No. of Recommendations: 11

A great post (#3003) with a fine understanding of economics and politics in my opinion. A couple of comments.

Trade deficits and surpluses are generally overrated in their significance, in my opinion. A trade deficit can be a very healthy sign!

Absolutely and a trade surplus may be a very unhealthy sign as evidenced by Japan who is in a decade-long no-growth phase and has failed to stimulate domestic demand to improve the economy and lower its trade surplus.

But if one of our domestic industries can't create the value and/or quality of a foreign company, do we really wish to subsidize that mediocre effort, and also penalize our consumers by restricting their choice? Bad economics.

Agreed and additionally the scarce resources that would become tied up in mediocre industries wouldn't be available in industries where the U.S. has a comparative advantage. Therefore, limiting imports also limits exports. Not limiting imports increases GDP through exports. In Asia the Tigers (Singapore, Taiwan, Hong Kong, and partly Korea) followed free trade policies and have grown to become wealthy through exports. Countries like Malaysia, Indonesia, China, etc. are still developing countries partly because they severely restricted imports and thus exports.

P.S. To this last point, our recent surprisingly glowing GDP report was mainly propped up by a falling trade deficit. Yep, as I understand it, a drop in trade deficit specifically lifts the GDP numbers, and that's what happened. But what did that drop in trade deficit truly show? A recessionary instinct among consumers to cut back their purchases of (sometimes more exotic) foreign goods. That's not a good sign, and should be factored out of GDP.

I don't I agree with this. By definition GDP can be computed as private consumption, C, plus private investments, I, plus government expenditures, G, plus exports, X, minus imports, M. In the first quarter of this year real GDP increased by 2% per year as follows:

+C +I +G +X +M

% Change +3.1 -11.5% +4% -2.2% -10.4%
Contribution to GNP % change +2.1% -2.2% 0.7% +1.4%

Private investments declined the most which is somewhat of a concern, partly due to a reduction of inventories. Imports dropped 10.4%, private consumption increased by much less (3.1%) and government expenditures also increased. However, because imports is only a small percentage of GDP while private consumption accounts for 60%+ of GDP it was the increase in consumption that was the most important force behind the strong GDP figure as evidenced by the last line of the table. The increase in real private consumption accounted for 50% more of the increase in GDP than the net effect from the trade balance (2.1% vs 1.4%). Normally lower imports will be a reflection of weaker private consumption but not in this case. Consumers increased real spending but for some reason substituted foreign goods for domestic. We may speculate why this happened (such as a temporary weakening of the strong dollar against the euro early this year) but it doesn't seem to reflect a fundamental weakness. I'm quite optimistic for Q2 if the poor Q1 performance for private investments temporarily reflected lower inventories.

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