BAM! GDP and The Confused Man at Commerce

Benn Steil and Benjamin Della Rocca write:

"The United States has an $800 Billion Dollar Yearly Trade Deficit because of our 'very stupid' trade deals and policies," tweeted President Trump in March. As result, he said, "our jobs and wealth are being given to other countries."

On the basis of this belief, that trade deficits amount to giving away jobs and wealth, Mr. Trump has launched an unprecedented simultaneous attack on all of America's major trading partners. From the EU to Mexico, from Canada to China, the president is imposing tariffs and quotas on imports of steel, aluminum, autos, and other products. Given the angry and uncompromising response of the affected governments, and the prospect of an escalating global trade war, it is imperative that—at the very least—Mr. Trump get his facts straight.

But let us begin with basic trade logic. The president's commerce secretary, Wilbur Ross, famously asserted that imports reduce gross domestic product (GDP), and that trade deficits therefore "weaken our economy." This was, he said, "Economics 101." Yet both of us have taken Economics 101 (and then some), and neither of us learned any such thing.

That is because it is nonsensical. Ross is correct in stating that GDP is calculated by summing domestic economic activity and exports, and then subtracting imports, but wrong in interpreting this to mean that GDP is higher without imports. When you buy a product in the United States, the value of the imported content must be stripped out in order to capture the value of the purely domestic content. The foreign content does not itself reduce GDP; it is simply not part of it. Imports have no determinate effect on GDP, positive or negative.

The importance of global supply chains, however, means that attempts to reduce imports by government fiat are more likely to lower than to increase GDP. If the American company that sold you its product had not had access to foreign components, you might well have wound up buying an alternative product made, say, entirely in China.

We suspect that neither Mr. Trump nor Mr. Ross will be entirely convinced by logic.

-RW