Analysis: EU-U.S. trade talks promise both prizes and pitfalls

Thanks to the inverse relationship between population density and per capita consumption, the U.S. already suffers a $116 billion per year trade deficit with the EU. Further moves toward freer trade will only exacerbate the situation and rob the U.S. of even more manufacturing jobs.

When two nations attempt to trade freely with each other, their economies are combined and the work of manufacturing is spread evenly (more or less) across the combined labor force. But disparities in per capita consumption remain. The result is an automatic trade deficit and loss of manufacturing jobs for the less densely populated nation – the U.S. – and a shift of manufacturing toward the more densely populated “nation” – in this case the EU, a “nation” almost as densely populated as China.

With the half of the world’s nations below the median population density, the U.S. enjoys a surplus of trade in manufactured goods of $153 billion (2011). In contrast, with the other half of nations – those above the median population density – we suffer a trade deficit of $572 billion. Same number of nations, starkly different results. It’s the disparity in population density that is driving this huge trade imbalance.

When the U.S. signed a new free trade agreement with South Korea, a nation 15 times as densely populated as the U.S., we were promised that it was a big win for U.S. manufacturing. Has anyone noticed that our trade deficit with South Korea worsened by 25% in 2012 from 2011, while our global trade deficit was nearly flat?

A free trade agreement with the EU will yield similar results – a bigger trade deficit and more lost manufacturing jobs. The U.S. should be moving toward the expanded use of tariffs to restore a balance of trade instead of wading more deeply into the waters of a flawed and failed early-1800s free trade theory.

Pete Murphy
Author, “Five Short Blasts”