Is Trade a Plus or Minus for U.S. Growth?

Is trade a plus or minus for U.S. growth in this recovery?  This is obviously an important question, given that domestic demand is likely to be stagnant for sometime.  We’d like to see net exports becoming less negative, which would indicate that trade is a source of growth for the U.S. economy.

However, this morning’s GDP release gave an ambiguous answer to this question.  If we look at  net exports of goods and services, measured in nominal dollars,  the trade gap has increased over the past year from $379 billion in the first quarter of 2009 to $504 billion in the first quarter of 2010 (measured at annual rates).

 

But if we look at the trade gap adjusting for price changes, it’s actually shrunk over the past year, from $387 billion to $367 billion.

In other words,  the real gap is shrinking while the nominal gap is increasing.

The same pattern holds over the past ten years as well. In nominal dollars, the trade gap has increased since 2000, making it a drag on the economy.  Meanwhile in real dollars the trade gap has shrunk.

The apparent shrinkage of  the real trade gap  since 2000 is either one of the key positive facts about the U.S. economy,  or an exceedingly misleading statistical illusion.

Comments

  1. The title of this post is misleading. No combination of movements of imports and exports could lead a competent economist to conclude “minus”. Voluntary informed exchange is always mutually beneficial. A better title would have been, “Don’t Confuse Nominal Variables with Real Variables.”

    • CompEng says:

      While voluntary exchange occurs all the time, I marvel at any instance of truly informed exchange.

  2. Let me see if I’ve got this right. Suppose the excess imports consisted exclusively of a certain car. Suppose, very roughly, as of 1Q09, annual excess imports consisted exclusively of cars costing $37,500 each — 10 million of them. Apparently as of 1Q10, these cars averaged $30,000 each over the past year — a 20% price reduction. We imported 16.6 million of them, costing $500 billion. If not for the price decrease, our $500 billion would have only bought 13.3 million of them. It’s sort of as though 3.3 million of them were free, and 13.3 million were full price. The 3.3 million free ones would have cost 125 billion at the original price, so our $500 billion in a sense only cost us $375 billion. Roughly.

    The question being posed is whether this annual pattern is a plus for the economy. Well, certainly it is not a plus to the extent that it has been debt driven discretionary expenditure — it means that countless individuals would have been better off to just wait to buy whatever imported goods they wanted. To the extent that it represents an unavoidable cost of living, then yes it is a plus. How much of a plus depends upon whether it has been sufficient to offset other unavoidable costs that have been increasing — health care, housing (until recently), energy, food (erratic). I doubt it. Nobody really needs a brand new car made of mostly imported components, and keeping the family clothed at a bargain is just not going to offset all those other living expenses.

    I am nearly certain that 1) discretionary dollars are shrinking for 95% of households and 2) the vast majority of excess imports represent discretionary expenditures. Presuming that import price decreases are in this 20% annual realm and lead to some lesser price decrease at the point of sale, the question is whether that exceeds the rate of decrease of discretionary dollars, and if it does, whether any measurable good results from it. Examples of measurable good for the economy would be cell phones that increase small business owners’ efficiency, or solar panels that reduce the cost of electricity. A larger TV might ultimately be a negative if all external costs and diverted dollars are considered. Whether the delight of a new camera is good for the economy is a question that I find impossible to answer, but I would lean toward not, same as for many offerings that presume a great amount of leisure time that people don’t actually have.

  3. L.A.O. says:

    On second thought, I’m convinced that the importation of most discretionary goods, particularly those that function and entertain with ever less user expertise required, do not contribute to the economy — they are sunk dollars that are no longer available to the economy, but worse, they demand so little of us as to transform us into near helplessness. Forgive me for this obvious rant.

    We increasingly use these things without learning anything about even the most basic principles of physics or materials or chemistry or problem solving, or any appreciation of the challenges that were met in producing them and making them affordable and effective and appealing. Their low price contributes to the disappearance of repair expertise and even the ability to discern quality except by gleaning the experience of earlier buyers.

    We instead hone our bargain hunting skills and judgment of what lends prestige and a sense of belonging, along with the skill of complaining effectively. There seems to be, not surprisingly, a corresponding pervasive lack of respect for more and more of the contributions to the end result. Even the scientist is a geek who earns far less than a banker and whose work is subject to contradiction by the uneducated man on the street, and mathematical competence in managing one’s affairs seems to have been supplanted by asking one another’s opinions. We promote the goal of education while subtly discounting the value of much of its traditional objective. We need not look to the physical world for innovation in this economy as we increasingly remove ourselves from any first hand knowledge of it. I am hard pressed to envision the economic benefit of this cultural transformation.

    • azmyth says:

      Trade allows specialization far in excess of what would be possible without it. From the earliest days of economics, Smith marveled at how specialization within a firm improved the productivity of pin manufacturing and how specialization across firms improved productivity in making woolen coats (B.I, Ch.1, Of the Division of Labor, The Wealth of Nations). Leonard Reed likewise noted that “no one can make a pencil” due to the massive amount of coordination and distribution of labor involved. While it may be difficult to envision how such a complex web of trade makes us better off, that does not imply that we are worse off because of it. Countries which are open to trade are orders of magnitude richer than those which are not. Just as farmers of ages past may have looked down on the increase of manufacturing as a useless activity, so too do people today view the services professions as inherently wasteful since they don’t make anything. However, physical goods are only valuable for the services they provide. No one cares about the physical properties of an umbrella, so long as it provides the service of keeping you dry. No one cares about the physical composition of their car, so long as it gets them to their destination quickly and safely. More and more of our economy is devoted to coming up with recipes rather than products, but isn’t that a hopeful thing? Recipes are public goods – they can be used over and over at low cost and make everyone better off. They are non scarce and they have increasing returns to scale; all things to celebrate, not mourn.

      While I do not understand why people buy the things they do, nor why the interplay of supply and demand is such that bankers make more than scientists, I still take wonder at the patterns of voluntary cooperation that allow people to live their lives as they choose.

      • CompEng says:

        The negative here may not be the consumption per se so much as the culture effect that limits production. Again, trade is fine, but I’d expect specializing in consumption rather than production is bad for us culturally in much the way eating too much sugar is bad for one personally.

      • L.A.O. says:

        You indeed have the outlook of an optimist, and a little review of the Silk Road is all it takes for anyone to catch that poetic appreciation of trade contributions to the richness of life and culture, whether measured in material wealth or something more precious. There are different drivers now than then, though.

        I think we have the consciousness and knowledge to begin to understand that you get from people what you enable. You cannot build upon your nation’s technological prowess, for example, if you take away everything that made the people technologically innovative. I think the vast majority of Americans assume that somebody here is inventing the next big thing, and that it will be technological in nature, but I am saying that they may be wrong. I am hunting for the recipe for an economy that works and provides people some resilience and dignity.

        It is not like farmers mourning the growth of manufacturing, it is more like farmers having the topsoil sold out from under them, knowing that the nation will no longer be able to grow its own food. Some Asian nations allowed the destruction of their farming on the basis that they could always buy cheap imported food, but it went awry — it was a big mistake.

        Maybe I mistake your meaning of a public recipe — not being forced to reinvent the wheel, perhaps, nor to rely upon a wise grandfather. I probably call it standing on the shoulders of giants and also feel pretty positive about it, but so much of this again is in the physical realm. In the social realm and the services realm, there is little so far that isn’t just another way to sell goods we don’t make. We do have the recipe for making music and great food, the recipe for working with remote strangers, the recipe for buildings and roads, for removing stains, installing many things, spreading accident risk, extracting wealth from gullible people, etc. Not much of this scales well.

  4. Mike Mandel says:

    I like the way you are heading. These posts are thinking out loud, and I’m kind of heading in the same direciton.

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