The phases of development of the world economy have largely been a struggle between the two schools of economic thought-“mercantilism” and “liberalism”. The term “mercantilist system” was coined by Adam Smith to describe the system of political economy that encouraged exports and restrained imports to consolidate regional power centers. Economic liberalism, on the other hand, has components of international division of labour and specialization with focus on free markets and private ownership of capital. The popular opinion today is of the existence of the economic liberalism doctrine. However, it does seem the lines between mercantilism and liberalism are blurring and what might come about in the future is a hybrid form of economic liberalism with traces of the mercantilist system. While trade policy around the world has been increasingly liberalized, there exists an underlying mercantilist characteristic of supporting domestic production and employment with the motive of increasing exports rather than imports.
Governments of many countries all over the world today, have fallen prey to a common fallacy that supposes a country’s wealth is augmented by a positive ‘balance of trade,’ i.e. nations become rich by exporting more than they import. Trade policies around the world have focused on promoting exports over imports in the belief that rising imports and trade deficits are bad for economic growth and employment. In recent times, the emphasis on exports has gained popularity and countries have managed exchange rates, doled out tax benefits to exporters and subsidized exports; among other measures to make their economies export oriented. These measures along with the establishment of export promotion councils (even in India); do tend to signal towards the stress laid on exports as opposed to that on imports. Efforts are made to boost exports and diminish imports by usually subsidizing exports by means of grants and lower taxes, and discouraging imports by means of tariffs.
This is not surprising as the motivation for a country to import goods and services from other countries is perhaps less obvious than its motivation for exporting (making a profit on goods not consumed by the domestic market). A judicious examination of the reasons for and advantages of imports would throw light on the significance of imports in trade. There are broadly two reasons to import:
Goods or services that are either essential to economic well-being or highly attractive to consumers but are not available in the domestic market
Goods or services that satisfy domestic needs or wants can be produced more inexpensively or efficiently by other countries, and therefore sold at lower prices.
The merits of imports and exports have often been hotly debated. Contrary to popular belief, imports are just as beneficial to an economy as exports. On the production side, imports can improve firm productivity and export competitiveness, and the resulting trade growth can contribute to global economic growth. The key to improvements in firm productivity lies in imports of intermediate goods and services.
Adam Smith exposed the fallacy of exports making a nation wealthier by pointing out that the wealth of nations consisted in the productive labor of its peoples rather than in bars of gold and other precious metals stored in its treasury. In fact it is imports that make a nation richer. By importing goods that are cheaper than those they can produce themselves, nations have cash to spare as well as the goods. This makes them wealthier than if they were self-dependent (Smith 1776).
The US humorist, P J O’Rourke put it succinctly: “…Imports are Christmas morning; exports are January’s MasterCard bill.” Imports make us richer, and exports make it possible. The self-sufficiency which is advocated as a virtue is the road to poverty. It denies us the specialized and skilful services of far-flung producers anxious to provide us with goods at lower prices than we can make for ourselves.
On the consumer side too, imports are actually good for a country and its people in general. Imports deliver lower prices and more variety to consumers. Imports raise the standard of life. As an example, till 1983, India had two brands of cars which were actually outdated. Even for these, India had to wait for several years. In 1983, this changed with the arrival of the Maruti. Then, with liberalization and globalization reforms in 1991, we now have all the top brands of cars in India. Other industries also witnessed the same pattern. Consumers have benefited a lot with increase in imports. All industries in India followed the same pattern before 1992. There are all the top brands of the world operating in India now.
In the trade policy circle, there has always been a greater misunderstanding when the discussion turns to the balance of trade question. Policymakers often get anxious when a country�s imports exceed its exports, creating a trade deficit. Anxieties about imports and trade deficit can lead to trade policies that do more harm than good. An expanding trade deficit is not necessarily a sign of weakness, but may signify a more robust domestic demand for goods and services, as well as rising investment and a larger inflow of foreign capital to finance it. The idea that imports reduce employment and slow down the economy undermines public support for trade liberalization. It falsely paints the trade as a zero-sum game, pitting nations against each other in a contest to export the most and import the least, with countries have trade-surplus as winners. Adam Smith eloquently wrote about this in 1776 in his seminal book, The Wealth of Nations:
“Each nation has been made to look with an invidious eye upon the prosperity of all the nations with which it trades, and to consider their gain as its own loss. Commerce, which ought naturally to be, among nations, as among individuals, a bond of union and friendship, has become the most fertile source of discord and animosity.”
The goal of policymakers should not be to maximize exports and minimize imports in behest of notion of achieving a balanced trade. Instead the goal of policymakers should be to maximize benefits of citizens to buy and sell in global markets for mutual gain, whatever the mix and proportion of goods, services and assets they freely choose to trade.
A trade deficit may be beneficial if a country is spending more than it is currently earning to build the capacity to service and, ultimately, perhaps, pay off its debts. The bottom-line is that it is not the deficit or surplus that is the key thing, but what it is doing and whether the country is building enough capacity to service that debt.
After debating and understanding the merits of international trade, countries need to revisit their trade policy regimes. This holds true even for India. In the current scenario, when the Indian economy is poised for the giant leap, it is imperative that import-export considerations are kept in mind to judiciously leverage the capacity building with its deficit.