Trade Volume: It's the Total That Really Counts

by: Mark J. Perry

From Cato's Dan Griswold post "Rising Exports—and Imports—Are Good News for U.S. Economy":

Politicians and commentators love to focus on the deficit, as though it were a scorecard of who is winning in global trade, but the real measure is the total volume of trade. As economies expand, so does trade, both imports and exports. Exports help us reach new markets and expand economies of scale, while imports bless consumers with lower prices and more choices, while stoking competition, innovation, and efficiency gains among producers.

By this measure the BEA's recent trade report for December was good news all around, and one more sign that the U.S. and global economies continue to recover from the Great Recession. Last year, U.S. exports of goods were up 21 percent from 2009, while imports were up 23 percent. In contrast, in the recession year of 2009, exports of goods dropped 18 percent from the year before while imports plunged 26 percent. (Unemployment soared in 2009, but, hey, at least the trade deficit was “improving”!)

I've made this point before about the importance of adding exports and imports to report total trade, see posts here and here. As the top chart above illustrates, total trade plummeted by $120 billion due to the global recession from mid-2008 through the summer of 2009, and this was at a time when our monthly trade deficits were "improving," from almost -$70 billion to less than -$30 billion. Obviously, the declining volume of total trade in 2008-2009 was a much better indicator of the deteriorating economic conditions than the "improving trade deficit."

As Dan points out, when it comes to measuring economic performance of the U.S. economy, the most meaningful and relevant measure is "total trade" and not the relatively meaningless current account "trade deficit" for goods and services (which is exactly offset by a capital account surplus). It's unfortunate that the total volume of international trade doesn't get more attention. Thanks for Dan Griswold for making the case.