Critical Goods and International Trade Dependence in the U.S.

Some goods are critical to economic activity and welfare despite accounting for a small fraction of aggregate output and consumption.

Products used to combat COVID-19, such as personal protective equipment and vaccines, are one example of these goods: They are a small fraction of aggregate consumption and economic activity, but access to such goods during the COVID-19 pandemic has had a substantial impact on social welfare. For instance, increased scarcity of vaccines, tests or masks would have amplified the impact of the pandemic on economic activity and lives. Indeed, the 2020 working paper I wrote with Ana Maria Santacreu shows the importance of these considerations and the role of trade policy to mitigate some of this impact.Leibovici, Fernando; and Santacreu, Ana Maria. “International Trade Policy during a Pandemic.” Working Paper No. 2020-010D, Federal Reserve Bank of St. Louis.

Another example of critical goods is semiconductors: The ongoing shortage of these is showing their importance for the production of a wide range of products, despite accounting for a small fraction of aggregate economic activity. For instance, automobile production is being severely disrupted by the unexpected scarcity of one out of a wide range of inputs used to produce cars.

Shocks to the availability of critical goods such as these might thus expose the U.S. economy to systemic risk. One potentially important source of such shocks arises from significantly depending on international trade to get access to these goods. Geopolitical risk (e.g., wars), reliance on risky trade partners and shocks to trade institutions are a few examples of events that can severely disrupt the short- and medium-run access of the U.S. economy to imported goods that might be critical for economic activity and welfare.

Evidence of International Trade Dependence across Critical Sectors

In this blog post, I report my findings from investigating the dependence of the U.S. economy on international trade to secure access to goods deemed critical. My first step was, thus, to identify which goods might be classified as such. To do so, I defined critical goods as those produced by the 16 “critical infrastructure sectors” classified by the U.S. government’s Cybersecurity & Infrastructure Security Agency. Here I focus on those sectors that are more tradable internationally:

• Chemicals
• Communications
• Critical manufacturing (metals, machinery, electrical, transportation)
• Energy
• Food and agriculture
• Medical and pharmaceutical
• Information technology

I then examined the trade dependence of these sectors by exploiting highly disaggregated input-output tables for the U.S. economy collected by the Bureau of Economic Analysis for 2012, the latest year with data for 405 sectors. The first figure below reports these industries’ imports-to-absorption ratios; that is, imported goods as a percentage of the sector’s aggregate demand. And the second figure below reports the net exports-to-absorption ratio; that is, the sectoral balance between goods exported and imported, scaled relative to the sector’s aggregate demand.

I found that the critical sectors of the U.S. economy that are most reliant on international trade are communications and IT: More than 60% of the total U.S. demand for these goods is imported. Consistently, these sectors run significant trade deficits: The difference between imports and exports of these goods is greater than 40% of total U.S. demand for these goods. Medical supplies and pharmaceuticals, and energy are also highly dependent on international trade.

High trade dependence for access to such goods implies that shocks that might disrupt trade relations may also have a severe impact on economic activity and welfare in the U.S.

But the U.S. is not reliant on international trade to get access to the goods produced by all critical sectors. Notable exceptions are food and agriculture, and chemicals, for which the U.S. features relatively low imports-to-absorption ratios and positive (yet small) sectoral trade balances.

Policy Implications

These findings point to the importance of international trade to ensuring the supply of critical goods to the U.S. economy. This significant dependence on international trade is likely to reflect the vast benefits of cross-country specialization based on comparative advantage. Yet, such pattern of production might simultaneously make the U.S. economy vulnerable to trade-related shocks, which might limit access to such goods in the short and medium run. Given the critical nature of these goods, such shocks might be particularly costly.

Indeed, President Joe Biden’s recent executive order to secure America’s critical supply chains is designed to investigate the resiliency and security of the U.S. economy’s supply across critical sectors, and to propose policies aimed at mitigating potential systemic risk. Further developments on this front are expected by next year at the latest, when an exhaustive review of a broad range of critical sectors is set to be released.

Notes and References

1. Leibovici, Fernando; and Santacreu, Ana Maria. “International Trade Policy during a Pandemic.” Working Paper No. 2020-010D, Federal Reserve Bank of St. Louis.

Additional Resources

• Economic Synopses: The Dynamics of the U.S. Trade Deficit during COVID-19: The Role of Essential Medical Goods
• On the Economy: Protectionism and Dependence on Imports of Essential Medical Equipment