The great export dodge

I can’t seem to get away from good news about exports. On Monday, the Wall Street Journal worried about foreign shocks retarding America’s "export-led rebound." Then a message from the U.S.-China Business Council emphasized that U.S. exports to China are skyrocketing on their way to early fulfillment of President Obama’s export doubling objective. Having just digested that, I received an email from Globalworks explaining how last year’s 17 percent increase of $265 billion in U.S. exports had accounted for half of 2010 GDP growth.

Because the words "export-led growth" vanished from the American vocabulary over half a century ago, and because I am one who has long called for a U.S. export led growth strategy, I should have been delighted. So why wasn’t I? Why did I have the feeling that this news was so, well, too good to be entirely true?

One thing was the fact that there was not much mention in any of these messages of U.S. imports. Yet I knew that after dipping during the Great Recession the chronic U.S. trade deficit has been rising steadily for the past twelve months and that the current account deficit is now well above the 3 percent of GDP level considered sustainable by most economists. So it sounded like we might be in the position of exporting our way to another crisis as our global deficits become increasingly unsustainable.

This paradox is the big problem with what I call the export dodge. Promoters of our present system of international trade and globalization do not want to discuss trade deficits and imports because such topics raise difficult questions about the validity of the theories and assumptions on which the present system is based and about the possibility that the present system is actually disadvantageous to the U.S. economy. Thus the emphasis is placed on exports. The president doesn’t want to talk about cutting the trade deficit because that might be perceived by some as smacking of protectionism. So he calls for doubling exports. Other defenders of the status quo want to divert attention from the mercantilist practices of some of our trading partners and from any "protectionist" consideration of measures to counter those practices. So they emphasize how well our exports are doing and how much they are contributing to growth.

Of course, it would be wonderful to double exports. But if attention to that diverts the President and others from noticing that imports continue to rise more than imports, we are very likely to fall into a new crisis.

Let’s take a look at the numbers behind the headlines to see how this works.

In 2010, U.S. exports increased by $265 billion or 17 percent over the level of 2009. Exports of goods rose by about $211 billion and exports of services by roughly $43 billion. The total equaled about 1.34 percent of U.S. GDP and was thus credited for raising GDP by that amount. This is well and good and makes it sound as if international trade is doing wonders for the U.S. economy.

But now we must take a look at the other side of the equation. Over the same period, U.S. imports rose by $385 billion or nearly 20 percent with goods imports rising by $360 billion and services imports by $25 billion. Thus imports outstripped exports by $120 billion and adding that amount to America’s enormous international debt and to the great pile of dollars and U.S. treasury bonds held by its major trading partners.

The fact that net exports were negative might suggest that trade was actually a drag on U.S. GDP growth and that all the emphasis on exports is entirely misplaced. In fact, it’s a little more complicated than that. To know the exact answer one would have to look at what was being imported and exported and to what extent imports displaced potential domestic production.

What is clear, however, is that talking about exports without addressing imports and the balance of trade is misleading and potentially dangerous. In particular, the only way to cut U.S. unemployment without increasing U.S. debt is to reduce the trade deficit. That means increasing exports more than imports. There are several ways to do that. We could cut imports while raising exports or cut imports while holding exports steady or raise exports by a lot more than imports. But what cannot be done is to simply focus on export gains while ignoring imports.

In short, it’s time to stop dodging the tough questions on trade.