GDP, Free Trade, and Prosperity

By Matthew Tanous

In my recent social media discussions on the subject of free trade, a certain thread of argument related to GDP has become more common. The argument, such as it goes, asserts that international trade is not very important as a component of GDP. The net impact of trade is a small impact on GDP, with imports and exports generally “balancing” each other out, leaving just a few percentage points either way. Trade (and immigration) restrictions seem like a small price to pay, economically, according to this framework.

Despite its superficial validity, this is a wholly erroneous way to look at the problem of generating prosperity and rests primarily on two economic fallacies. The first is the use of the GDP aggregate as a viable measure of national prosperity, which has been heavily criticized in other contexts.

Many criticisms of the concept of GDP focus on the concept’s formulaic assumption that government spending is inherently productive. This assumption has resulted in many errors, including economists and laymen alike in the 1970s and 80s looking at the growing GDP of the USSR and assuming the Soviets would economically overtake the West as a result. To a lesser degree, the same fallacy has driven concerns about China’s growing economy in the last couple of decades. However, in the context of international trade, the aggregate GDP fails to measure human welfare in yet another way. GDP’s focus on the supposed “net production” of a country fails to see the absolute production of a country and how much is involved in trade.

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