Tariffs are affecting America’s GDP. Here’s how.
Tariffs are affecting America’s GDP. Here’s how.
Imports to the U.S. rose 10% in January from December, according to the Bureau of Economic Analysis. Importers brought in a whole lot of electronics, pharmaceutical products and other goods that would be exposed to the Donald Trump administration’s new tariffs, causing the trade deficit to surge the most in a decade.
And though there are still plenty of questions around what countries and what products will be affected, trade barriers are certain to affect the country’s gross domestic product.
GDP is a measure of production. It’s calculated by adding up consumer spending, business investment, government spending and the balance of trade, or the difference between exports and imports.
“Imports tend to count against the GDP calculation,” said Meagan Schoenberger, senior economist with KPMG Economics. “Exports count towards the GDP calculation.”
The reason imports are subtracted from GDP is that an imported T-shirt, for instance, isn’t something an American company made. It’s not our domestic product. That means all of those imports in January will have a negative impact on GDP growth.
“While none of the other categories of GDP are expected to collapse in the first quarter, we could see a very weak first-quarter number, due to the fact that imports surged,” Schoenberger said.
The balance of trade lately has averaged around 4% of the size of the economy as a whole. Meanwhile, GDP growth has been averaging about 2.75% a year.
Schoenberger said there are big caveats to keep in mind with January’s jump in imports. For one, that surge probably won’t last.
“It is probably likely that we’ll see it for the first couple months of the year. Importers will stock up, and then they may be in a wait-and-see mode,” Schoenberger said.
The other caveat is that the surge of imported goods will have a positive effect on other parts of the GDP formula once those goods are sold: personal consumption and business investment.
Take the example of imported computers and computer parts. “The No. 1 sector right now, when I think of investment booming, is construction of data centers, and putting equipment in needed to support that,” said Jason Miller, a professor of supply chain management at Michigan State University.
Miller said that boom led to a 55% increase in imports of computers between October and January.
“Some of the computers are going to end up as capital investment in equipment,” Miller said. “Others will end up as personal consumption.”
Bottom line? While that big surge of imports in January will drag down GDP, it probably won’t cause it to tank.
“We should see offsetting increases in investment and consumption under the hood, over the course of the quarter, and perhaps into next quarter or later this year,” said George Pearkes, macro strategist at Bespoke Investment Group.
Pearkes said a bigger concern is what could happen to GDP if the trade war continues, or escalates. In that case, exports, which add to GDP, are likely to fall.
“We’re going to see countervailing duties applied by trading partners,” Pearkes said. “It’s already happened from China. It’s already happened from Canada.”
And if imports fall at the same time, Pearkes said there are plenty of domestic industries that would feel knock-on effects.
“For instance, transportation of those goods, retailing of those goods, the services that those goods enable,” Pearkes said. “Those are all relatively high value-add activities, and if you don’t have those imports, and you haven’t spun up domestic production to offset them, you’re left in the lurch.”
In other words, slowing down trade slows down economic growth.
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