Writing about free and fair trade recently in the Wall Street Journal, President Trump’s director of trade and manufacturing policy Peter Navarro took issue with some World Trade Organization rules. He especially dislikes those requiring member nations to avoid applying discriminatory tariff policies when trading with other WTO members. Navarro, like his boss, favors the use of tariffs as a big stick for battering other countries when their policies are unacceptable to him. Recall that the president refers to himself as a “Tariff Man.”
But while Navarro’s analysis of the relative merits of WTO rules opens what could be a useful policy debate, a related statement (that higher imports always lead to lower GDP and therefore less employment) is just plain wrong.
Navarro put it this way: “But because imports don’t contribute to gross domestic product, unfair trade reduces growth, and narrowing the trade deficit through higher exports and lower imports boosts growth.”
It seems that former professor Navarro learned his Keynesian economics a bit too well. At the simplest level, the model says “GDP = Consumption + Investment + Government Spending + Exports – Imports.” Yes, all else equal, when imports rise, GDP falls. The model works well at the blackboard, but not quite so well on the factory floor.
The hitch comes with the “all else equal” requirement. It turns out that in lots of cases, imports are used as components in products that later become exports. The issue is intermediate goods, and we are not talking about small potatoes.
An intermediate good is a component that will be made a part of a final domestic product. In 2016, the United States imported about $90 billion in consumer goods, $77.6 billion in capital goods, and $34.7 billion in intermediate goods. For example, Alcoa imports aluminum made by its own Canadian plant and uses the newly produced metal when fabricating final goods to be sold in the United States. An increase in imports, for Alcoa, enables U.S. production to increase. Higher imports = higher GDP.
The International Trade Commission describes the situation this way: “Globalization of supply chains, better known as ‘offshoring,’ tends to rely on the production of manufactured goods (most of which are intermediate inputs) abroad. The intermediate inputs are commonly manufactured by either a foreign affiliate or an independent supplier and are then imported back to the United States for final assembly.”
Consider BMW, the largest exporter of U.S.-made automobiles. In 2017, it exported more than 270,000 automobiles produced at its South Carolina plant. Each one of the vehicles contained an engine and transmission produced abroad that had been imported to the United States. The value of BMW’s 2017 exports was $8.6 billion, more than 15% of the value of all U.S. automotive exports that year.
[Related: BMW curbs 2018 profit forecast due to Trump’s tariffs, new emissions rules]
If we wish to build and export more BMWs, we must import more BMW engines and transmissions. If, by presidential command, we reduce the importation of engines and transmissions, we will immediately reduce our exports by a greater value. A completed BMW is worth more than a BMW engine and transmission.
Mr. Navarro needs to rethink his anti-free trade position. What works on the blackboard doesn’t always work in the real world.
Bruce Yandle is a contributor to the Washington Examiner’s Beltway Confidential blog. He is a distinguished adjunct fellow with the Mercatus Center at George Mason University and dean emeritus of the Clemson University College of Business & Behavioral Science. He developed the “Bootleggers and Baptists” political model.
