Stemming Imports Is the
Only Effective Way to
Re-balance U.S. Trade
Saturday, August 04, 2007
©U.S. Business and Industry
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
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
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
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
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
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).