Industry Assistance


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Stemming Imports Is the Only Effective Way to
Re-balance U.S. Trade

Alan Tonelson
Saturday, August 04, 2007

©U.S. Business and Industry Council 2007

Here’s to Carlos Gutierrez – the Commerce Secretary is world-class at capturing conventional thinking. He announced recently, “Our [trade] policy is to focus on growing our exports as opposed to introducing protectionist policies to limit our imports.” In making this pronouncement, he not only reflected the Bush administration’s position, but he also expressed the strong preference of virtually every American who has thought about international trade and the world economy.

If, however, the idea is to boost American output in goods and services, and thus spur growth and improve living standards throughout the U.S. economy, then Gutierrez’s trade priorities are completely backwards – as the conventional wisdom often is. Why? By far the greatest and readiest opportunities for increasing U.S. output are offered here in our home market and that would invariably involve curbing imports – i.e., enabling U.S.-based producers to win back the vast chunks of a home market they have lost in recent decades to foreign competition.

Of course, both better targeted exports and more selective imports would enhance American prosperity. There are two factors at work: the composition of the exports/imports and their levels. In the first place, maintaining America’s first world living standards requires that U.S. exports be concentrated in high value sectors like capital- and technology-intensive manufacturing, and imports be concentrated in lower value sectors like commodities. Exponentially increasing net exports of the latter, while ignoring the former, is a recipe for impoverishment.

It’s vital to draw another distinction as well. As much as 40 percent of all U.S. manufacturing trade consists not of the finished and/or consumer goods typically associated with the idea of trade, and forming the foundation of trade theory, like aircraft and computers and clothing. Rather, it consists of producer goods (also called intermediate good s), the parts and components of final products that are traded within the global supply chains of individual companies. This category also includes capital equipment – the building blocks of factories, and thus eventually final products.

Trying to re-balance the nation’s trade accounts by exponentially increasing exports of producer goods and capital goods could also set the stage for much greater trade deficits down the line – if either of the two following considerations holds. First, the parts and components go into final goods sent back to the United States, still the world’s champion importer. Second, the capital goods are used to build factories aiming their output at the American market. Disturbingly, these conditions pretty well describe today’s business models of many “American” multinationals, as well as foreign producers.

Yet even avoiding these complicated calculations, the need to focus on import reduction should be obvious for several reasons. There’s much less to most foreign markets than meets the eye, especially in the so-called emerging markets of the third world. Along with others, I’ve noted for years the fatal flaw in the globalization cheerleaders’ claim that America has no choice but export, because 95 percent of the world’s “consumers” live outside U.S. borders. What they always leave out is how many of those alleged consumers live on a dollar a day, and how many others are doing little better.

A recent Wall Street Journal article provided some specifics illustrating the pervasiveness of poverty deep enough to prevent significant third world consumption and importing for decades. According to the World Bank (the Journal’s Carl Bialik reported), 985 million of the world’s total population of about 6.60 billion lives each day on what $1.08 could buy in 1993. But a United Nations study last year showed that increasing this poverty line to only $1.22 per day boosts the poverty population all the way to 1.37 billion – or a fifth of humanity. Imagine how many hundreds of millions more don’t even earn $2 per day.

Another realistic perspective on the importance of U.S. imports comes from America’s status as far and away the most important end-use market – domestic or foreign – for most major trading powers. How else could it be accounting for some two-thirds of the world’s trade deficits while representing less than one third of its output? And why else would China and other Asian mercantilists – not to mention the OPEC oil producers – be spending such vast sums of money to buy U.S. Treasury bills and prop up Americans’ consumption? They clearly believe that subsidizing the U.S.. market – and therefore their own exports – will yield greater gains than investing in and expanding their own markets. Remember this the next time you read one of those news stories about China being the world’s new growth engine.

And then there’s the inexcusably overlooked truism (part of trade theory since David Ricardo described it two centuries ago) that selling domestically is much easier, all else equal, than selling abroad The business culture and legal and regulatory systems are that much more familiar; popular and commercial tastes are that much better known; distances are almost always shorter; and – especially relevant to U.S.-based producers – there are no trade barriers blocking the way.

But the strongest evidence for stressing import controls comes from the nature of America’s trade flows themselves. Most fundamentally, the sheer size of the trade deficit tells us that imports so vastly exceed exports that, from a purely mathematical standpoint, most of the potential for improvement must be on the side of limiting imports. Indeed, by every measure, the disparity between import and export flows has widened dramatically until the first half of this year.

For example, in 1997, properly measured to exclude transshipped products, U.S. imports of goods exceeded exports by just over 34 percent. In 2006, the gap has grown to nearly 100 percent – that is, goods imports were nearly double exports. Many commentators and many shills for the outsourcing multinationals have insisted recently that these trends are turning around. But even though goods export growth in 2007 (11.5 percent) has more than doubled import growth (4.6 percent), imports are still so much greater that the year-on-year deficit has fallen only 2.6 percent. And this shift has required a big drop in the dollar’s value, a marked slowdown in U.S. economic growth, and a big pickup in foreign growth. Worse, double-digit export growth recently has been the exception, not the rule, and indeed export growth this year is slower than last year’s comparable pace.

But the importance of imports sticks out most dramatically when you look at the trade figures not alone, but when combined with the actual figures on U.S. output – as USBIC has done with its pathbreaking research on import penetration . The needed output figures only go up through 2005, but show vividly how the gains from moderate import restrictions would dramatically outweigh gains from plausible export increases.

Let’s start with the more than 100 manufacturing industries whose import penetration rates USBIC has studied. They make up a highly representative cross-section of capital- and technology-intensive U.S. manufacturing – the kind our leaders keep saying they are most eager to promote.

One sees a huge, rapidly widening trade deficit for these sectors collectively – $51 billion in 1997, $257 billion in 2005. That’s because imports have grown three times faster (75.51 percent) than exports (26.39 percent) during this period. There is output growth too, but it’s astonishingly unimpressive – only 12.14 percent over eight years. And as is the case with the trade figures, that’s before adjusting for inflation, which would lower the total substantially.

So how best to improve this anemic output performance? Grow exports? It just doesn’t stand to reason. Between 1997 and 2005, exports only grew at a 3.30 percent annual average. Let’s say this growth rate doubled over those eight years – so that 2005 exports totaled $521 billion, not $431 billion – and that all else remained constant. The extra $90 billion in output represented by that amount would have been a nice boost, but it still leaves a large gap between 2005 exports and imports – and, of course, it didn’t actually happen; it was just an assumption. Many real world factors would have to change for the assumption of increased exports to come true in the future. Put another way, simply positing, as Gutierrez does, that we will increase imports doesn’t necessarily make it so.

No one can know with certainty the full potential of export growth. But achieving the doubling goal would have required exports to grow by a more than 10.50 percent annual average – more than three times faster than they actually did, and a performance reached in only single year during the 1997-2005 period.

Now let’s examine the import side. Let’s say we held the combined import penetration rate of these 100-plus industries steady during the 1997-2005 period. Imports would have risen in absolute terms (because U.S. consumption of these goods kept rising), but their share of the U.S. market would have remained at an already lofty 24.49 percent, not the 34.52 percent it actually became.

In this case, total 2005 imports of these products would have been only $488 billion, not the $688 billion they actually reached. Thus, holding all else equal, $200 billion would have been added to 2005 product shipment levels – an increase of 11.50 percent. That’s more than twice the gain generated from doubling the export growth rate.

Yet there’s another case to consider. Let’s assume that, rather than simply holding the import penetration rate level, the absolute levels of 2005 imports stayed where they stood in 1997.

Under that scenario, 2005 imports would have been $296 billion lower than they actually were, and 2005 output would have been $296 billion, or 17 percent higher, and would have hit $2.033 trillion. That’s 3.28 times the gain generated from doubling exports. And for an export-growth strategy to match that, more than 14 percent average annual growth in U.S. overseas goods sales would have been needed. U.S. goods exporters have recorded a gain this big only once in the last 10 years – in 2006.

Similar points emerge from analyzing the figures for individual manufacturing sectors. Not surprisingly, the case for an import-policy orientation is clearest in industries that have suffered deteriorating trade performances. But because even so many traditional export winners now fall into this category, the importance of import limits holds for some of America’s best export performers as well.

Take turbines and turbine generator sets, which power energy production facilities of all types, and which are viewed as a hugely promising export market because of infrastructure building in developing countries. Yet the sector’s trade worsened during the 1997-2005 period. Doubling the export growth rate from 1997 to 2005, to an annual average of 7.70 percent, would have boosted domestic output 16.58 percent in 2005. The export record of this volatile industry, however, provides no reason to expect such growth to be sustainable over any meaningful period of time. Meanwhile, simply holding the import penetration rate at its 1997 levels of 25.42 percent (it actually jumped to just over 48 percent) would have added nearly as much to domestic output – just over 13 percent. And had imports remained flat in absolute terms, product shipments would have jumped by an even greater 17.59 percent.

Advanced medical equipment (e.g., CAT scan and MRI machines), is also viewed as a big potential export winner because of third world population growth and aging. Yet its trade balance went from surplus to deficit between1997 and 2005. Here, doubling export growth rates from 1997 to 2005 (to an annual average of 13.68 percent) would have lifted domestic output by just under 10 percent. Export growth, however, attained that level only once during that period. Yet had the import penetration rate stayed at its 1997 level of just under 22 percent (rather than rising to 30 percent), domestic production would have expanded by nearly as much in 2005 (by 8.46 percent). And had import levels remained flat between 1997 and 2005, U.S. output would have been more than 21 percent higher in 2005.

The picture in construction equipment is especially interesting. Its export prospects elicit particularly loud raves. After all, it not only supplies the infrastructure projects that rapidly growing developing countries are building, but it aslso supplies the mining sector, and most mineral and other raw materials prices have surged in recent years. All the same, from 1997-2005, its trade balance changed from surplus to deficit.

Doubling the average annual export growth rate for that period from 7.34 percent to 14.68 percent would have added just over $4 billion to 2005 domestic output, an increase of 15.65 percent. The especially interesting aspect of this sector’s picture is that, although its annual export growth topped that level only twice between 1997 and 2005, a continuing third world infrastructure boom could put this goal within reach in the years ahead.

What would have happened, however, if its import penetration rate had stayed at its 1997 level of 29.15 percent, rather than shooting up to 49.85 percent in 2005? Domestic output in 2005 would have been $6.20 billion, or 23.84 percent higher. That’s much better than the 15.65 percent figure that would have resulted from doubling export growth rates. If imports had stayed at their 1997 levels, domestic output of construction equipment would have surged even more – by $8.67 billion or fully 33.33 percent! That’s more than twice the increase that would have been generated by doubling export growth.

The exceptions to this pattern are industries that export robustly, that have maintained positive trade balances, and that export an outsized share of their total production. Yet even when it comes to sectors that have only maintained trade surpluses, the importance of limiting imports becomes obvious.

Aircraft is a prime example. The sector’s trade surplus actually shrunk a bit from 1997 to 2005, but still remained at nearly $20 billion – the biggest in absolute terms for all of manufacturing that year. As a result, doubling average annual 1997-2005 export growth in aircraft to just under five percent would have increased 2005 domestic production by $4.99 billion, or 7.91 percent. The industry is extremely volatile. But such export growth seems well within reach, since Boeing has recovered from several years of poor production management, since Europe’s Airbus is now mired in similar problems.

At the same time, if the import penetration rate for aircraft had stayed at 1997's 15.24 percent, rather than increasing to 25.04 percent in 2005, U.S. production would have been 6.75 percent higher in 2005 – not far below the level in the export-growth-doubling scenario. If absolute import levels had not grown from 1997 through 2005, domestic production that year would have been increased by more than 10 percent – substantially more than had export growth doubled.

The bottom line couldn’t be more obvious. Exports should be encouraged, but the most promising way to expand domestic output and thus raise living standards is by stemming the import tide of recent years. Both common sense and the numbers support this conclusion. Does anything except stubborn ideology, lack of political willpower, or the simple greed of outsourcing interests stand in the way?

Alan Tonelson is a Research Fellow at the U.S. Business & Industry Educational Foundation and the author of The Race to the Bottom: Why a Worldwide Worker Surplus and Uncontrolled Free Trade are Sinking American Living Standards (Westview Press). .