ANALYSIS/OPINION:
President Obama wants to use international trade policy to generate a sustainable, private-sector-led recovery, and that’s a good idea.
Unfortunately, to do so, he evidently needs to learn some basic economics about how exports and imports affect growth and employment. Otherwise, on balance, initiatives like his oft-repeated commitment to double U.S. exports by 2014 and his pursuit of new trade agreements won’t create a penny more of output or a single new job. In fact, as indicated by the new government data for 2010, this trade-policy approach is likeliest to undermine recovery and increase the nation’s already dangerous debt load.
Trade unquestionably represents a badly needed growth opportunity. With U.S. consumer and government finances shaky at best, selling more American goods and services abroad credibly promises to bolster the economy without further risky borrowing and spending.
For decades, however, economists generally have agreed that for trade policy to fuel growth and employment, simply boosting the absolute level of exports — what the president keeps emphasizing — isn’t enough. Exports must increase relative to imports. Indeed, exports must increase sufficiently compared with imports to improve the country’s trade balance — the difference between the two. Because U.S. imports have vastly exceeded exports for so many years, better trade performance requires narrowing a huge deficit.
For confirmation, the president need only look at his own Commerce Department’s official statistics on the economy’s output (the gross domestic product, or GDP) and its growth rate. Commerce economists agree with their peers that exports add to the GDP — by expanding the market for U.S.-generated goods and services beyond the nation’s shores. Imports, however, subtract from GDP — because they represent sales lost by producers at home to producers abroad.
This official method for determining GDP, in turn, makes clear how trade balances affect the economy’s size at any given time. When exports exceed imports, and America’s foreign sales therefore more than offset the domestic sales lost to imports, U.S. trade flows on net add to output levels. When imports exceed exports, and therefore the domestic sales lost to imports more than offset the nation’s foreign sales, U.S. trade flows on net subtract from output levels.
According to the official figures, trade flows affect U.S. economic growth rates over time in similar ways, and they, too, impose a “net effect” test on trade policy. When the trade balance worsens, trade flows detract from growth. When the trade balance improves, they contribute to growth.
Given America’s recent deficits, then, altered trade flows can foster growth only when this gap narrows — i.e., when net exports rise. In 2009, the goal was achieved as the inflation-adjusted net exports soared by nearly 28 percent. Unfortunately, no one could be happy with the main reason: The deeply recessed economy saw imports fall even faster (13.84 percent) than exports (9.53 percent).
Last year, however, even sluggish U.S. economic expansion was enough to bring back trade deficit growth and its destructive effects on overall growth. In 2010, after inflation, exports rose by 11.72 percent. But the much greater volume of imports increased even more — by 12.56 percent — and pushed the net export total down by more than 16 percent for the year.
The effects on growth also contrasted dramatically during those two years. In 2009, the economy shrank by 2.60 percent in inflation-adjusted terms. But this shrinkage would have reached more than 3.70 percent without the improvement in the deficit. In 2010, however, the economy’s 2.80 percent inflation-adjusted growth would have reached 3.28 percent without the worsening of the deficit.
The effects of trade flows on employment are much more controversial among economists. But if overall growth rates are held constant, when are jobs likeliest to be created by trade? When the economy is shrunken by trade deficits, or when it is enlarged by surpluses? When overall growth is undermined by worsening trade balances? Or when it is strengthened by improving trade balances?
The official GDP data, therefore, show that achieving the president’s goal of doubling exports over any time period won’t promote genuine recovery unless it produces a net export expansion and thereby reduces the trade deficit. The trade deficit’s rebound last year as soon as even modest growth returned by itself casts doubt on his chances for success. Cause for even greater concern is his continuing failure even to mention the net export imperative.
The president’s habit of touting new trade agreements in comparably one-sided terms, meanwhile, does not inspire confidence in the net benefits of these deals. Nor does his determination to repeat the fundamental mistakes of previous deficit-ballooning deals: Pursuing trade expansion with countries that cannot become major net importers from the United States either because of their low income levels (see Mexico or Colombia, for example), their own obsession with boosting net exports (see China or Korea), or both.
The financial crisis and ensuing recession demonstrate the folly of basing an economy on illusions. Real recovery cannot possibly be based on equally illusory trade policies.
• Alan Tonelson is a research fellow at the U.S. Business and Industry Council, a national business organization whose nearly 2,000 members are mainly small- and medium-sized domestic manufacturers. Author of “The Race to the Bottom,” Mr. Tonelson also is a contributor to the council’s website www.AmericanEconomicAlert.org.
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