Tuesday, January 22, 2008

Teach me international-trade!

(An inquiry on exports versus import)

Honestly, I am really not proficient on international-trade economics. All I grasp about international-trade are that it happens as consequences of open economy-system, gap between domestic supply-demand and international supply-demand, and absolute-competitive advantages. Yet it is really hard for me to answer a grandma test on what is competitive advantage? Thus, my most understanding on this area conceptually only with two related activities: Exports and Imports. However, please let me jot down a bit my international-trade economics homework through this blog.

When analyzing the international trade structures, we simply observed two trends:

1) Growth on export per GDP vis-à-vis import per GDP; and

2) Composition within exports and imports structures themselves.

I have been taught that when analyzing former trends, as for developing countries, there is a strong believes that encouraging export is much better than import. The underlying argument is because imports in developing countries also high. Why? We can argue by looking at types of goods being imported and phases of imports strategies. There are three types of imported goods:

1) Consumptions goods

2) Raw materials and auxiliary goods

3) Capital goods

Firstly, countries will import consumptions goods since they are unable to produce enough consumption goods demanded by domestic markets. In this first phase, countries will apply import substitution policies only if they able to produce the consumption goods. At the second phase, the countries still need to import raw materials and auxiliary goods since it is highly needed by the manufactured industries which producing consumption goods related with the first phase. Finally, at the third phase as the countries need to increase their production capacity and enhanced their production technology, they need to import capital goods to be able to enhance their output and increasing their economies of scale. Obviously, by giving intimate attention at the second and third phase, developing countries’ import growth will be faster than GDP. Thus, to finance the accelerating imports, exports should be growing faster. In a more ‘for-grandma’ words, exports are good while imports are bad. Do you buy this argument or not?

Until last week, I put up with the above arguments. Then, I read Aaron Schiff’s blog titled Down with exports!. Schiff posted about one of Steven Landsburg arguments in Landsburg’s book The Armchair Economist that exports are actually bad while imports are obviously good. How is it so? Using simple illustration, Schiff explained as following:

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, labor, capital, etc). Exports involve 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 specialize 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 focusing 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 think 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.

Since I am not a proficient international-trade economist, Schiff's illustration somehow takes away my agreement on previous argument that exports are good while imports are bad. If any of you feels that Schiff’s arguments are not make sense, could you teach me again about international-trade economics?


Berly said...

Hmmm.. remind me of Hatta when he wrote that export should be the residuals of what Indonesian consume and question the wisdom of export driven economy.

On the other hand, recent study on industrial policy and economic growth (especially by Ha Joon Chang) found, if used wisely, climbing up the ladder of value added could bring lasting prosperity to a country

fajar said...

salam kenal