President Trump Forgets That Imports Are a Necessary Ingredient of Prosperity
Those who are focused on the balance of trade must have gotten a shock the other day. The U.S. trade deficit rose to a 10-year high, imports increased, exports decreased, the trade deficit in manufactured goods with China surged, as did the U.S. global trade deficit in manufactured goods. But the truth is, a growing trade deficit is not necessarily a bad thing. If there is a problem, it isn’t in the fact that imports went up – it is the fact that exports went down.
The U.S trade deficit increased to $54.6 billion in October from $54.0 billion the previous month – the fifth consecutive month in which the trade gap has widened – the Commerce Department reported Thursday. Imports of goods and services rose 0.2 percent to $266.5 billion, an all-time high. Exports declined. The politically sensitive goods trade deficit with China surged 7.1 percent to a record $43.1 billion.
This must be disappointing news for all protectionists, including President Trump – who has staked so much of his economic agenda on driving exports up and imports down. We are seeing the opposite. But is that really a bad thing? Mercantilists view the trade balance of a country the way one would read the balance sheet of a company, with exports taking the place of profits and imports seen as losses. Global trade is seen as being divided into winners and losers, with one country’s gain being another’s loss. But trade is not a win-lose game. Success is not a matter of exporting more, and importing less. More often than not, when one declines, so does the other.
Consider the fact that of the 35 member countries of the OECD, the so-called rich countries’ club made up of developed and rapidly developing countries, a majority – 19 – recorded a trade deficit in 2016. OECD countries exported about $9 trillion in goods last year. But they imported more – $9.5 trillion. Exporting does not equal “winning” and importing does not equal “losing.” Prosperous countries like Germany, China and South Korea carry positive trade balances. But similarly prosperous countries like the United Kingdom, Canada, France –m as well as the United States – carry negative trade balances. Four of the seven member countries of the G-7 posted trade deficits in 2016.
Trade deficits are not an economic problem for any country. They reflect the fact that people in wealthy and growing economies can afford to buy more goods and services. Rather than indicate a declining economy, imports point to a robust one. Sellers and buyers both benefit from a transaction, or else the transaction wouldn’t be made. Wealthier countries contain wealthier consumers. Because they can afford to buy more, they import more.
Imports are a key element of an efficient economy, and essential to a country’s ability to export. Companies requiring inputs toward a finished product need to get the best price, quality, and service levels they can to compete. They need the widest potential network of potential suppliers. Being able to import – and therefore obtain the best possible terms and conditions from both domestic and foreign suppliers – is crucial to being able to efficiently make products for export.
In fact, the opportunity to import helps achieve productivity and prosperity more than the opportunity to export, because it does more to broaden choice. Importing widens the circle of potential suppliers competing to meet the needs of consumers and intermediate producers. It forces domestic companies to become more efficient and compete more effectively. It generates economies of scale, spreading production costs over a wider and larger market. It allows countries to utilize comparative advantage, importing goods and inputs from countries that are most efficient at making them. And it transfers knowledge, allowing importers to benefit from technological spillover.
Quite simply, imports are not a necessary evil. They are a necessary ingredient of prosperity. If there is a problem with the U.S. trade picture, it isn’t in the fact we saw imports increase in October; it is the fact that we saw exports decline at the same time. Reduced imports do not usually correlate with increased exports. Quite the opposite: When exports increase, imports do too. When imports decline, so do exports. Taking data aggregated in the CIA’s World Factbook, for countries with a population of a half-million or more, one finds that between 2015 and 2016, 129 countries experienced increases or decreases in both exports and imports. Only 33 countries experienced an increase in one category and a decrease in the other – and only three of those rank among the world’s 25 leading exporting nations. The ratio is even higher for OECD countries. Between 2015 and 2016, the volume of exports and imports moved up or down together in 29 of the 35 member countries. This was also true of all G7 countries.
Importing and exporting are both features of a dynamic economy. When either declines – as U.S. exports did in October – a national economy is out of step, and may have a problem.
Some may feel that the sum of global trade must be zero – one country’s gain being another’s loss. But the two activities go up or down in unison for more than 80 percent of OECD member countries because trade offers an opportunity for all nations to benefit – not just as producers, but as consumers.
If anyone is worrying about the growth of imports, they shouldn’t be. Instead they should be worrying that exports are not keeping pace.
