Wednesday 30 July 2008

Imports good; exports bad (updated)

In a discussion on our trade balance the Visible Hand in Economics takes up the frog blog challenge to talk about imports. I agree with what is said there so won't repeat it. Here I just wish to make the simple point that "imports are good; exports are bad". Not an idea I think frog blog would go for.

Why? Well, notice 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 frog blog. 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.

The flog blog thinks that imports destroy jobs in New Zealand while I assume they think exports create jobs. In fact trade has little effect on the total number of jobs in the economy. What it does is move jobs around, away from areas in which we don't have a comparative advantage into areas where we do. As Paul Krugman, of all people, has said
It should be possible to emphasize to students that the level of employment is a macroeconomic issue, depending in the short run on aggregate demand and depending in the long run on the natural rate of unemployment, with microeconomic policies like tariffs having little net effect. Trade policy should be debated in terms of its impact on efficiency, not in terms of phony numbers about jobs created or lost.
and as trade economist Douglas Irwin has put it
The claim that trade should be limited because imports destroy jobs has been around at least since the sixteenth century. And imports do indeed destroy jobs in certain industries: [...]

But just because imports destroy some jobs does not mean that trade reduces overall employment or harms the economy. [...]

Since trade both creates and destroys jobs, a frequently asked question is whether trade has any effect on overall employment. Unfortunately, attempts to quantify the overall employment effect of trade are I exercises in futility. This is because the impact of trade on the total number of jobs in an economy is best approximated as zero.
But perhaps Laura LaHaye puts it best
Of the false tenants of mercantilism that remain today, the most pernicious is the idea that imports reduce domestic employment. This argument is most often made by American automobile manufacturers in their claim for protection against Japanese imports. But the revenue that the exporter receives must be ultimately spent on American exports, either immediately or subsequently when American investments are liquidated.
Thus if the flog blog is really worried about unemployment, there are much more important issues to deal with than imports.

So imports are not bad for employment and exports are not good for employment.

Not PC suggests we Buy foreign-made.


Matt Nolan said...

Awesome post :)

Anonymous said...

I accept everything in this post, except possibly the title which confuses me.

If exports really are required to pay for imports - then aren't exports good? And aren't more exports better if that allows more imports? (assuming that is what consumers demand)

I understand the point that exporting is the price paid for importing, and not the other way around.

Nice graph by the way :-)

Paul Walker said...

Matt: My point is that frog blog seems to think imports are bad whether or not we export. I'm guessing they would say "exports good; imports bad". This is mercantilism in the modern world. My point is that if we could import without exporting imports would makes us better off. Frog blog would say importing without exporting is bad, in and of itself. Of course we can't import without exporting, which is why you are right. Exports are good in the sense they pay for our imports.