Every month the BEA releases its closely-watched report on “U.S. International Trade in Goods and Services,” here’s a link to today’s release. In June there was $150.5 billion of international selling activity (U.S. firms selling their output to other countries, or exports) and $200.3 billion of international buying activity (U.S. firms and consumers purchasing products from other countries, or imports). Then what the BEA does next (and this is what gets reported widely by the media) is to subtract imports ($200.3 billion in June) from exports ($150.5 billion), to arrive at the monthly “trade deficit,” which was -$49.9 billion in June.
When the trade deficit gets larger (in absolute terms) this is described by the media as a negative event, here’s an example today from Haver Analytics:
“Unexpectedly, the June U.S. foreign trade deficit deteriorated to $49.9B from $42.0B in May. The combination of lower exports and higher imports brought the deficit to its deepest level since September 2008.”
But this standard approach to calculating international trade activity seems somewhat flawed. Why should exports of U.S. goods and services be seen as a positive contribution to the U.S. economy (these are goods that we produce but consumers and firms in other countries get to consume), and imports of foreign goods into the U.S. seen as a negative contribution to the economy (these are goods produced by foreigners, but we get to consume them)? In other words, the implication that a larger deficit is a "deterioration" of our trade position can only result from the false, mercantilist belief that exports are somehow “good” and imports are “bad.”
Another way to ask the question: When analyzing the contribution of international trade to the U.S. economy, why should U.S. sellers (exporters) have such a favored position (their sales are considered as a positive contribution) over U.S. buyers/importers, whose international transactions are considered to be a negative contribution to the economy? After all, both exports and imports are important to the U.S. economy, and shouldn't we really be more concerned about the overall total amount of international trade taking place by American buyers and sellers than the difference of international trading activity between those two groups of Americans?
I think the answer is that international trade data is used to calculate Gross Domestic Production (GDP) by the BEA, and that economic measure focuses specifically on the production of domestic goods, and not the consumption of goods and services, which would include both domestic and foreign products. That’s why exports are considered as a positive contribution to production and increase GDP, and imports are a negative contribution to production, and subtracted from GDP (C + I + G + X – M).
Given the importance of all international transactions to the U.S. economy, why not consider a measure of international trade that would compute the total amount of international trading activity in a given month by ADDING exports to imports, instead of netting out these two amounts to calculate the “trade deficit”?
Here’s how the June statistics might get reported:
Total U.S. trade with the rest of the world (sales of U.S. products to consumers and firms in other countries PLUS purchases of foreign production by American consumers and businesses) reached a 20-month high of $350.8 billion in June, the highest level since October 2008, and 42.6% above the April 2009 low of $246 billion (see chart above).
Further, the combined international trade volume for U.S. buyers and sellers has increased in 11 out of the last 13 months (following ten consecutive declines), providing further evidence that the economy started on a recovery path last summer and continues to make solid gains almost every month. Both the sales of U.S. goods and services produced by American firms and sold to the rest of the world, and the purchases of foreign-produced goods and services by American consumers and firms, have been on an upward trend as the U.S. and global economies recover.