Are imports bad? Are exports good? Is a negative balance of trade (trade deficit) the ‘true evil’? What do import duties and tariffs do?
I grew up thinking imports (M) are bad and exports (X) are good for a country. Imports make you spend valuable foreign exchange and exports bring in the Dollars. So it follows that a trade deficit is pure evil, right?
Wrong! Let’s see why.
We use the terms imports and exports in relation to international trade activities of a nation. Imports are what you buy and exports are what you sell. The difference between the exports and imports from a particular country is my balance of trade with it. A positive balance of trade (X-M) is a trade surplus and a negative balance of trade (X-M) is a trade deficit.
Let us conduct a thought experiment. I, as an individual, import (buy) a lot of things from my neighborhood grocery store. But I export (sell) nothing to it. It follows that I have a huge trade deficit with it. Is that bad? Don’t the two parties to the transaction benefit from it? I am now free to use my time and energy on more ‘productive’ pursuits, rather than growing or producing things which I bought from the grocery store. Therefore, my trade deficit with the grocer does not bother me. We each do the thing we are better at and enter into mutually beneficial transactions. The way I, as an individual, benefit from trade is similar to how a country benefits from trade.
Shouldn’t it be the same with a nation?
There are certain things which I, as a nation, can produce at a competitive rate and it makes sense for me to produce as much of those things as I can, then export those things and import things which I cannot produce competitively. That way I can get the highest amount of revenues from the exports as I can and spend them on importing products which I can produce domestically at a cost higher than another country. So I sell high and buy low.
In a way my exports pay for my imports. As David Boaz says, ‘Imports are the benefit of trade while exports are the cost of trade.’
However, if I insist on producing everything domestically, I will end with a higher cost for certain things (which I was not competitive at producing). Since, there is no free lunch, who ends up bearing this higher cost?
In a bid to discourage imports, we see governments imposing import duties or tariffs on goods imported from countries with which we have a trade deficit. This brings the cost of imported goods at par or even higher than the domestically produced good. As consumers start purchasing the now lower priced domestic good, they still end up paying higher than what they would have paid in the absence of such tariffs. The benefit of tariffs go a select few whereas those bearing the higher cost are diffused or spread out. Tariffs, in a way, are inequitable as they lead to redistribution of wealth from many to a few.
So in conclusion, imports are not always bad, trade deficit is not evil and tariffs are regressive.
How often do we question what we learn from books or from ‘sage on the stage’ teachers?
Hardly ever! And then along comes something that makes you question your conclusions, look at the same information with a different lens, connect economics with international trade and walk away with an entirely novel perspective.
Credit: I read this eyeopening post by Vivek Kaul and it inspired me to write this post.