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.


The ‘Malo’ Half of NAFTA

March 15, 2013

In the previous two articles, we examined trade with America’s two largest trading partners (by total imports and exports):  Canada and China.  We saw that while the U.S. has a fairly large trade deficit with Canada, all of it and more is due to the fact that Canada is by far our largest source of imported oil.  The U.S. actually enjoys a healthy surplus of trade in manufactured goods with Canada, making Canada the good half of NAFTA – the North American Free Trade Agreement.

Now we turn to the other half of NAFTA – Mexico.  Mexico is a fairly densely populated nation – almost twice as densely populated as the U.S.  Mexico isn’t a wealthy nation but, by world standards, they’re not poor either.  With a per capita purchasing power parity (PPP) of $15,300, Mexico ranks 83rd out of 228 nations, placing them in the top 40%.  However, 51% of its people live in poverty, though it’s not for lack of jobs.  Mexico currently enjoys a rather low unemployment rate – 4.5% – a rate that is the envy of the United States.

Here’s a chart of overall trade with Mexico, through 2012:  Mexico Trade.

Since 2007, our overall trade deficit with Mexico has moderated somewhat, dropping from $73 billion to $61 billion in 2012.  But all of that decline is due to a drop in oil imports.  Our deficit in manufactured goods rose in 2012 to $46.1 billion, only $0.8 billion shy of the record deficit set in 2007.  Expressed in per capita terms, that’s a deficit of $401 with every Mexican citizen.  In 2011, our per capita deficit with Mexico in manufactured goods was our 14th worst – worse than China, with whom our per capita deficit is “only” $258.

So, of our top three trading partners in 2012 (who together account for 43% of all U.S. trade), the U.S. enjoys a surplus in manufactured goods with only Canada, a nation with a population density of less than ten people per square mile.  The U.S. suffers large deficits with China and Mexico, nations with population densities of 361 and 151 people per square mile respectively.  You should be starting to get suspicious that population density may be a factor.

As we did with Canada and China, let’s consider the other factors that economists like to blame for trade deficits – weak currencies and low wages.  The following is a chart of our trade deficit in manufactured goods with Mexico vs. the peso-dollar exchange rate:  Mexico Trade vs Exchange Rate.

As the peso has weakened from 9 per dollar in 2001 to 14 pesos per dollar in 2012, our trade deficit in manufactured products with Mexico has worsened dramatically, almost doubling during that 11-year span.  This is the effect that economists would predict but, so far, the exchange rate theory is only batting 2 for 3, while the population density theory is batting a thousand.  Mexico’s weakening currency may explain why our enormous deficit with Mexico is so out-of-proportion to their population density. 

And I won’t deny that low wages also play a role.  Many American companies have set up shop just across the border for that very reason.  Here’s a chart of our balance of trade in manufactured  goods with Mexico vs. their PPP:  Mexico Trade vs PPP.

As you can see, Mexico’s PPP (analagous to wages in Mexico) has risen by over 50% since 2001.  But, instead of our balance of trade improving as economists would predict, our trade deficit in manufactured goods with Mexico has nearly doubled.    If the “low wages” theory really held water, we should be seeing at least some improvement in our balance of trade with Mexico as their incomes have risen dramatically.  Instead, it has gotten much worse.  Once again, we see that economists have the cause and effect backwards.  Mexicans are growing wealthier because of their surplus with the U.S., instead of rising incomes in Mexico improving our balance of trade.   So far, economists’ “low wages” theory is batting zero.

Taken together, the 55% decline in the value of the peso since 2001 essentially cancels out the 50% rise in PPP (and wages) during the same period in Mexico.  So traditional economic theory should predict that our trade imbalance with Mexico should have held steady instead of nearly doubling.  The real explanation for that is that the effects of the population density disparity are becoming more pronounced the longer we attempt to apply free trade in a situation where it’s a hopelessly inappropriate trade strategy. 

Free trade with sparsely populated Canada – the good half of NAFTA – makes sense and has been enormously beneficial to the U.S.  Free trade with Mexico – the “malo” (or bad) half of NAFTA – has been a trade policy disaster, draining hundreds of thousands of manufacturing jobs from the U.S.  And it’s getting worse as the Obama administration stands idly by and renegs on its promise to fix NAFTA.

Next up, our 4th largest trading partner:  Japan.


$US-MXN Exchange Rate vs. U.S. Balance of Trade with Mexico

August 24, 2010

Continuing my series that examines the correlation (or lack thereof) between currency exchange rate and its effect on the balance of trade between the U.S. and various nations, we now turn our attention to Mexico.   Here’s the chart of currency exchange rate (between the dollar and the Mexican peso, or “MXN”) vs. the balance of trade between the U.S. and Mexico.

$US-MXN Rate vs Balance of Trade

This is the strangest chart we’ve seen yet, for a lot of reasons.  First of all, in 1993, Mexico devalued their currency by a factor of 1,000, lopping three zeroes from the value of the peso.  Secondly, the North American Free Trade Agreement (NAFTA) went into effect at the beginning of 1994.  The result is that a tidy surplus of trade with Mexico instantly vanished, to be replaced by a rapidly exploding trade deficit.

So, from 1990 through 2009, the American dollar actually soared by almost 5,000%, and our balance of trade went from surplus to a huge deficit.  This is what economics would predict.  However, when we do a year-by-year analysis, we find little correlation between exchange rate and the balance of trade.  There were some years in which the dollar fell; yet the trade deficit continued to worsen dramatically.  Exactly 50% of the time, the balance of trade moved as economists would predict in reaction to changes in currency valuation, while it moved in the opposite direction the other 50% of the time.  For this reason, I’ve given the exchange rate between the U.S. and Mexico a score of “no correlation” on our correlation tracking chart:

Theory Correlation Score

This may not seem fair, since there seems to be a strong correlation when the whole 19-year time span is considered.  A much stronger dollar coincides with a much worse balance of trade.  But “coincides” seems to be a good choice of words because it seems to be nothing more than pure coincidence.  The fact is that a long-term trend of deteriorating economic conditions in Mexico has continued to erode the value of their currency, in spite of their enormous trade surplus with the U.S., keeping wages depressed and exacerbating the trade imbalance.  Under normal circumstances, such a large trade surplus should have resulted in rising wages in Mexico, eventually leading to the restoration of something closer to a balance of trade.  But Mexico’s slow but steady backward march from developing nation to 3rd world status prevents normal economic mechanisms from functioning.

So Mexico lands right on the trend line that has been taking shape as we’ve added more countries to this analysis.  The balance of trade with nations with a relatively low population density seem to respond as economists would predict to currency valuation changes, as evidenced by a correlation score greater than 0.5.  But, for more densely populated nations, the correlation falls below 0.5 and there is no tendency whatsoever for trade imbalances to improve in response to a falling dollar.

Next up:  the U.K.

*****

Currency exchange rate data provided by www.oanda.com/


Wimpy Response by Obama to Mexican Trade Challenge

March 17, 2009

http://www.reuters.com/article/politicsNews/idUSTRE52F7KN20090317

As reported in the linked article, in retaliation against the  U.S. for ending a program that would have given Mexican trucks free rein on America’s highways (thanks to Congress), Mexico has slapped tariffs on American food exports. 

Mexico slapped tariffs on 90 American agricultural and manufactured exports on Monday in retaliation for Washington’s move to block Mexican trucks from using U.S. highways.

Not all U.S. food exports, though: 

But a spokesman for the Mexican economy ministry said the new tariffs would not affect rice, corn, beans or wheat, which are the main U.S. farm products exported to Mexico and make up much of the average Mexican’s diet.

Unfortunately, it appears that the response by the Obama administration to the first trade challenge of its administration is weak:

President Barack Obama‘s administration, facing its first dispute with a major trading partner and neighbor, promptly said it would work to create a new cross-border, long-distance trucking program between the two countries.

“The president has tasked the Department of Transportation to work with the U.S. trade representative and the Department of State, along with leaders in Congress and Mexican officials to propose legislation creating a new trucking project that will meet the legitimate concerns of Congress and our NAFTA commitments,” White House spokesman Robert Gibbs said.

I hope this is just a stalling tactic, but this wimpy response is really disappointing.  The proper response would have been an immediate imposition of a small tariff – about 5% –  on all Mexican manufactured goods, a tariff that would be ratcheted ever higher if there was further retaliation by Mexico.  After all, with an annual trade deficit with Mexico of about $37 billion in manufactured goods, it’s impossible for the U.S. to come out the loser in a trade war with Mexico.  It’s a perfect opportunity to demonstrate to the other parasitic economies of the world that they are in no position to dictate trade terms when they are the ones with the trade surplus.  But if the response by Obama is any indication, it’s an opportunity that will be lost.


Mexico: A Millstone Around the Neck of the U.S. Economy

March 9, 2009

Continuing my series in which we examine the results of trade between the U.S. and its major trading partners, and having just finished an evaluation of Canada (see the previous post), we now turn our attention to the flip side of the NAFTA (North American Free Trade Agreement) coin:  Mexico.   Here’s a graphical presentation of our balance of trade with Mexico, broken down into several major categories:

trade-with-mexico

sources:  http://www.census.gov/foreign-trade/statistics/product/enduse/imports/c2010.html

http://www.census.gov/foreign-trade/statistics/product/enduse/exports/c2010.html

The title of this post says it all about U.S. trade with Mexico and our overall economic relationship – it’s a huge drag on the American economy.  Because Mexico is 66% more densely population than the U.S., the theory I presented in Five Short Blasts predicts that we would have a trade deficit in manufactured goods, and that’s exactly what we find.  Our overall trade deficit with Mexico in 2008 was $64 billion, which doesn’t even include illegal drugs.  And the trade deficit in manufactured goods was $36 billion, which translates to a per capita trade deficit in manufactured goods of $327 – far worse than our per capita trade deficit in manufactured goods with China. 

For a nation of their population density – relatively moderate in comparison to nations like Japan, Korea, China and Germany, this trade deficit is even worse than my theory should predict.  Clearly, the deficit is aggravated by chronic low wages (probably intentionally suppressed by corporations in concert with a corrupt government) and an absence of labor and environmental standards. 

President Obama has spoken of the need to re-write NAFTA to incorporate labor and environmental standards.  Such talk makes the best friend we have in the world – Canada – nervous, but it shouldn’t.  If anything, their labor and environmental standards actually exceed ours.  The president is clearly directing such talk toward Mexico, where our trade results prove that corrective action is long overdue.  As I recommended in Five Short Blasts, it should begin with a relatively small tariff on manufactured goods to compensate for Mexico’s higher population density.  But, in this case, a second tariff is in order too – a tariff designed to motivate the enactment of labor and environmental standards, that would remain in place until they are implemented. 

Aside from being a significant source of imported oil, there is little good that can be said about America’s trade relationship with Mexico.  Throw in Mexico’s drug trafficking and illegal immigration and, overall, America would be far better off if the Gulf of Mexico extended all the way to the Pacific Ocean.  In previous articles, we’ve seen cases where  free trade can be very beneficial, but Mexico isn’t one of them.  We don’t have to look far for opportunities to fix our trade policy and begin restoring some balance.