Subscribe to BrookesNews’ Bulletin
Imports and trade deficits: the good and the bad
Gerard Jackson
The Government is being attacked for not implementing policies that would protect domestic firms against implement unfair foreign competition. One frequently hears these people argue that all they want is “fair trade” but not “free trade at any cost”. What these critics are really saying is that it is fair for the Government to force Australian consumers to pay more for imported goods in order to force them in to buying more expensive Australian substitutes.
The protectionist injunction against “free trade at any cost” is ridiculous. Free trade never takes place “at any cost”. Trade only occurs up to that point where the cost of trading exceeds the benefits. Moreover, the critics fail to see that because it is individuals that really do the trading, not countries, there can be nothing unfair about it. Free trade is always voluntary trade.
Whatever the critics say, their views are just a variation of the great mercantilist myth that imports are bad and exports are good. (This fiction has bedevilled trading nations for centuries). Therefore governments must always act to deter the former and promote the latter. The classical economists exploded this fallacious thinking by pointing out that exports are a cost and imports are benefit. Put another way, exports are simply the price of imports. It follows from this chain of reasoning that ‘export income’ is only of any real use to the extent that it is used to buy imports.
If a country only exported and never imported it would be giving its goods away. The lucky recipients of the exporting country’s largess would, in effect, be receiving huge subsidies. But there is a double effect. These imported subsidies now mean that consumers’ incomes will rise and that resources that were once used in exporting those goods that have now been denied their foreign market will now be used to produce goods and services for the domestic market thus raising economic welfare. Total consumption will therefore rise. The protectionist argument that imports, especially if they are subsidised, cause unemployment is therefore based on a fallacy.
Now it is true that the exporters will be receiving ‘export income’ in the form of foreign exchange. However, this money can only be spent in the importing country and its territories. The exporters have to convert their ‘export income’ into the domestic currency. As Ricardo and others pointed out this does not add anything to economic welfare. The exporters are able to purchase more goods because of their ‘export income’; but these goods have to be bid away from others thus reducing their level of consumption. What this really means is that the exporting country’s tariff policy has kept its people’s living standard lower than it would otherwise be while raising the living standard that of its trading partner.
Trade is always a two-way street. A simple — and invariably overlooked — example of this is the wage earner. His exports are the labour services he sells to his employer; his wages are, in fact, his export income; the goods and services he now buys are the equivalent of imports. It should now be easy to see that by not consuming his income he is really working for nothing. That exporters spend their income conceals from the layman the fundamental truth that their spending only succeeds in reducing the consumption of the rest of the community. It does not raise living standards.
Note: complications arise when monetary policy changes the pattern of international prices. This will be dealt with next week.
Gerard Jackson is Brookes’ economics editor
BrookesNews.Com
Monday 1 January 2007