Tuesday 23 March 2010

Looking for new tools to help exporters: Why?

Mike Smith writes over at The Standard
A really interesting three-quarter page article by Ben Heather in today’s DomPost is titled “Looking for new tools to help exporters.” Lord knows we need them.
But why do we need them? Why should we want to help exporters? Looks like more of the old "exports good, imports bad" modern day mercantilist mentality.

Note that Adam Smith pointed out more than 240 years ago that "Consumption is the sole end and purpose of all production" and that the measure of a country's true wealth, is the total of its production and commerce. That is, a country's wealth is what the people of that country can consume. The great 19th century French economic pamphleteer Frédéric Bastiat wrote, "Consumption is the end, the final cause, of all economic phenomena, and it is consequently in consumption that their ultimate and definitive justification is to be found." Note also that exports are things that we produce and send to other (overseas) people. That is, they are goods and services that we produce but do not consume and thus they lower our welfare. Imports on the other hand, are goods and services that other counties produce and send to us to increase our consumption. This means imports increase our welfare. So imports are welfare increasing and exports are welfare decreasing. Therefore "imports are good; exports are bad"

But this does raise the question of why do we bother to export and not just import? The obvious answer is that exports are the way we pay for our imports. If we want people to send their goods and services to us we have to send our goods and services to them in exchange. Adam Smith also noted that in any free exchange, both sides must benefit. The buyer profits, just as the seller does, because the buyer values whatever he gives up less than the goods he obtains. That's why we trade at all.

This simple idea blew a hole through the trade walls that had persisted for centuries. It destroyed the notion that "exports are good; imports are bad" which was the prevailing view of trade before Smith, and seemingly still the view at The Standard. Before Smith people believed that the measure of a nation's wealth was the gold and silver in its treasury. Imports were bad because this gold and silver must be given up in payment. Exports were good because these precious metals came in. Trade benefited only the seller, not the buyer, and a nation could get richer only if others got poorer.

Today, most, people know better. Trade benefits not only the seller but also the buyer, so importing increases our welfare. So back to my original question, Why do we wish to help exporters? Why not help importers for they increase our welfare.

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