How Imports INCREASE GDP
In recent posts, Pierre Lemieux and Scott Sumner refuted a common but mistaken idea: that because gross domestic product can be calculated by taking national expenditure data (i.e., the “C + I + G” part of the equation) and adding the value of exports while subtracting the value of imports (the “X – M” in said equation), imports reduce GDP.
This mistake should be obvious to people who have weighed themselves at the gym and then subtracted a few pounds to allow for the weight of their shoes and clothes: wearing heavier clothes doesn’t change their bodyweight. Similarly, subtracting imports that were included in C, I, or G expenditures does not reduce the “weight” of GDP. Still, this mistake is so common that such folks as Trump administration trade adviser Peter Navarro (a Harvard economics PhD, no less), political figure Pat Buchanan, countless economics reporters, and others who should know better routinely make it.
One of the reasons this error persists is that it echoes another mistaken but intuitively compelling idea: the imported goods could have been made domestically, and thus would have added to domestic employment. To show that this intuition is false, economists recite the theory of comparative advantage. Unfortunately, trying to explain what has been called the most counterintuitive idea in social science is not a winning debate strategy.
So here’s a different strategy: tell the story of the cocoa bean, one of many U.S. imports that increases American GDP and employment.
Cacao trees, which produce the bean, grow only in hot and humid conditions. Most of the world’s cacao comes from right along the equator; practically none comes from the United States. (American Samoa produces something like 0.0002% of the world’s crop). Yet the United States is one of the world’s largest chocolate producers, using cocoa beans imported from Ivory Coast, Ghana, Indonesia, Trinidad, and elsewhere.
I live just a few miles from Hershey, Pennsylvania, where enormous quantities of cocoa are processed daily by thousands of workers into Hershey bars, Reese’s Cups, Kisses, and other confections. Those jobs would not exist if not for the imported beans. Likewise, countless dairy farmers (including generations of my family), peanut farmers, sugar producers, and truckers depend on Hershey for work. Also, countless domestic dairies, bakeries, restaurants, cereal makers, and snack food makers use Hershey chocolate products in their wares.
The same is true for U.S. chocolate factories operated by Mars, Ghirardelli, Ferrara, and others. Most if not all of that production—and the tens of thousands of jobs behind it—would disappear without imported cocoa beans (though perhaps some would continue by using artificial or alternative flavors). That’s how this imported bean creates American domestic production and jobs, completely contrary to the explanations of Navarro, Buchanan, et al.
They would likely respond to this anecdote by saying that the destroyed jobs would be replaced by other jobs elsewhere in the economy. This is true, but the affected workers could move to those jobs now if they wanted to. Instead, they stick with chocolate-making because they are more productive and better paid. That is the point of the theory of comparative advantage: you produce what you can do more efficiently (like chocolate in Pennsylvania) and you import what others in the world can produce cheaper (cocoa beans).
This effect is not isolated to one temperamental tree. Cheap imported steel, aluminum, softwood lumber, and other inputs do the same thing. Even when domestic supplies of those inputs are available, the preferred foreign supplies result in higher employment and greater economic output in the United States by supplying a better intermediate good. It also works for finished goods; by importing, say, washing machines and solar panels, Americans free up more of their income to employ building contractors, dentists, artisanal bakers and vintners, musicians, mechanics, etc.
At a time when U.S. employment is below 4 percent and American wages are finally beginning to climb, it’s baffling that U.S. politicians want to put a number of productive jobs at risk because of a woeful misunderstanding of trade and economics.
As the old commercial said, Hershey is the Great American Chocolate Bar, yet it wouldn’t exist without imports. The same is true for plenty of other American goods.