Much of what we import doesn't displace domestic production so much as complement it. Imports fuel American industry by providing the raw materials, intermediate inputs and capital machinery our producers need to compete. Competition from imports spurs innovation, cost containment, and productivity gains. Lower prices for imported consumer goods allow households to spend more on home-grown services.
The dollars we spend on imports quickly return to buy U.S. assets. In 2010, our trade deficit in goods of $647 billion was exactly offset by our trade surplus in services and investment income and our large capital surplus—the amount of U.S. assets, including Treasury bonds, purchased by foreigners, minus the foreign assets purchased by Americans. The grand balance of U.S. international transactions last year, as in every year, was zero.
Politicians obsessed with the trade balance should give up the goal of promoting exports over imports. The aim of U.S. trade policy should be to maximize the freedom of Americans to buy and sell in global markets for mutual gain, whatever the mix of goods, services and assets we freely choose to trade."
Today's monthly trade report showing an increase in America's current account deficit to $50.2 billion in May was accompanied by the typical alarming media headlines such as: "U.S. Trade Gap Soars to 31-Month High in May," "U.S. Trade Deficit Jumped in May,"and "U.S. May Trade Gap Widens to $50.2 Billion."
Here's what probably won't get widely reported:
1. The total volume of U.S. international trade activity (exports + imports) reached an all-time record high in May (not adjusted for inflation) of almost $400 billion, slightly higher than the previous record of $398 billion in July 2008 (see top chart above). Compared to the recession-related, cyclical low of $277 billion of total trade activity in May 2009, there has been a 44.5% increase in U.S. trade in just two years, as the U.S. world economies have recovered and our trade level has "surged" and "jumped" to a record high.
2. Despite a slight dip in exports from April, the May volume of exports ($174.86 billion) was the second-highest monthly export volume in history (not adjusted for inflation), a further sign that a worldwide economic recovery, along with a cheap dollar, have led to a "surge" and "jump" in demand for U.S. products (see bottom chart above).
Related: Cato's Dan Griswold recently wrote in a Barron's article about the political and media obsession with the U.S. "trade deficit," and the underlying assumption that imports are "bad" and exports are "good":