Thinking about Import Penetration

Please excuse this very very wonky post. I’m going to be thinking out loud here about import penetration, and working out an example.

Here’s the starting question: When consumers start buying and retail sales goes up, how much of that added purchasing power stays in the United States and how much goes overseas as imports?

The answer is not obvious. But even the right question is not obvious either.

Let’s look at a simple example.  Suppose that American consumers are buying 10,000 dining room tables annually from American furniture factories. Each dining room table leaves the factory door at a producer cost of $1000.  Along the way,  the costs of trucking and distribution add another $1000,  so the price to the consumer is $2000 per table.

Now let’s suppose that after a few years, half the dining room tables sold in the U.S. are made in China (5000 out of 10000). The reason why?  Chinese factories can produce and deliver the tables cheaper—it costs $700 per table to make the table, ship it across the Pacific, and put it on a truck at the Port of Los Angeles.  After that, the same $1000 in domestic trucking and distribution costs apply, so that the table is sold for $1700.

Question: How much of the U.S. market have the imported tables taken? (This is another way of asking: If retail sales of tables goes up,  how much of the extra spending will leak abroad).

a) 50%




e) all of the above

The answer, of course, is all of the above.  Let me explain each of them. The first number,  50%,  just comes from just counting tables. If half the dining tables bought in the U.S. are imported, then in some intuitive sense imports have 50% of the market.

The second number, 19%, is the cost of imported tables as a share of total consumer spending on tables.

      Cost of imported tables = 5000*$700 =$3,500,000

      Total consumer spending on tables = 5000*$1700 + 5000*$2000 = $18,500,000 

      19% ≈   3,500,000/18,500,000

For the whole economy, this figure is precisely analogous to calculating  imports as a share of gross domestic purchases. (In the fourth quarter of 2009, this number for the whole economy was 14.2%).  19% is  much lower than 50% because the consumer dollar pays for a lot of domestic trucking, warehouses, wholesaling and retail employment and capital investment, which is there whether or not the table  is imported.

The third number, 46%, represents the retail value of imported tables as a share of total consumer spending on tables.  It’s lower than 50% because the imported tables cost less. If the retailers charge the same price for imported tables as domestic ones (allowing a higher profit margin on imported tables),  then this number could be 50% also.  

The fourth number, 41%, represents the cost of imported tables as a share of the production/acquisition costs of tables

   Cost of producing domestic tables = 5000 *$1000 = $5,000,000

    Cost of imported tables = 5000*$700 =$3,500,000

    Production/acquistion costs of tables = $8,500,000

    41% ≈   3,500,000/8,500,000

Several questions here. First, which of these numbers can be calculated using government data? (a) requires us to know the relative production/acquisition price of imported versus domestic tables. This data does not exist (see, for example, Bill Alterman’s presentation at the “Measurement Issues Arising from the Growth of Globalization” Conference).

(b) can be calculated using existing data.  (c) cannot be calculated using existing data, because the government does not distinguish between imports and domestic products once the imports have entered the country–imports are assumed to be indistinguishable from the domestic products that they compete with.  (d) in theory can be calculated using Census data on individual industries to measure shipments, and then link that with the import and export data.  In practice, however, we don’t know whether the imports are competing with domestic products, or used in the production of the domestic product, which makes a big difference.

To get back to the original question. How much of retail sales flows through to imports? I can use the BEA’s input-out tables to take a stab at (b).  And by making some assumptions about the relative price of imports and domestic goods, I can make a stab at (a).  Here are  my sentences about the calculations. I would appreciate  anyone who cite these numbers quote whole sentences.

**My preliminary and tentative calculations–which I reserve the right to revise or completely repudiate at any moment–suggest that roughly  15% of every retail spending dollar flows overseas.  However, my preliminary and tentative calculations also suggest that 25-30% of the goods we buy are made overseas. **

The first number corresponds to concept (b), and the second range corresponds to concept (a).  They answer different questions. (b) answers the question about increased retail spending and overall job creation. For some products–notably consumer electronics–it may be that nearly 100% of the products we buy are made overseas, but the cost of the good only accounts for 60% of the final price.   So even complete penetration means that 40% of the consumer spending dollar on a big-screen television still goes to support retail clerks and truckers.

On the other hand, (a) answers the question about retail spending and manufacturing production.  How much does an extra retail dollar go to get factories running again…if we spend more on big screen televisions, it has very little direct impact on manufacturing jobs in the U.S.  

I thank any of you kind people who got down to the bottom of this long and baroque post. I’m getting closer to understanding what’s going on.


  1. Yes, but is what you’re trying to understand worth understanding at all? Most of us don’t care where these goods come from: if somebody abroad is willing to do the work cheaper, we’re glad to make that deal. Your work on these stats can only be used to implement idiotic tariffs, that would charge all of us more so the few lazy Americans in those protected sectors, unable to compete in a free and fair market, would then make more off those goods.

    • Or as a first-level effort to zoom in and identify trade partners trying to take an industry through export subsidies and publicly shame them.

      • No, because we don’t need to pore over stats to figure that out, we just look at the bills on the congressional record that they’re trying to push through, that’s easy. 🙂 The only reason to crunch through the stats is to create some sort of sham intellectual justification for such protectionism. Otherwise, we just let the market figure it out and consumers will buy whatever they like best and do those price calculations themselves.

  2. mike shupp says:

    Maybe I miss something here.

    Effectively, 10 thousand tables are sold in the USA at a cost of $2000 each (half for producing the tables, half for shipping). The Chinese enter the market with cheaper tables — say, $600 bucks for production, $100 for shipping across the Pacific Ocean, $1000 for domestic truckage — at a total of $1700.

    This really ought to boost the market for tables considerably. If say 10,000 people bought tables each year at 2 grand, maybe 15000 will buy tables at $1700. And perhaps the 2000 people who once would have bought $2500 tables will become 3000 people who now buy equivalent tables at $2200.

    There’s a bit of hand-waving here. We need some sort of statistical Propensity-To_Buy-Expensive-Dining-Set Function with values established over some range of table prices, from say $1000 to 10000. But in general, entry into this market by a lower cost supplier might be expected to expand the market in total size (number of purchasers) if not necessarily in total value (2000 table purchasers at $2500 become 3000 purchasers at $2200, but the 50 table purchasers at $8000 and above in 2009 slide to say 30 purchasers at $8000 up in 2010.)

    Bottom level, if Chinese actually provide a range of expensive tables, from $1700 to $10,000 (counting shippping), they will suck up more than 50% of the (former) $2000 table market, and likely more than 50% of the over-$2000 market.

    So all your 5 guesses are wrong.

  3. The question: how much of that added purchasing power stays in the United States and how much goes overseas as imports?

    really doesn’t make sense economically. Purchasing power is a functional adjustment for suubstitute products using currency as the unit of accounting:

    One could also use energy or carbon for accounting, but we usually talk currency.

    What you may be looking for is value added. You might be interested in how much design is a function of value added these days.

    Deisgn and innovation in product, service, delivery, etc. is usually more important than bulk value. For example the chips and info tech in a car are worth more than steel a commodity.

    Another issue confusing this debate is transfer pricing and reshipping.
    which distort accounting metrics due to tax and or business strategy.

    The question that appears to be asked is about value retention and geography, aka the hint at China in the end of your article. It is difficult to say, the world is shrinking.

    I think a faith in Ricardo’s comparative advantage working out over time is the best one can hope for.

    It is also important to acknowledge of course that currency units adjusted strictly by PPP (purchasing power parity) may not adequately reflect “value” efficiency, transfer and capture relative to human rights, environmental or other “costs” not typically or easily quantified.

    One can only offer caution when assuming nationalism, geography or accounting can reflect value capture, or correct actions in an ever more complicated product and services environment globally.

  4. Caleb Rawson says:

    You could even go further to find out at what point importing tables from China would be better for the US economy.
    With 10,000 USA made tables at $2000, $20,000,000 stays in the states.
    With 5,000 USA made tables and 5,000 Chinese tables, $15,000,000 stays in the states. However, because of the lower $1700 price tag more people would buy tables raising Chinese table sales to maybe 6,000 adding another $1,000,000 to the economy.
    Now if China produced all the tables sold and was able to lower the price even more to added demand to $500, then demand would rise to lets say 20,000 due the total cost only being $1500. If this happened then the amount of money in the states would be the same as that if there were 10,000 USA made table sales.


  1. […] Michael Mandel on retail sales and imports: “Here’s the starting question: When consumers start buying and retail sales goes up, how much of that added purchasing power stays in the United States and how much goes overseas as imports?” […]

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