Importing is ‘GREAT’, too

The UK government promotes international trade under the banner ‘Exporting is GREAT’. However, imports are a ‘good thing’ too – and in some ways they are actually better.

This is not always an easy concept to grasp. If exports help to support local businesses and create jobs, it seems logical that imports must do the opposite. Many people regarded the UK’s deficit in trade in goods with the EU as a ‘cost’ of EU membership. Correspondingly, the possibility that new trade barriers may encourage UK consumers to switch from EU imports to local products is seen by some as a ‘benefit’ of Brexit.

Similarly, there is plenty of popular support for the ‘Preston Model’, or its variations in other towns and cities, where councils prioritise spending on local suppliers in the name of ‘community wealth building’.

Unfortunately, this is poor economics. To understand why, it might help to step back and ask why trade happens to begin with. There are three key principles.

First, the purpose of economic activity is (or should be) to provide the goods and services that people want at the best possible combination of price and quality. It is not about supporting particular businesses or employing people in particular jobs. This means that the interests of consumers should take precedence.

Put another way, exporting is sometimes what we have to do to pay for imports, and is only a means to this end. Goods and services that are exported are goods and services that local consumers are unable to enjoy.

Second, trade improves welfare by allowing people to specialise in what they do best. Even if it were possible for everybody (or every town) to be self-sufficient (grow their own food, make their own clothes, and meet all their own needs for shelter, healthcare and entertainment), the results would clearly be less than ideal.

Third, this does not mean that two people can only gain from trade if one is better at doing something than another. Instead, what matters is that each person specialises in whatever they do best – compared to the alternatives available to them.

This is the principle of ‘comparative advantage’. For example, I could probably clean my own windows. But any time I spent doing so would carry a large opportunity cost, because I can earn more money working as an economist (incredible though that may seem!).

I am therefore better off if I stick to economics and pay someone else to clean the windows. And unless the window cleaner has a better alternative, we should be able to agree a price that leaves both of us better off than if no trade took place at all.

So, how do these principles apply in the real world? Let’s start with the example of the large deficits in trade in goods that the UK has run with the EU. Since trade is voluntary, it’s reasonable to assume that at least some UK consumers prefer German cars, French cheeses, or Italian wines, to those goods produced at home. Similarly, the UK runs a large deficit in tourism with Spain because Brits like to holiday in the sun.

Worrying about these bilateral deficits makes no more sense than me worrying about the persistent trade deficit I run with my window cleaner, or my local supermarket. Should I refuse to take my family holiday in Spain unless an equal number of Spaniards agree to take a summer break in the Surrey hills?

Next, suppose that governments erect some barriers to trade between the UK and the EU that raise the relative cost of imports. (That is one inevitable consequence of Brexit.) This may well result in a reduction in imports from the EU and an increase in domestic production, and this will mitigate some of the costs. But in what sense does this substitution make the UK better off overall?

It clearly does not benefit consumers. When faced with a free choice, they preferred German cars and Spanish holidays. How does raising prices and restricting that choice improve their welfare?

At this point, someone is probably thinking that ‘Buy British’ is good for British jobs. That might be true, in some cases: free trade does tend to ‘destroy’ jobs in sectors where countries do not have a comparative advantage. But free trade also creates jobs in those sectors where countries do have an advantage. This should be a net gain, because jobs in more productive sectors are likely to be higher paid and more secure. We also have many other ways to help those who might lose out (including welfare benefits and help to retrain).

What’s more, if we take ‘Buy British’ to its logical conclusion, we would restrict all imports, whether from the EU or the rest of the world, in order to shield UK firms from competition. Most people would (I hope) reject this as crude protectionism.

Some also argue that the UK could and does make better cheeses, wine, and so on, if only shops could be persuaded to stock them, and consumers were more aware of them. But what, precisely, is the market failure that prevents this from happening now? If there is already plenty of latent demand for UK produce – and money to be made selling it – why does the government need to get involved at all?

A better argument is that a country may not be able to run large trade deficits for ever. It is true that the balance of payments has to balance. If country is importing more than it is exporting, the difference has to be paid for somehow (for example, by selling assets to the rest of the world).

However, it still makes no sense to worry about the bilateral deficits between one country and another. And even if a country is running a large trade deficit overall, the free market already provides a mechanism to correct this – in the form of a floating exchange rate. The UK current account deficit has averaged 2½% of GDP since 1990 – not a big deal. When it’s got too big, sterling has fallen to correct it.

(This might justify US complaints that the bilateral US-China trade deficit has been boosted by the way that China has artificially held down the value of the renminbi. But this could also be seen as a net gain for US consumers, who have benefited from lower prices, at the expense of their counterparts in China.)

Concerns about the impact of imports on the environment are usually misplaced too. Importing goods from a long distance away may require more flights, longer road journeys, and so on, and hence cause more pollution than sourcing the same goods locally. But this isn’t an inevitable consequence of trading across international borders. It might be less harmful for, say, a business in Kent to import from Northern France than from Scotland.

The longer distances should also already be reflected in higher transport costs and in the relative prices of imported goods versus local products. (If it isn’t, it still makes more sense to tackle this problem with targeted taxes to correct environmental externalities, rather than restricting imports across the board.)

And even allowing for additional transport costs, importing may still have environmental benefits. For example, it may be better overall to grow some foods or flowers in hot countries, and then fly them in, rather than attempt to grow them here in artificial conditions.

More generally, if someone in another country can produce something more efficiently, they are likely to use fewer natural resources and cause less pollution while doing so. (Again, there may be an exception where environmental standards in other countries are far lower, but that’s also a problem requiring a more targeted solution.)

Finally, there is a lot of nonsense written about the benefits of reducing the reliance on imports. It is true that you would not want to depend on a limited number of suppliers for any essential product, especially if national security is involved. (China, again). But international trade actually allows you to diversify and spread risks.

For example, it is often argued that it would be a ‘good thing’ if the UK were (more) self-sufficient in food. But what if the UK suffered a heatwave that wiped out local crops?

The Covid crisis has also underlined the benefits of international trade in goods like personal protective equipment (PPE) and medicines, including vaccines. It is far more efficient, and safer, to be able to source these from a variety of competing suppliers worldwide, rather than tie up resources in domestic capacity that will rarely be needed.

The pandemic has raised concerns too about the vulnerability of international supply chains. Actually, these chains have generally held up well. But if these chains are indeed too fragile then companies that are dependent upon them can be left to work that out by themselves, without government intervention.

I’ve also seen it suggested that we should welcome the fact that the UK has recently run a trade surplus. (In the 12 months to November 2020, the total trade balance, excluding non-monetary gold and other precious metals, was in surplus by £7.8 billion.) But this isn’t ‘good news’. Instead, it reflects the collapse in spending during the pandemic and the disruption to trade, which has seen imports fall by more than exports.

In summary, trade benefits both sides or else it would not take place at all. This means that imports and importing are great, too.

6 thoughts on “Importing is ‘GREAT’, too

  1. Of course multi-lateral trade is good – so long as there is a cyclical balance. You mention this but, I think, too blithely write it off as correctible with a floating exchange rate – which the BoE tries to interfere with by raising and lowing interest rates so that more expensive imports don’t fuel inflation. It also assumes that the UK has the production capacity to benefit from a fall in the value of the £ – we don’t and it takes too long to rebuild capacity to respond quickly. You also blithely write-off workers made redundant when their industries become uncompetitive – benefits and retraining in a fulfilment centre on a zero hours contract are poor replacements for skilled production jobs. If we really did redistribute wealth from winners by investing in new production jobs for losers then I may agree with you – but we don’t, and if the winners knew they were going to have to give up a good slice of their winnings to compensate the losers then maybe they might make different decisions. If making a one industry/set of workers redundant through a new free trade deal, had cost implications for industries that benefit, then maybe that FTA wouldn’t be so attractive.

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    1. Thanks Colin for the feedback.

      On the exchange rate, you’re right that the BoE might respond to higher import price inflation by raising interest rates, but in practice the impact of currency moves on overall inflation is usually swamped by domestic factors.

      A good example is the slump in the pound after it left the ERM, when there was indeed plenty of spare capacity, including high unemployment. There’s certainly no shortage of spare capacity at the moment either, or cash to spend and invest.

      I don’t see any case for protecting employment in industries that have become (in your word) ‘uncompetitive’. This is not ‘writing off’ people who work in these industries. But I obviously agree that we need a strong safety net to support them until they can find new jobs. Since free trade boosts overall welfare, it should be possible to compensate the losers and still be better off.

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  2. If Brexit results in UK businesses moving to UK suppliers, would it be fair to expect these sorts of job gains to roughly cancel out job losses from EU businesses doing the same? In that example, the suppliers would still be specialists in their work, UK farmers/EU engineering firms etc. I do recognize this isn’t possible for all goods, foods that can’t be grown in UK climate, eg, but I can imagine many supply chains canceling out like this.

    Re: imports for consumer choice, I’d think that opening up to too many imports risks the price being driven down in a way that might not be good for the people working in the industry, e.g. very cheap clothing from Asia. Low price supermarkets and clothing stores seem to do well in the UK. In this way could more limited imports protect against that and ensure higher paid, more sustainable jobs?

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    1. Thanks Ryan, good questions.

      On Brexit, it’s possible that jobs gained and lost will cancel out. But the EU is a much bigger market, so new barriers to UK-EU trade will probably mean that more UK production moves to the EU than vice versa. (Of course, this could be offset by other Brexit-related factors, notably a more business-friendly environment in the UK.) What’s more, even if there is no net impact on employment, the reduction in trade is bad for consumer welfare.

      On ‘people working in the industry’, again it’s important to focus on the interests of consumers rather than the amount of employment in particular sectors. If Asia can make clothes more cheaply that may well mean that fewer people are employed making clothes in the UK. But they should be able to find higher paid, more sustainable jobs in other sectors where the UK does have a comparative advantage. In addition, the money that UK consumers save by buying cheaper clothes is additional money that can be spent in the UK economy on other goods and services.

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