I have heard of USB2 drives being so slow that editing is difficult (not as much of a problem with USB3) and problems relinking media if a USB drive is disconnected and reconnected, but I have never heard that PE will not use video stored on a USB drive
Exactly what error message results when you try?
It's not a error, it tells me to import to the computer. I tried with an external hard drive and that worked so I guess it knows when it's a thumb drive. Both were USB 3.
What version of Premiere Elements and on what computer operating system?
From a Premiere Elements 11, 12, or 13 Windows perspective, you cannot use Add Media/Files and Folder/ to import source media on a USB Flash Drive. For the video part of what is on that USB Flash Drive, you use Add Media/Videos from Flip or Camera/Video Importer. For the photo part of what is on that USB Flash Drive, you use Add Media/Photos from camera or devices/Adobe Premiere Elements - Photo Downloader.
On the other hand, you should be able to import photos and videos from an external hard drive (formatted correctly) and using Add Media/Files and Folders.
The data transfer rate of such devices is a consideration once you determine that you are using the correct import path supported by the program.
Please review and consider. Any questions or need clarification on the above, please do not hesitate to ask.