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No, the Trade Deficit Did Not Subtract from U.S. GDP

The most recent government report on U.S. gross domestic product (GDP) led to several media outlets misinterpreting the impact of the trade deficit on GDP. Among these:

New York Times: “A soaring trade deficit subtracted from U.S. economic growth figures.”

Wall Street Journal: “For starters, the trade deficit expanded, meaning that some U.S. demand was basically met by other countries’ production. That alone shaved 3.2 percentage points off GDP growth.”

Axios: “Trade subtracted 3.2 percentage points from overall GDP growth, as exports fell sharply and imports soared.”

Marketwatch: “The trade deficit by itself reduced GDP by a whopping 3.2 percentage points.”

CNBC: “[A] burgeoning trade deficit helped shave 3.2 percentage points off growth as imports outweighed exports.”

USA Today: “In the first quarter, trade accounted for the dismal performance, subtracting more than 3 percentage points from growth.”

Bloomberg: “GDP declines an annualized 1.4% on huge rise in trade deficit.”

Associated Press: “Imports surged nearly 20% in the January-March quarter as businesses and consumers bought more goods from abroad while U.S. exports fell nearly 6%. That disparity widened the trade deficit and subtracted 3.2 percentage points from the quarter’s growth.”

Statements like these typically flow from a belief that imports subtract from GDP. But this is incorrect, as a Federal Reserve Bank of St. Louis report explains: “To be clear, the purchase of domestic goods and services increases GDP because it increases domestic production, but the purchase of imported goods and services has no direct impact on GDP.”

Economist and commentator Noah Smith put it more succinctly: “IMPORTS DO NOT SUBTRACT FROM GDP!!!”

This is not a difference of opinion over trade policy. It is an accounting identity. However, a growing trade deficit may be driven by a strong U.S. economy that allows Americans to import more goods, or by providing a hospitable investment environment that attracts foreign capital. In these cases, a trade deficit may actually be a sign of a strong U.S. economy. But that’s a blog post for another day.