Imports and trade deficits do not ‘hinder’ economic growth and are not a ‘setback’ for the US economy

From Mark Perry.

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The WSJ reported today that the “Widening Trade Gap Hinders US Economic Growth,” here are some excerpts of that article (emphasis added):

A stronger dollar and an influx of pent-up imports into West Coast ports are pointing the U.S. economy toward its third quarterly contraction in its six-year-long expansion, reflecting choppy conditions that appear set to restrain growth throughout the year.

The nation’s trade deficit expanded by 43.1% in March from February, the largest monthly widening since 1996, the Commerce Department said Tuesday. A record level of non-petroleum imports flowed into the U.S. after a labor dispute at West Coast ports ended, causing the seasonally adjusted trade gap to widen to $51.37 billion.
That was significantly larger than economists had forecast, even with pressure from a strong dollar and weak global growth. As a result, revisions could push the official reading for first-quarter gross domestic product into negative territory from the paltry 0.2% annualized gain initially reported last week.

The figures represent a setback for the U.S. economy, but it overcame a similar one that surfaced last year.

In a post (“Imports, Trade Deficits and the Economy”) at his new blog (A Force for Good) Jon Murphy makes a very important point that “Trade deficits and imports do not drag on the economy. They drag on GDP.” Because of the way that GDP is calculated (exports are added and imports are subtracted), it’s a mathematical identity that “rising imports will naturally lower GDP. But that does not mean that imports are a drag on the economy.” Jon explains further why the latest trade data don’t “represent a setback for the U.S. economy” as reported by the WSJ today (my emphasis):

GDP is often used as a proxy for economic activity. It’s a pretty good tool, to be sure, but it shouldn’t be the only tool used to gauge economic activity. Other indicators can, and should, play a part as well: industrial production, retail sales, standard of living, prices (in terms of labor-hour costs), that sort of thing. By relying on a single measurement, such as GDP, it gives rise to false notions, such as imports harming an economy.
The truth of the matter is imports help economic growth, not hinder it. Remember that all trade occurs because both parties benefit. Imports occur because the buyer (who just happens to be of a different nationality from the seller) obtains a better value for a good/service than he could get domestically.

MP: The chart above helps to demonstrate how imports play a positive role in the US economy, even though rising imports and larger trade deficits are generally viewed as having negative effects on the economy. In the first quarter of this year, Americans purchased about $570 billion worth of foreign goods between January and March.

The chart above helps answers the question — What is being purchased from overseas and who is doing the purchasing? — by displaying the shares of imports in the first quarter for the five main end-use categories of foreign goods. The first two categories – Capital Goods, and Industrial Supplies and Materials – represent the nearly $300 billion worth of imports purchased by US businesses in the first quarter that include machinery, equipment, engines, aircraft, oilfield equipment, vessels, testing instruments, chemicals, lumber, minerals, newsprint, cotton, plywood, glass, rubber, wool, iron, steel, copper, etc. Together, those two categories accounted for more than half of US imports in the first quarter, and were purchases of inputs, raw materials, and machinery that help American businesses produce their “Made in the USA” outputs more efficiently and cost-effectively. By shopping globally and purchasing the lowest-priced and highest-quality products, the competitiveness of domestic producers is enhanced, which often helps them to expand US production and hire more American workers (imports = jobs).

The category “Automotive Vehicles, Parts and Engines” (15.2% of total imports) would also include purchases by US automakers of imported parts and engines, and the category “Foods, Feeds and Beverages” (almost 6% of total imports) would include purchases by US food companies of unprocessed, raw food materials like green coffee beans, nuts, sugar, foodoils, and foodgrains that will be used to produce food products made domestically. Finished consumer goods accounted for only a little more than one-quarter of US imports in the first quarter (26.9%) and those consumer products (toys, clothing, footwear, TVs, electronics, musical instruments, appliances, jewelry, etc.) are purchased by retailers like Walmart, Dollar General, Macy’s, Target, CostCo, Office Depot, Home Depot and Best Buy. By shopping globally on behalf of US consumers for the best consumer products at the lowest prices, domestic retailers can therefore deliver tremendous value to all Americans, especially low- and middle-class US households.

It’s only in a world where “economic growth” is narrowly measured by “domestically-produced economic output” that imported goods by American businesses and consumers are considered to be a drag on the US economy. Under national income accounting standards developed in the late 1920s, exports make a positive contribution and are added to GDP (economic output) while imports make a negative contribution and are subtracted from GDP. But that doesn’t tell the whole story about the economy and economic growth. As Jon points out, imports don’t harm or hinder the economy at all; just the opposite, imports actually help and support the US economy. Here’s why:

Every voluntary market transaction creates wealth because it benefits both the buyer and the seller, and that doesn’t change in an international transaction when the buyer and seller are on different sides of an imaginary line called a national border. For every export transaction, there’s an American seller who is made better off, and for every import transaction there is an American buyer who is made better off. So when we calculate international trade data and incorporate those statistics into GDP accounting to assess the health of the US economy, why do we only account for the American sellers who are made better off and completely disregard all of the American buyers of foreign products who are made better off? In fact, we don’t just disregard the value of imports to Americans, we actually subtract those values to arrive at final GDP and then calculate economic growth!

In the past on CD, I’ve occasionally reported international trade as the total volume of trade that includes Imports + Exports to arrive at the total volume of international trade activity in a given month or year. When the BEA releases monthly international trade data, and when the media then reports those trade data, there is never any consideration given to total trade – exports and imports are always reported separately, and never added together as positive numbers. As mentioned above, the positive value of trade to US sellers (exports) actually gets offset by the negative value of trade to US buyers (imports) to arrive at the “trade deficit,” which if it increases, is supposed to “hinder” economic growth and gets reported as an economic “setback.”

Here’s a look at total annual US trade from 1992 to 2014 in the chart below. In both nominal and real dollars, total US trade reached a record high last year of $5.2 trillion. Although it’s been flat in recent years, total US trade was higher in 2014 than in any previous year, meaning that the total benefits Americans receive from global buying and selling activities has never been greater. Although we hear all the time, including from the WSJ, that imports and trade deficits are harmful to the US economy, that’s only the case when we narrowly use GDP as our measure of economic output and growth. Perhaps a more comprehensive and expansive view of economic growth deserves greater attention – one that doesn’t completely ignore the benefits of imports to domestic businesses and the US economy and in fact would treat the value that accrues to American buyers from foreign purchases as positive, and not negative. An increase in imports usually mean that American consumers are better off (not worse off), US businesses are more competitive (not less competitive), which translates into a higher (not lower) standard of living and an increase (not decrease) in the number of US jobs.    

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