NCPA - National Center for Policy Analysis

Trade Deficit Overstated

August 12, 1999

A closely watched economic statistic is the trade deficit -- the excess of imports over exports. However, due to faulty data, the monthly figures for the trade deficit are significantly overstated, says a Federal Reserve Bank economist.

The U.S. Census Bureau, which is responsible for trade data, says that a major component of the trade deficit called the merchandise trade deficit overstates the gap between imports and exports of goods.

  • The Census believes that merchandise exports are probably understated by 3 percent to 7 percent, but possibly as much as 10 percent.
  • Since there is no evidence of similar errors in import data, Census estimates the merchandise trade deficit was overstated by as much as 34 percent in 1997.
  • Until the Census began basing figures on exports to Canada on that country's import data, in 1990, it was estimated that exports to Canada were understated by as much as 20 percent.

A major reason the data are flawed is because Census bases merchandise trade figures on the paperwork importers and exporters file with the U.S. Customs Service -- but exporters are not required to file paperwork for shipments valued at less than $2,500. Instead, Census relies on a survey to estimate the fraction of total trade in these small shipments; but the most recent survey was conducted almost 10 years ago.

Since then, the market share of small shipments has changed relative to large ones, due to such things as the boom in inexpensive air cargo services; but the magnitude of the shift is unknown.

Source: Joseph A. Ritter, "An Overstated Headline," National Economic Trends, July 199, Federal Reserve Bank of St. Louis.


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