Wednesday, August 11, 2010

U.S. Total International Trade (Exports + Imports) Reaches 20-Month High of $350 Billion in June

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.


At 8/11/2010 10:26 PM, Blogger bix1951 said...

Thumbs up for your analysis.
"Perception is reality."
Just got back from a vacation on the California coast. The economy is fantastic. Plenty of tourists from Europe.

At 8/11/2010 11:35 PM, Blogger Buddy R Pacifico said...

This comment has been removed by the author.

At 8/12/2010 1:05 AM, Anonymous Anonymous said...

That's quite a zig zag in the last 3 years: care to break out the two components so we can see which was more volatile? Also, I wonder why overall trade was so abrupt in stopping and starting this time around.

At 8/12/2010 5:17 AM, Blogger marmico said...

It's called GDP for a reason...Gross Domestic Product. Maybe you are feeling a little sad since the trade deficit together with other revisions will reduce Q22010 GDP to stall speed vitiating your v-shaped recovery meme.

Rewrite the GDP accounting identity. Just subtract imports of consumer goods from Consumption and capital goods from Investment, etc. No matter how it is rewritten, Q22010 GDP is still at stall speed.

At 8/12/2010 10:04 AM, Blogger Sean said...

I think the implicit understanding is that there is more value in the ability to create than to consume. After all, anyone can blow a million dollars: creating a million dollars of worth is another thing altogether.
There is strategic, personal, political, and cultural value in Americans being competitive in their ability to create, to find a place in market. It is of far less value to be able to consume, even leaving aside the consideration of employment.
But I suppose this is blindingly obvious.

At 8/12/2010 10:17 AM, Blogger Buddy R Pacifico said...

" 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?

Thus, to extend the professor's logic we should emphasize the Gross International Trade Product. Exports and Imports are all added together and suddenly there is no mercantilist nation that the U.S. trades with. Millions of jobs lost in the U.S., and their incomes, are of no consequence because the GIP is growing.

The stifling of U.S. Exports and uber-mercantilism of trade associate nations is of no consequence because the U.S. is getting GIPed!

Or, we can quickly back away from getting GIPed with aggressive - actions to grow U.S. Exports and shut-down anit-trade agreement mercantilist policies of the U.S. trading associates.

At 8/12/2010 10:28 AM, Blogger Buddy R Pacifico said...

Upon further review of my comment above: I suggest Gross Internationl Product of Trade or GIPT - this acronym is pronounced "gypped". Thanks, for your indulgence.


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