Why do so many (most?) business reporters and television talking heads, along with a boatload of economists, get the story dead wrong on trade?
Whenever the latest U.S. trade numbers — i.e., exports, imports and the trade balance — are released, if imports are up and the trade deficit expands, a cacophony of voices spout off about how this is a negative for economic growth. On the flip side, if imports fall and the trade deficit shrinks, it’s deemed to be a positive for the economy.
Economic reality, however, usually tells the exact opposite story.
The U.S. Bureau of Economic Analysis released April trade numbers on June 9. Exports rose and imports declined, with the trade deficit shrinking a bit as a result, from $46.8 billion in March to $43.7 billion in April.
How was this reported? A Wall Street Journal report began: “The U.S. trade gap narrowed in April as exports grew and imports shrank, suggesting trade could give a healthy boost to economic growth in the second quarter of the year.”
The New York Times quoted Kevin Logan, the chief U.S. economist for HSBC, asserting, “Normally, an improvement in the trade balance leads to an increase in estimates of G.D.P. growth in the quarter.”
And then there’s Steve Liesman, senior economics reporter on CNBC. Liesman regularly gets it wrong on what changes in imports and trade deficits mean, and it was no different this time around. He declared, “But the April deficit improvement will help add to second quarter GDP.”
These reports line up with widespread assumptions that imports are bad for the economy and jobs. It is not unusual, for example, to hear in the nation’s political debate and discussion that imports must be limited.
But aren’t the Journal, Times and CNBC correct? After all, when you look at GDP data, it is clearly stated in the tables that imports are subtracted from exports to arrive at net exports. Net exports are added to personal consumption expenditures, gross private domestic investment, and government consumption spending and gross investment to arrive at total gross domestic product (GDP). Therefore, increasing imports mean lower net exports, and therefore, lower GDP — right?
Imports are subtracted from GDP not because they are somehow negatives for the economy and growth. They are subtracted to avoid distorting GDP numbers.
It must be understood that the consumption numbers in GDP include consumption of imported goods and services. As for the GDP measure of investment, again, it includes both domestic and foreign capital goods. And the same goes for government consumption and investment. Even when it comes to exports, those products can be made with goods that were imported.
Quite simply, imports are already counted in these other GDP measures. If imports were not then subtracted, GDP would be overstated. And since gross domestic product is about domestic production, imports do not directly affect GDP.
What about other ways that imports convey information about the economy or indirectly affect growth?
First, the early nineteenth century French economist Jean-Baptiste Say reminded us that “products are always bought ultimately with products.” This is known as “Say’s Law.” It makes clear that in a market economy, one must produce marketable goods or services in order to be able to purchase goods or services, including imports. In essence, expanding imports correspond with expanding domestic production.
This is Economics 101 common sense (or at least it should be). During good economic times, individuals and families purchase more consumer goods, including imports, and businesses are expanding investment, including the purchase of imported capital goods.
In fact, when the U.S. economy grows robustly, imports also increase and trade deficits usually expand. And the opposite occur in a down economy.
Just consider the period of July 2008 to May 2009. Imports plummeted, and the monthly trade deficit was slashed by more than half. Yet, at the same time, the U.S. was in the midst of one of the deepest recessions since the Great Depression. So much for the idea that smaller trade deficits are good for the economy. In the end, the trade deficit really does not matter. Instead, the direction on both exports and imports is what matters. Expanding exports mean more benefits for U.S. businesses and workers, while growing imports reflect domestic growth.
Second, imports aid the economy by boosting competition. Increased competition from imports pushes domestic producers to be more efficient and innovative. That’s a key point against protectionism and in favor of free trade.
Third, due to enhanced competition, efficiency and innovation, consumers wind up with increased choices and lower prices. Those lower prices free up resources for saving, investing and making other purchases. So, the impact that imports have on competition and prices flow into enhanced income and faster economic growth.
The reporters and talking heads then could not be more wrong about what imports mean to the economy. Imports do not subtract from the economy. Quite the contrary, imports both reflect what’s occurring in and provide a boost to the overall economy.
Raymond J. Keating, chief economist for the Small Business & Entrepreneurship Council, can be reached at email@example.com. His new book is titled Warrior Monk: A Pastor Stephen Grant Novel.