Scott Lincicome and Daniel Griswold have performed an admirable act of public service by explaining, for the umpteenth time, that imports do not reduce economic growth.
The misconception arises from the equation that is used to calculate GDP. It’s consumption plus investment plus government spending plus exports minus imports. Therefore, just looking at the equation, more imports would contribute a larger negative number to the sum, which would decrease the total.
The most important thing wrong with this way of thinking is that it mistakes the purpose of GDP. GDP stands for gross domestic product, so it exists to calculate the value of all final goods and services produced in the United States. Imports are not produced in the United States, by definition, so they must be excluded from GDP. Thus, minus imports.
But the errors don’t stop there, as Lincicome and Griswold explain. Imports are not necessarily substitutes for domestically produced goods. In many cases they are complements. That’s true for producers (think of American companies importing raw materials to make final goods domestically). It’s also true for consumers:
Even imported consumer goods can complement domestic output by reducing retail prices and thus freeing consumer dollars for spending on domestic goods and services. U.S. companies tasked with moving or selling imported items – in wholesale trade, retail trade, and transportation and warehousing – also generate trillions of dollars of additional U.S. economic output. And, of course, dollars spent on imports quickly return to the United States, either to invest in U.S. assets or to buy U.S. exports, both of which contribute to GDP growth.
Even if that doesn’t convince skeptics, there’s an easy way to test the proposition that imports hurt growth. If we zoom out and look over economic history, we should see a negative correlation between import volumes and economic growth. As Lincicome and Griswold point out, though, we don’t see that at all:
If anything, the correlation seems to run in the opposite direction from what the media imply. In recent decades, stronger economic growth has tended to correlate with a rising U.S. trade deficit (as Griswold found in this Cato study.) In the first three years of the Trump administration (2017–19), as GDP growth reached a respectable annual average of 2.5 percent and a total of 6 million net new jobs were added, the overall goods deficit increased by $115 billion, or 15.7 percent. In 2021, the first year of the Biden administration, the U.S. economy expanded 5.6 percent as it shook of the Covid shutdown while the trade deficit grew 18.4 percent from the year before.
Imports are not bad for growth, no matter what trade skeptics say and the media report.