Analysis: SE Asian governments gamble on making cheap labor less cheap

An exhaustive study of purchasing power parity (analogous to wages) vs. balance of trade finds that low wages play absolutely no role in trade imbalances. In fact, the relationship is the opposite: large trade imbalances drive wages higher in the surplus nation, but the increase in wages does little to dampen the trade imbalance. America’s largest trade imbalances (expressed in per capita terms) are with wealthy, high wage nations like Germany and Japan. Our per capita trade deficit with these nations is far larger than our deficit with China.

Instead, it’s the disparity in population density between the U.S. and these extremely densely populated nations that drives the trade imbalances. Overcrowded societies are simply not capable of consuming products at the same rate as less densely populated societies like the U.S. But they’re every bit as productive. When two such nations attempt to trade freely with one another, the work of manufacturing is spread evenly across the combined labor force, while the discrepancy in per capita consumption remains. The result is an inevitable deficit for the less densely populated nation – the U.S. It’s inevitable, that is, unless some tactic like tariffs is employed to restore balance to the relationship.

Pete Murphy
Author, “Five Short Blasts”

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