have some American-made alternatives, like cars, significant progress could be made if Americans would simply choose to buy American.  But that’s just not going to happen.  Offer people a choice between two equivalent alternatives, and they’ll choose them in roughly equal proportions.  Very few Americans will make an auto purchase with any patriotic considerations.  They simply don’t understand the connection between their purchase and the state of our economy, choosing to rationalize that competition is good and makes our own manufacturers healthier in the long run. 

There is only one real remedy in such situations:  a tariff structure on manufactured goods that is indexed to population density.  It’s not protectionism.  It’s common sense.  There is nothing virtuous about the blind application of free trade when it fails to account for factors that make it impossible to work.  The scrap heap of history is piled high with theories and policies, and nations and organizations that clung to them too long, that refused to acknowledge reality.

We’ve now examined the results of trade with our seven largest partners and have found that my theory has correctly predicted the results in each instance. 

Next up:  Korea