Is Wal-Mart Driving the Trade Deficit

KNZN asks why Europe doesn't have a growing trade deficit.

After all, the euro is surging against the Asian currencies and Asian manufacturing is only getting more productive. If exchange rates and productivity are central to explaining the Asian export story then why isn't Europe more in the hole.

A theory, for which I have as of yet developed no empirical support, is that Asian productivity is not at the heart of this story, nor exchange rates.

The key is US productivity - US retail productivity in particular.

See, economists not only fall into the trap of immaculate transfer, the notion trade deficit magically go away when national savings exceeds domestic investment, but also the trap of immaculate delivery.

In other words, we assume that all that needs to happen is for foreign goods to be produced relatively cheaper than domestic goods and then they will magically be consumed. The problem is that the goods have to get from the foreign country to our living rooms. Somewhere in that process comes retailing.

Retailing is possibly important because we have seen massive increases in productivity over the last 15 years in retailing, with Wal-mart leading the way.

Lets assume the following example:

Suppose that originally an America toy costs roughly $5 to make and $5 to distribute and retail for a total of $10.

Now, you could get a Chinese toy stateside for $1. That means it retails for $6. However, its a piece of crap and it costs about 60% of the the American toy. With the two relatively close in price and both somewhat expensive you might as well opt for the American toy.


Enter Wal-Mart. Efficiencies in distribution and inventory management cause retailing margins collapse so that the it costs only a $1.20 to distribute and sell the toy (gross margin on the American toy falling from 50% to 20%) .

The American toy now retails for $6.20, which is a great deal. Yet, the Chinese toy retails for $2.20. It may be crap but at $2.20 why not just get it!


In this case whats happening is not that Chinese imports are getting cheaper themselves but they are getting relatively cheaper because retailing costs are falling. Just like the well known result that rising excise taxes shift consumption towards more expensive items, falling retail costs will shift consumption towards cheaper items.


What does this have to do with Europe? Well Wal-Mart and big box retailers have been considerably less successful there.