Will consumers benefit from cheaper imports?

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The author is a senior member of Carnegie donations for International Peace

For decades, Americans have been told that low-cost imports are unresolved blessings. By purchasing cheaper products overseas, Americans can increase their salaries and improve their standard of living.

However, this story confuses causes and effects. The real advantage of international trade is that it helps the country maximize its domestic welfare by maximizing the value of domestic production. For the world economy and individual countries, it is only by producing more of what we can consume more.

Cheap imports can actually have the opposite effect if they encourage a decline in domestic production. When the US operates a trade deficit, it buys more from other parts of the world than it sells. As a result, rather than paying American imports with goods and services produced in the United States, Americans pay by transferring ownership of stocks, bonds, factories, real estate and other American assets.

Furthermore, the American economy automatically responds to weak demand in countries where industrial policies are designed to increase global manufacturing stocks at the expense of domestic demand, with largely open trade and capital accounts. This is done by shifting American production from manufacturing to service, regardless of actual American preferences.

That’s why Americans have simple claims that they “win” by getting cheap T-shirts from Bangladesh, and that cheap cars from China are missing out on points. Americans win from trade not when imports are cheap, but when those imports cause changes in American production and drive productivity growth. In other words, if trade leads to a faster expansion of domestic production, workers will improve welfare and consume more whether imports are cheap or not. And if trade does not lead to a more rapid expansion of domestic production, they will not improve their welfare even with cheaper imports.

A trade deficit is not necessarily harmful. A rapidly growing economy with strong investment opportunities could import more capital than exports to build new infrastructures and expand production. In that context, deficits can reflect strength. That is what characterized the US economy for most of the 19th century.

But that’s not what happens in the US today. In fact, by boosting the value of the dollar and decreasing American manufacturers’ competitiveness globally, foreign capital could actually put downward pressure on US investments. This can be seen as American companies tend to hold record cash on their balance sheets even after spending trillions of dollars on stock buybacks, dividend payments, acquisitions and relocating production facilities. Obviously, in that case, the desired investment in the US is not constrained by rare savings. In that case, foreign inflows will not increase domestic investment.

But nonetheless, more imports mean that a part of the US demand shifts from American-produced goods to overseas-produced goods. And if there is no relative increase in foreign demand for American goods – foreign demand is structurally too weak to coincide with increased exports, so the US economy will not respond by increasing domestic production and meeting the increase in exports.

In that case, you can respond in one of two other ways. American businesses need to reduce production and firefighting workers, cause unemployment, or take domestic demand with increased domestic or financial obligations. And they usually choose the latter, as US officials want to avoid the former. This means that while unemployment does not rise, US debt will rise, American workers will have to automatically move from production of tradeable goods to production of non-tradable services, regardless of their actual American preferences.

As a result, the enduring US deficit in the 19th century allowed American investment to increase and American manufacturing to grow, but the sustained US debt in the 21st century led to productive sectors such as American debt, manufacturing to rely on the asset bubble for share of the American economy, income inequality and economic growth. None of these benefits American consumers.

If we really want to maximize the happiness of American consumers, we must turn the story over. As most economists mistakenly believe, the goal is not to maximize cheap imports. It is to maximize domestic production and productivity growth, ensuring that the productivity growth outcomes are widely distributed. This is the only sustainable way to maximize welfare growth.

This does not mean closing our borders. Trade is very beneficial when structured to support production. But if trade is primarily profitable for Wall Street if the economy prioritizes imports of cheaper consumers over production and investment, or if the goal of trade policy is to address the imbalances of trade and savings around the world. And this is at the expense of American workers, farmers, businesses, and yes, American consumers.

We must rethink the traditional wisdom that the purpose of US trade is primarily to lower the prices of imports. Ultimately, increasing consumption can only be maintained by rising production. That’s why, in order for the US to improve long-term prosperity, it must recognize that the only way trade can promote domestic welfare and consumption is to boost domestic production. Ultimately, it is only an increase in productivity that will sustainably drive consumption growth.