NCPA - National Center for Policy Analysis

U.S. Manufacturing is Fundamentally Healthy

August 25, 2003

Bruce Bartlett contends that the manufacturing sector of the U.S. economy is in relatively good shape, despite the sharp decline in manufacturing employment. He dismisses the criticism that U.S. companies are simply reselling goods actually manufactured in China and attributes it to a misunderstanding of how the gross domestic product is constructed.

According to Bartlett, all imports are subtracted from final sales to calculate GDP. Therefore, imports from China or anywhere else can never raise GPD; they always cause it to be lower than if they were produced domestically. GDP measures only actual production on U.S. soil.

The equation goes like this:

  • In 2002, final sales to domestic purchasers equaled $10,866 billion.
  • You add $3.9 billion for the change in inventories nationwide, add $1,014.9 billion for exports, and then subtract $1,438.5 billion for imports.
  • This leaves a net figure of $10,466.2 billion for GDP.
  • In short, imports reduce GDP and exports increase it.

It is always tempting to think that we can ban imports or tax them in some way and thereby raise domestic output, by forcing consumers and producers to "buy American," says Bartlett. But the problem is that we import a lot of things we can't produce at all or not enough of domestically, like oil.

A lot of imports are industrial supplies and capital goods that are critical inputs into the manufacturing process. Banning them or raising their cost would raise costs for producers, reducing their international competitiveness. It would also invite retaliation by foreign countries. The trade deficit might even rise because exports would fall more than imports fell.

In the end, trade protection has never worked in any country at any time. The long-term effect has always been to impoverish nations that engage in it. (See the figure).

Source: Bruce Bartlett, "U.S. Manufacturing is Fundamentally Healthy," National Center for Policy Analysis, August 25, 2003.

 

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