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In a post earlier in the month on Cafe Hayek (“Almost All Imports Are Inputs“), Don Boudreaux made some excellent points about international trade. He started by quoting Dartmouth economist Doug Irwin:
Over half of all US imports are either intermediate components or raw materials. These imports are sold as inputs to domestic businesses rather than as goods consumed directly by households.
The chart above confirms Irwin’s statement by showing the shares of US imports of goods classified by “end-use category.” In 2015, imports of capital goods (machinery, equipment, aircraft, semiconductors, engines, tractors, etc.) and industrial equipment (lumber, chemicals, aluminum and copper, iron and steel, cotton and wool, plastics, fuels, etc.) together accounted for 53% of total imports last year. It’s an important point that more than half of what enters the US as imports are orders from US companies (e.g. manufacturers) for equipment, supplies, raw materials, commodities, and other imports that serve as direct inputs into the production process that takes places in American factories and businesses that employ millions of American workers. And the lower the price of inputs for US businesses (whether sourced internationally or domestically), the more competitive those companies are, the more of their products they can sell (both international and domestically), the greater market share they can achieve, and the more US workers they can hire. In contrast, the higher the prices of imported inputs (e.g. through higher tariffs), the less competitive US companies will be, and the fewer workers they will hire. Keep that in mind the next time you hear Trump’s nitwitery about creating more American jobs by making imported inputs more expensive with his proposals to impose double-digit tariffs on goods from Mexico and China.
But Don makes a different and equally, if not more, important point about imports:
Nearly all imports that are not raw materials are appropriately classified as intermediate components. Thus, the percentage of American imports that together comprise the category “intermediate components or raw materials” is far larger than 53%. Indeed, it’s likely well over 95%. Nearly all American imports – even of goods formally classified as consumer goods [and as cars and food in the chart above] – are inputs into the production of producers in America.
Consider, for example, a truckload of individually packaged bed linen imported into America from China. And to make matters simpler that no American-supplied cotton or other inputs, at any stage of production, went into making these packages of bed linen. Suppose, reasonably, that these packages of bed linen will be offered for sale to final consumers in Walmart stores throughout the United States.
These packages of bed linen are classified as consumer goods (see chart above). They are, therefore, not among the 53% of American imports that are conventionally classified as intermediate components. Yet I submit that this conventional classification is mistaken. These packages of bed linen, when unloaded on an American dock, are not sold directly to final consumers. They have already been purchased by Wal-Mart. These packages of bed linen are intermediate goods; they are inputs into Wal-Mart’s production process.
So when Wal-Mart imports packaged bed linen, it does not buy these goods as consumer goods; it buys them as intermediate goods – goods that are used by Wal-Mart as inputs into producing the final consumer service that we might call “shopping convenience.” Only by supplying this latter service – shopping convenience – does Wal-Mart earn profits. From Wal-Mart’s perspective, imports from China of packaged bed linen are inputs used to produce its own output no less so than are Wal-Mart’s delivery trucks, warehouses, cash registers, advertising, and corporate stationery.
An understanding of Don’s point leads to the insight that rising imports (intermediate goods, or inputs), even if that increase leads to an increase in the “trade deficit,” is a sign of economic strength, not weakness. Suppose the increase in imports (intermediate goods) comes about because GM and Ford have ordered more engines and car parts (inputs) from Mexico to increase production of cars in Michigan. Or suppose the increase in imports (intermediate goods) comes about because Wal-Mart orders more bed linens (inputs) to meet rising consumer demand. In both cases, those increased orders of intermediate goods (imports) would reflect economic strength, not weakness.
Don Griswold made that point here in 2011:
Politicians and commentators love to focus on the trade deficit, as though it were a scorecard of who is winning in global trade, but the real measure is the total volume of trade. As economies expand, so does trade, both imports and exports. Exports help us reach new markets and expand economies of scale, while imports bless consumers with lower prices and more choices, while stoking competition, innovation, and efficiency gains among producers.
I’ve similarly argued before (see CD post here) that we should focus on the total volume of trade by reporting the sum of exports and imports in a given period, instead of only reporting the trade balance every month by subtracting imports from exports (as if rising inputs were somehow a drain on the US economy?). Given the discussion above, rising imports shouldn’t be considered negatively, but rather as a positive sign of economic strength. In the post at the link above, I wrote that “An increase in imports means that American consumers are better off (not worse off), US businesses are more competitive (not less competitive), which translates into a higher (not lower) standard of living and an increase (not decrease) in the number of US jobs.”
Finally, in a Letter to the Editor in today’s Wall Street Journal, David E. Weisberg also makes the point that rising imports (even if that increases the trade deficit) represent more domestic economic activity:
Suppose our trade deficit in a particular year were represented by one big shipload of goods delivered to a US. port. The value of those goods would be the net trade deficit for the year. But that ship would be off-loaded by US port workers; their work is domestic US economic activity. The goods would probably then be loaded onto trucks that would haul it to warehouses across the country. Transportation and storage is also domestic US activity. From those warehouses, some of the goods might be transported to retail stores and sold to consumers, while other goods might be sold online and delivered directly from warehouses to Americans’ homes. All of this business represents more US domestic economic activity.
No one can know a priori whether the dollar value of domestic economic activity generated by imported goods is more or less than the value of those imported goods, regardless of whether or not the value of those imported goods exceeds the value of our exported goods.
Bottom Line: What the two Dons and David said.
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