After many quarters of healthy expansion, US economic activity abruptly contracted in the first quarter of 2025—President Trump’s first quarter in office. How did a strong economy begin to falter so quickly? Many, if not most, commentators attributed the decline to a surge in imports dragging down GDP. In truth, however, imports have no direct effect on GDP. Because of its popularity, it is important to debunk the myth that imports reduce GDP.
Figure 1 displays the quarterly growth rates (annualised) of US real GDP beginning in 2022—after the significant fluctuations caused by the pandemic. Since then, the US economy has grown steadily, expanding by 2–3% per quarter. However, this pattern changed abruptly in the first quarter of 2025, when GDP contracted by 0.3%.
Figure 1. Quarterly growth rates (annualised) of US real GDP. Source: BEA and J. Rangvid.
The contraction in GDP in the first quarter of 2025 marks a significant turning point. Donald Trump inherited a healthy, steadily growing economy—and managed to turn it into a contracting one within his first few months in office.
So, what explains this dramatic reversal of fortune? Most newspapers pointed to a surge in imports. A few examples:
*) Wall Street Journal (link): U.S. Economy Shrank in First Quarter as Imports Surged Ahead of Tariffs.
*) Bloomberg: (link): US Economy Contracts for First Time Since 2022 on Imports Surge.
*) BBC (link): US economy shrinks as firms import more ahead of tariffs.
*) And so on.
The message is clear: virtually every article claimed that GDP fell because imports surged.
This, however, is an imprecise—if not outright incorrect—explanation. Given how widespread this misunderstanding is, it is important to clarify why imports do not reduce GDP.
Why people (wrongly) believe that imports reduce GDP
GDP (Gross Domestic Product) is our most comprehensive measure of economic activity. As anyone who has studied basic macroeconomics will know, GDP is calculated as the sum of private consumption (C), investment (I), government spending (G), and net exports—exports (X) minus imports (Z):
Y = C + I + G + X – Z.
This is known as the expenditure approach to calculating GDP. It adds up all spending by households, firms, government, and foreigners on goods and services produced domestically. The reason this works is that everything produced in the economy is eventually sold; therefore, measuring total expenditure allows us to infer total output.
Here’s where the confusion arises: as you can see, imports (‘Z’) enter the equation with a negative sign. This leads many to (wrongly) conclude that imports directly reduce GDP. In a moment, I’ll explain why that interpretation is flawed—but first, let’s examine why this explanation became so popular in the coverage of the Q1 2025 data.
Figure 2 shows how growth in the various expenditure components contributed to GDP growth in Q1.
Figure 2. Contributions to percentage change in real GDP, Q1 2025. Source: BEA and J. Rangvid.
The 0.3% fall in US GDP in Q1 was the result of the following changes:
*) A 1.2% increase in consumption.
*) A 3.6% increase in investment.
*) A 0.3% decrease in government spending.
*) A 0.2% rise in exports.
*) A 5.0% surge in imports (which are subtracted in the GDP calculation).
At first glance, the sharp rise in imports thus appears to be the cause of the GDP contraction.
Why imports do not reduce GDP
So, how can it be that imports do not directly reduce GDP, even though ‘−Z’ appears in the GDP formula?
Let’s start by recalling what GDP actually measures. According to the official definition (link) from the Bureau of Economic Analysis (BEA):
“GDP measures the value of the final goods and services produced in the United States.”
The crucial phrase here is “produced in the United States”. GDP only captures the value of goods and services produced domestically within a specific time period (typically a quarter or a year).
Imports, by definition, are goods and services produced abroad and then brought into the United States. That means imports do not contribute to GDP. They are excluded by definition.
But if that’s true, why are imports then subtracted in the GDP formula (Y = C + I + G + X − Z)? The answer is straightforward: because the value of imports is already included in the other components of GDP—specifically consumption and investment. To avoid double counting, we subtract imports.
Let’s look at two examples to clarify this:
*) A US household buys a car produced in China for $30,000. This counts as consumption, so C in our GDP formula increases by $30,000. But because the car was not made in the US, it does not add to US GDP. To avoid overstating output, we subtract the $30,000 as an import, leaving GDP unchanged. Had we not done this, it would misleadingly appear as if US GDP had increased by $30,000—even though the car was produced abroad.
*) A US corporation buys $50,000 worth of toys from China (in anticipation of forthcoming steep tariffs) and adds them to its inventories. This is classified as an investment, so I (investments) in our GDP formula increases by $50,000. But again, the goods were not produced domestically (in the US), so their value should not be counted as part of US GDP. We account for this by subtracting the $50,000 from the GDP calculation—again leaving GDP unchanged.
In both cases, imports are not reducing GDP—they’re simply being subtracted to correct for the fact that their value was included in consumption or investment. In essence, imports are only subtracted in the GDP formula to ensure we don’t mistakenly include foreign-produced goods in a measure of domestic production.
To put it plainly: imports don’t reduce GDP—they just stop us from wrongly inflating it.
If you’re interested in further explanations, here are some useful discussions from The Economist (link), the Federal Reserve (link), and Forbes (link).
Historically, imports and GDP have been positively—not negatively—correlated
To drive home the point that imports do not automatically reduce GDP, I examined the historical correlation between US GDP growth and import growth. The results are shown in Figure 3, where I have marked the Q1 2025 combination of a 0.3% contraction in real GDP and a 36% (annualised) expansion in real imports by a red dot.
Figure 3. Quarterly growth rates in US real GDP versus quarterly growth rates in US real imports, 1947-2025. Q1 figures marked as a red dot. Trendline added. Source: BEA and J. Rangvid.
Figure 3 shows, quarter by quarter since 1947, how real GDP growth has aligned with real import growth in the same period.
As you can see from the imposed trendline, there has historically been a positive—not negative—correlation between import growth and GDP growth. In other words, in quarters where imports have risen, GDP has tended to rise as well. This runs counter to the intuitive (but incorrect) assumption one might make when staring uncritically at the GDP formula, which subtracts imports.
Although a full explanation lies beyond the scope of this post, the key reason for this positive relationship is simple: when the economy is strong and GDP is growing, consumption tends to rise—and a portion of that consumption is satisfied through imported goods and services. So, a growing economy naturally tends to generate more imports.
Why did GDP fall in Q1, then?
While imports do not directly reduce GDP, the way households and firms adjust their broader spending in response to imports can affect GDP. Specifically, a sharp rise in imports may crowd out other domestic purchases.
For example, if a household buys that $30,000 Chinese-made car I mentioned earlier, and funds it by cutting back on spending on US-made goods, then domestic production—and thus GDP—will fall. Similarly, if firms significantly ramp up imports, they may simultaneously reduce orders for US-produced inputs or products, especially if they’re managing their inventories carefully.
And this is the most plausible explanation for the GDP contraction in Q1. US firms front-loaded imports in anticipation of Trump’s incoming tariffs (link). As shown in Figure 2, investment—particularly in inventories—rose sharply, by 3.6% on an annualised basis. Faced with surging inventories, many firms likely scaled back purchases of domestically produced goods to avoid overstocking. This decline in domestic demand dragged down GDP.
Conclusion
GDP (Gross Domestic Product) is calculated as the sum of consumption, investment, government spending, and net exports—exports minus imports:
Y = C + I + G + X – Z.
Because imports are subtracted in this equation, many mistakenly believe that they directly reduce GDP. They do not. Imports are subtracted only to correct for the fact that they are already included in other components, such as consumption and investment. This distinction is crucial—particularly now, given how many recent headlines have misleadingly claimed that GDP fell in Q1 because imports rose.
The more accurate explanation is that US households and firms, anticipating steep tariffs, rushed to import goods before the new measures took effect. This surge in imports didn’t itself reduce GDP. What reduced GDP was the offsetting reduction in demand for US-made goods and services.
Ironically, this outcome is the exact opposite of what Trump’s policy is meant to encourage: more domestic production and consumption. Instead, it prompted US firms to import aggressively—and then pull back on spending at home.
