Imports are foreign goods and services bought by residents of a country. Residents include citizens, businesses, and the government. It doesn’t matter what the imports are or how they are sent. They can be shipped, sent by email, or even hand-carried in personal luggage on a plane. If they are produced in a foreign country and sold to domestic residents, they are imports.
Even tourism products and services are imports. When you travel outside the country, you are importing any souvenirs you bought on your trip.
Imports and the Trade Deficit
If a country imports more than it exports it runs a trade deficit. If it imports less than it exports, that creates a trade surplus. When a country has a trade deficit, it must borrow from other countries to pay for the extra imports. It’s like a household that’s just starting out. The couple must borrow to pay for a car, house, and furniture. Their income isn’t enough to cover the necessary expenses that improve their standard of living.
But, like the young couple, a country should not continue to borrow to finance its trade deficit. At some point, a mature economy should become a net exporter. At that point, a trade surplus is healthier than a deficit.
Why? First, exports boost economic output, as measured by gross domestic product. They create jobs and increase wages.
Second, imports make a country dependent on other countries’ political and economic power. That’s especially true if it imports commodities, such as food, oil, and industrial materials. It’s dangerous if it relies on a foreign power to keep its population fed and its factories humming. For example, the United States suffered a recession when OPEC embargoed its oil exports.
Third, countries with high import levels must increase their foreign currency reserves. That’s how they pay for the imports. That can affect the domestic currency value, inflation, and interest rates.
Fourth, domestic companies must compete with the imports. Small businesses that can’t compete will fail. Since they create 70 percent of all new jobs, that will affect employment.
And finally, exports help domestic companies gain a competitive advantage. Through exporting, they learn to produce a variety of globally-demanded goods and services.
Four Ways Countries Increase Exports
Countries often increase exports by increasing trade protectionism. That insulates their companies from global competition for a while. They raise tariffs (taxes) on imports, making them more expensive. The problem with this strategy is that other countries soon retaliate. A trade war hurts global trade in the long run. In fact, this was one of the causes of the Great Depression.
As a result, governments are now more likely to provide subsidies to their industries. The subsidy lowers business costs so they can reduce prices. This strategy has a lower risk of retaliation. If other countries complain, the government can say the subsidies are temporary. For example, India claims the subsidy allows its poor to afford basics like fuel and food. Some emerging markets protect new industries. They give them a chance to catch up with technology in developed markets.
A third way countries boost exports is through trade agreements. Once protectionism has lowered trade for everyone, countries see the wisdom in reducing tariffs. The World Trade Organization almost succeeded in negotiating a global trade agreement. But the European Union and the United States refused to end their agricultural subsidies. As a result, countries rely on bilateral and regional agreements.
Most countries increase exports by lowering their currency value. That has the same effect as subsidies. It lowers the prices of goods. Central banks reduce interest rates or print more money. They also buy foreign currency to raise its value. Countries like China and Japan are better at winning these currency wars.
The United States can produce everything it needs, but emerging market countries can make many consumer items for less. The cost of living is low in China, India, and other developing countries. They can pay their workers less, creating a comparative advantage.
The United States is a free market economy that’s based on capitalism. These low-cost imports cost American jobs. U.S. companies cannot both pay a living wage and compete on price.
Exports are the goods and services produced in one country and purchased by residents of another country. It doesn’t matter what the good or service is. It doesn’t matter how it is sent. It can be shipped, sent by email, or carried in personal luggage on a plane. If it is produced domestically and sold to someone in a foreign country, it is an export.
Exports are one component of international trade. The other component is imports. They are the goods and services bought by a country’s residents that are produced in a foreign country. Combined, they make up a country’s trade balance. When the country exports more than it imports, it has a trade surplus. When it imports more than it exports, it has a trade deficit.
What Countries Export
Businesses export goods and services where they have a competitive advantage. That means they are better than any other companies at providing that product.
They also export things that reflect the country’s comparative advantage. Countries have comparative advantages in the commodities they have a natural ability to produce. For example, Kenya, Jamaica, and Colombia have the right climate to grow coffee. That gives their industries an edge in exporting coffee.
India’s population is its comparative advantage. Its workers speak English and are familiar with English laws. Those skills give them an edge as affordable call center workers. China has a similar advantage in manufacturing due to its lower standard of living. Its workers can live on lower wages than people in developed countries.
How Exports Affect the Economy
Most countries want to increase their exports. Their companies want to sell more. If they’ve sold all they can to their own country’s population, then they want to sell overseas as well. The more they export, the greater their competitive advantage. They gain expertise in producing the goods and services. They also gain knowledge about how to sell to foreign markets.
Governments encourage exports. Exports increase jobs, bring in higher wages, and raise the standard of living for residents. As such, people become happier and more likely to support their national leaders.
Exports also increase the foreign exchange reserves held in the nation’s central bank. Foreigners pay for exports either in their own currency or the U.S. dollar. A country with large reserves can use it to manage their own currency’s value. They have enough foreign currency to flood the market with their own currency. That lowers the cost of their exports in other countries.
Countries also use currency reserves to manage liquidity. That means they can better control inflation, which is too much money chasing too few goods. To control inflation, they use the foreign currency to purchase their own currency. That decreases the money supply, making the local currency worth more.
Three Ways Countries Boost Exports
There are three ways countries try to increase exports. First, they use trade protectionism to give their industries an advantage. This usually consists of tariffs that raise the prices of imports. They also provide subsidies on their own industries to lower prices. But once they start doing this, other countries retaliate with the same measures. These trade wars lower international commerce for everyone. For example, the Smoot-Hawley tariff lowered trade by 65 percent and worsened the Great Depression.
Countries also increase exports by negotiating trade agreements. They boost exports by reducing trade protectionism. The World Trade Organization tried to negotiate a multilateral agreement between its 149 members. The so-called Doha agreement almost succeeded. But the European Union and the United States refused to eliminate their farm subsidies.
As a result, most countries relied on bilateral agreements or regional trade agreements for years. But in 2015, the Obama administration negotiated the Trans-Pacific Partnership. In 2017, the Trump administration dropped out. But the other countries completed the agreement without the United States.
The third way countries boost exports is to lower the value of their currencies. This makes their export prices comparatively lower in the receiving country. Central banks do this by lowering interest rates. A government can also print more currency or buy up foreign currency to make its value higher. Countries that try to compete by devaluing their currencies are accused of being in currency wars.