Down with exports!
I’ve been reading The Armchair Economist by Steven Landsburg. I think it’s the original “pop econ” book, published more than 10 years before the Freakonomists et al got in on the act. If you liked the other pop econ books and haven’t read Landsburg’s yet, I recommend it. I like this book because it really made me think more deeply than, say, Freakonomics did.
One idea that Landsburg tackles is the conventional wisdom of many journalists and politicians that exports are good and imports are bad. In only three pages, Landsburg argues why this is exactly backwards. In fact, exports are bad and imports are good. Let me try to explain … I don’t know much about trade, so I’m interested in what you think.
First imagine you are living on a deserted island and you have to provide everything for yourself (this is like a country with no trade). You can only eat fish that you catch. You’re doing ok by yourself, when one day a helicopter flies overhead and drops you a fish, and then flies off again. This is imports, and it makes you happy. You got a free fish that you didn’t have to catch yourself, so you can either spend the same amount of time catching fish as you usually do and have an extra fish to eat, or you can spend less time fishing and have the same amount of fish as usual. Either way, you’re better off. Then the next day a bunch of pirates show up in a boat and demand some of the fish that you caught, but give you nothing in return. This is exports and it makes you unhappy because you spent time catching those fish and now you can’t eat them yourself, so you either have to go hungry, or spend more time fishing. Either way, you’re worse off.
The same idea applies to countries as a whole. The only good thing about exporting is that it allows us to pay for imports. There’s nothing good about exports per se, as exports without imports would be just like the pirates above. As every first-year econ student knows, every country has some quantity of scarce resources (land, labour, capital, etc). Exports involves sending these scarce resources on ships and airplanes to other countries. Why the heck do you want to do that?! These are the precious resources that your country has to produce things for itself! It’s only good to send these scarce resources elsewhere if it allows you to get some other country’s resources in return as imports. Then the theory of comparative advantage tells us that countries can specialise in producing what they are relatively more efficient at, and both sides can gain.
As Landsburg alludes to, the common belief that exports are good and imports are bad comes from focussing on output-based measures of economic activity and success, such as GDP. In GDP calculations, exports are added and imports are subtracted, so more exports and/or less imports makes GDP go up, which some people thing is a good thing. However, return to the deserted island example. Suppose you like to eat three fish per day and it takes you three hours to catch them. Your GDP is three fish per day. Now suppose the pirates come every day and demand two fish. Since you don’t want to starve, you spend five hours per day fishing and catch five fish, so you can still keep eating three fish per day, and “export” the other two. Your GDP went up to five fish per day, but you’re less happy than before — you’re eating the same amount of fish but working harder. So an economy can “grow” by increasing exports while keeping imports unchanged, but this isn’t going to make anyone happier.
This argument has interesting implications. Think about countries with large trade surpluses, like Japan and China. Suppose these countries were somehow able to cut their exports to equal the level of their imports. Then GDP would drop a lot, and headlines would scream “Massive Recession!”, but as a whole the people in Japan or China would be better off. They could consume exactly the same as they did before but work less, since they don’t have to spend so much time producing stuff for people in other countries.
Don’t get me wrong, I’m not saying international trade is bad. Trade is good because it allows countries to specialise in whatever they have a comparative advantage in producing. All I’m saying is that, in terms of people’s welfare or happiness, exports are the bad part of trade, while imports are the good part, no matter what this means for GDP. Do you have any counter-arguments?
6 Comments
The Undercover Economist does a pretty good job at explaining your argument too.
I agree that the The Armchair Economist is one of the best “pop econ” books. But as I argue here you may have missed the bet bit, chapter 9 on the Coase Theorem.
I think people view exports and bad and imports as good in the same way that people view savings as better than consumption, and if this is how people see it, it sort of makes sense.
If we view the country as an individual, then exports is its income (as it provides a claim on real resources), and imports is its consumption (as it involves receiving real resources). In this case any wish to increase exports while not changing imports is the same as wishing that the country saved more.
In this sense you need exports to pay for imports. If exports exceed imports then you are saving, if imports exceed exports you are borrowing. In the long-run these will need to be equalised, so whatever the country is doing depends on the nations preferences.
I’m not sure that slashing exports and consuming the goods domestically would necessarily slash GDP. GDP is consumption + investment + exports - imports. If we cut exports and increase consumption the impact on GDP is ambiguous. However, if firms are exporting the good, the value of the good must be higher on the world market than in the domestic market, so GDP would fall but only by the difference in intrinsic values between the world and domestic markets.
Ultimately, if a country is running a trade surplus or deficit it is because it is willing to save/borrow now. I find it weird that developing nations are the ones saving while developed countries are the ones borrowing - surely poor countries expect to have higher incomes later and so should borrow to smooth their income over time.
So why do developing countries differ? Because they want to import jobs, not goods.
Matt: Good points, thanks. Trade surpluses do make sense if you think of it as savings. In that case I can understand why a trade surplus might be good for Japan (because they expect a shrinking/ageing population in future), but I don’t understand why it would be good for China.
Lord: Jobs are also an output measure. People working more or harder doesn’t mean that they are happier.
But it does mean they are less likely to be restless.