Free Trade Agreements, Small Business, and IMPORTS

By SBE Council at 13 March, 2015, 1:38 pm

by Raymond J. Keating-

When it comes to trade and free trade agreements, there’s a lot of bad economics being tossed around these days.

In the previous SBE Council Technology and IP analysis (“Free Trade Agreements, Exports and Small Business”), I dealt with wrongheaded economic thinking on free trade agreements in general, and made clear how such agreements boost export opportunities, including for small businesses.

But now let’s get to the issue of imports, where there’s widespread misunderstanding. Many people mistakenly believe, and protectionists capitalize on such confusion (or they are confused themselves), that imports are negatives for an economy. After all, imports are subtracted from GDP, right?

Well, not really.

I’ve written on the “imports are not bad for the economy” topic several times before, but it is important to review the key issues given that assorted special interests are lining up to try to stop work on two major trade accords from moving ahead – the Trans-Pacific Partnership (TPP) with 11 Asia-Pacific countries (Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam), and the Transatlantic Trade and Investment Partnership (TTIP) with the European Union – as well as trying to derail passage of trade promotion authority, under which trade deals would go before Congress for an up-or-down vote, without special-interest amendments, thereby allowing trade negotiations to move forward in confidence.

So, let’s get the facts straight on the reality of imports.

Imports are subtracted from GDP not because they are somehow negatives for the economy and growth.

They are subtracted to avoid distorting GDP numbers. Consumption numbers in GDP already include consumption of imported goods and services. And in terms of GDP investment numbers, again, they include both domestic and foreign capital goods. The same also goes for government consumption and investment. Indeed, keep in mind that even when it comes to exports, those products can be made with goods that were imported.

So, since imports are already counted in these other GDP measures, if imports were not then subtracted, GDP would be overstated. That is, gross domestic product is about domestic production, and imports do not directly affect GDP.

Imports convey information about the state of the domestic economy.

As the early nineteenth century French economist Jean-Baptiste Say reminded us, “products are always bought ultimately with products.” This is known as “Say’s Law.” It makes clear that in a market economy, one must produce marketable goods or services in order to be able to purchase goods or services. What does it teach us about imports? Expanding imports correspond with expanding domestic production.

This is common sense from Economics 101. During good economic times, individuals and families purchase more consumer goods, including imports, and businesses are expanding investment, including the purchase of imported capital goods.

So, to tally up growing imports as some kind of a negative, costing the U.S. output and jobs, as assorted anti-trade advocates have done, is completely off base.

The numbers make the opposite case. When the U.S. economy slows or dips into recession, that’s when imports slow or decline. And when growth picks up, so do imports. Consider, for example, that during the most recent recession, real imports dropped in 2008 and 2009, and they declined during the 2001 recession, the 1990-91 recession, and the downturn from 1980 to 1982. Indeed, fewer imports are not positives for our economy.

Small businesses make up the overwhelming share of businesses involved in importing.

According International Trade Administration data, in 2012, 95 percent of firms that both export and import goods were small and mid-size enterprises (SMEs), and 97 percent of identified importers also were SMEs). As is the case with exporting, the import business is very much about small business.

In the end, rising imports are not a negative for the U.S. economy, but instead, reflect the state of the domestic economy, and the general expansion of trade – both imports and exports – are unmistakable good news for the many smaller businesses at work in the international marketplace.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

Keating’s latest book published by SBE Council is titled “Unleashing Small Business Through IP: Protecting Intellectual Property, Driving Entrepreneurship” and it is available free on SBE Council’s website here.