In Defense of Trade

July 5, 2022

Take a deep breath. I am going to get a bit wonky in this article. It is all for a good cause. I want to combat suggestions in the media that trade is bad for us.

After the first quarter measure of U.S. economic growth (GDP) was released, I re-read an article in the New York Times called rising imports a “drag on growth.” Similarly, Axios reported that “trade subtracted 3.2 percentage points from overall GDP growth.” These statements are simply wrong.

I know only a few can enjoy mind-numbing debates about economic concepts, so I’ll simplify. When the U.S. Bureau of Economic Analysis (BEA) calculates the growth of the U.S. economy each quarter (Gross Domestic Product, or GDP), it does so via the indirect method of calculation. As part of this, the BEA adds up all the purchases of goods over the quarter. Since the calculation seeks to identify what was produced domestically, imports must be subtracted from total purchases.

This subtraction of foreign-produced goods is an accounting method, not an economic phenomenon, as the reporting above would lead one to believe. The notion that imports detract from growth is a prominent component of an antiquated economic philosophy known as Mercantilism.

In 1776, Scottish Philosopher and Economist Adam Smith produced the influential book The Wealth of Nations, which in part sought to cast off the Mercantilist thinking that dominated the prior two centuries. After the first printing, it sold out, and the publisher was quoted saying its popularity “…has been more than I could have expected from a work that requires much thought and reflection, qualities that do not abound among modern readers…” Some things never change.

The Mercantilist framework perceived the importation of goods as detrimental to a country’s growth. Mercantilism has two core tenets. First, imports should be discouraged as much as possible. Second, if importation is absolutely necessary, it should be confined to raw materials that can be processed in the home country. The Mercantilist framework can be loosely summarized: if I win, you lose, and vice versa. There was no concept of trade benefiting both parties.

In Smith’s work, free trade was embraced as enriching to both parties. That reframing of the nature of trade has had powerful implications since, helping to open markets and enabling specialization, which has served to raise the living standards of billions.

This time of year, our thoughts as a country go back to our founding days and the genesis of the American experiment. Let us not through a misunderstanding of the nature of trade and its benefits perpetuated by some in the business media, look back to the antiquated economic thinking that previously held the world back.

Jeff Buck