The U.S. trade deficit jumped to its highest level in 10 months, according to data released by the U.S. Commerce Department this morning. What to make of this?
Every month the Commerce Department publishes data on the value of U.S. exports and imports. And every month, the media do an absolute hatchet job explaining the meaning of those data. As I’ve been arguing for a long time, careless reporting and inaccurate media analyses of imports, exports, the trade balance (exports minus imports), the "Trade Account" and the slightly broader measure of international trade activity called the "Current Account" help explain the growing aversion of Americans to trade and trade agreements during the past decade.
The media’s tendency to describe a rising trade deficit as bad news or imports as a drag on economic growth has reinforced misconceptions that politicians perpetuate all the time: that exports are good; imports are bad; the trade account is the "scoreboard," and; the large U.S. trade deficit is proof that the United States is losing at trade.
But the fact is that imports are very much pro-cyclical. They increase as the economy grows and decrease when it contracts. One of the more obvious reasons for this is that as personal consumption increases (decreases), consumer demand for imports increases (decreases). But another critical, but less discussed, reason is that U.S. producers rely heavily on imported raw materials, components, and capital equipment. As businesses starts to ramp up output, demand for imported intermediate goods rises. Purchases of intermediate goods have accounted for over half of all U.S. import value in recent years, which would suggest that the rising trade deficit has more to do with business being poised for expansion than with consumers itching to go to the mall.
Yet, media and politicians often characterize imports as a sign of profligacy. They argue that balanced trade or a trade surplus should be an objective of economic policy, and that policies designed to slow import growth can accomplish more balanced trade. But imports and exports are also very much positively correlated. They rise and fall together. Imports are contained in domestic output, and a good chunk of domestic output is exported. Buy more from abroad, and foreigners can afford to buy more from us. Sell more abroad and we can afford to buy more from foreigners. Stymie imports and you get stymied exports.
My colleagues and I have joked in recent years that what we need is a good recession to cause Americans to reexamine their feelings about imports. Maybe that would mark a turning point in public opinion about trade. Well, we may have been onto something. In recent months, as we’ve been emerging from the Great Recession, the media’s reporting of the trade figures has been more circumspect and more balanced.
The opening sentence in Martin Crutsinger’s Associated Press story today is: "The U.S. trade deficit jumped to the highest level in 10 months as an improving U.S. economy pushed up demand for imports (my emphasis)."
There’s nothing like a good reminder of the pro-cyclicality of imports to help Americans reconsider their antipathy toward trade. However, before concluding that we’ve fully turned the corner, there’s this passage from the same report:
"Through the first 11 months of 2009, the overall U.S. trade deficit in 2009 was running at an annual rate of $371.59 billion, down by nearly half from last year’s imbalance of $695.94 billion. That improvement (my emphasis) reflected a deep recession in the United States which cut sharply into consumer demand for foreign products."
If an "improving" U.S. economy is associated with a trade deficit that "jumped" in 2009 (as described in Crutsinger’s first passage), how can an "improvement" in the trade deficit "reflect a deep recession in the United States," as reported in his second?
It’s time reporters adopted neutral terminology when describing the trade account. The trade deficit "increased" or the trade deficit "decreased" are not only more objective descriptions, but more accurate ones as well.