(Bloomberg Opinion) -- President Donald Trump last week tweeted a declaration that his tariffs on Chinese goods had boosted U.S. economic growth in the first quarter of 2019:
Why does Trump think the tariffs boosted the economy? It’s possible that he doesn’t have a reason in mind. But it’s also possible that he thinks output rose because imports fell. If this is what Trump means, then his claim is on very shaky grounds.
The idea that imports subtract from gross domestic product is a common fallacy. They actually don’t count in GDP one way or another. GDP is a measurement of how many goods and services are produced within a country’s borders, and imports are produced elsewhere.
So why do some people -- including Peter Navarro, one of Trump’s economic advisers -- mistakenly believe that imports subtract from GDP? It’s because of the confusing way that economists define the different components of output. GDP is defined as the sum of consumption, investment, government expenditures and net exports (exports minus imports, the negative of the trade deficit). People look at that equation and think that because trade deficits are subtracted from output, that imports must be bad for the economy.
But although imports subtract from net exports, they also add to the other components of output -- consumption, investment and government spending. When an American buys a chair from China for $50, it decreases net exports by $50, but it raises consumption by exactly the same amount. The two effects net out exactly. Unfortunately, the way economists decided to define GDP makes imports’ negative contribution to the equation highly visible but hides their positive contribution from view.
In other words, the drop in imports in the first quarter did reduce the trade deficit, but it also subtracted an equal amount from the other components of GDP. The first quarter’s solid but unspectacular growth rate -- which, it should be noted, was lower than the first and second quarters of 2018 -- was really just due to modest increases in investment, consumption, government and exports.
But even if imports don’t directly count in GDP, could curbing purchases of foreign goods boost output indirectly? It’s certainly possible. If domestic producers immediately pick up the slack when imports are cut off, that would raise GDP. To go back to the example above, banning Chinese chairs might conceivably spur American furniture makers to start producing and selling more chairs in the U.S.
This notion makes sense -- after all, a certain number of people want chairs, and if they can’t buy them from China, they might buy them from American companies instead. But this doesn’t necessarily occur. First of all, recent evidence shows that Trump’s tariffs on Chinese goods have raised prices for American consumers. When prices go up, people tend to buy less of things. That means that at least some of the U.S. demand for Chinese goods didn’t shift to domestic suppliers -- instead, it vanished into thin air.
Even if U.S. producers do pick up some of the slack when tariffs staunch the flow of imported goods, it may reduce output in other sectors of the economy. Chairs and other goods require labor, buildings, machines and other resources to produce. If U.S. companies redirect these resources toward producing substitutes for vanishing Chinese imports, they generally have to take the resources away from some other enterprise, thus reducing production of something else.
An exception is when the economy is in a slump, so idle workers and factories are sitting around waiting for something to do. But this doesn’t really describe the current situation -- the U.S. labor market is quite healthy.
And there are also plenty of ways that import restrictions can harm GDP growth instead of helping it. The clearest way is by raising prices for U.S. producers. Tariffs on capital goods and intermediate inputs make it harder for American factories to get the machinery and the inputs they need to operate. That causes them to cut production, which hurts growth. It’s important to note that the bulk of Trump’s tariffs have fallen mostly on these sorts of goods:
So there are many ways that import reductions can hurt growth. Trade warriors who naively assume that there are idle American factories and workers standing by, itching to spring into action to replace lost Chinese imports, should realize how improbable this scenario is. It’s much more likely that tariffs are forcing American factories to reduce production, leading American consumers to lower consumption. The effect has probably not been large enough to hurt the economy so far, but if the trade war drags on, the losses could mount.
To contact the editor responsible for this story: James Greiff at jgreiff@bloomberg.net
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Noah Smith is a Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.
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