Starleaf: Exports good, imports bad, right? Nonsense

March 12, 2018

Dr. Dennis StarleafDennis Starleaf, emeritus professor, wrote an article as a guest columnist for the Des Moines Register March 12, 2018:

Your Turn

Many people appear to be under the impression that exporting is good while importing is bad. This is nonsense.

What a country gains from international trade is the ability to import things it wants from other countries. Exporting is not a rational national objective in and of itself. The need to export is a burden that a country must bear because its import suppliers demand payment for what they supply.

Suppose that the U.S. exported 10% of its national output and imported nothing. What would be the consequences? We would have for domestic use only 90% of what we produce, so we would have a lower standard of living than if we exported nothing.

Would we get anything in exchange for our exports? We would get a lot of foreign money. But foreign money is generally of value only because it can be used to buy foreign goods and services. If we are not going to import, of what use is acquiring foreign money? We could, of course, use this money to make investments in foreign countries and these investments would undoubtedly yield profits (or at least interest) in the future. But this simply means that we would have more unusable foreign money in the future. Unless you are going to use acquired foreign money to buy things from other countries (i.e., to spend it on imports) now or in the future, there is not much point in exporting.

Now suppose that the U.S. imported an amount of foreign goods and services equal to 10% of what we produce and exported nothing. What would be the consequences? We would have for domestic use 110% of what we produce, so we would have a higher standard of living than if we imported nothing. What would we give other countries in exchange for these imports? U.S. dollars, of course. And U.S. dollars are cheap to produce. For example, it costs only a few pennies for the U.S. government to print a $100 bill.

If we could get foreigners to sell us goods and services in exchange for dollars that they merely hoarded and did not spend on U.S. products, this would be a wonderful deal, along the lines of manna falling from heaven. And to some extent we have this deal.

Because the U.S. dollar has a pretty stable purchasing power, it is often used in trade outside the United States. For example, U.S. currency is commonly used (legally or illegally) in trade within countries that do not have a stable-value currency. In fact, most of the U.S. currency in existence is owned and held by foreigners outside the United States. And for foreigners to have acquired these dollars, they have had to export goods and services to us in exchange for the dollars.

Furthermore, foreign countries hold foreign currency reserves – pools of foreign money and other foreign- currency denominated financial assets – and much of the foreign currency reserves that foreign countries hold are denominated in U.S. dollars. The chief way that foreign countries acquire U.S. dollar denominated financial assets is to export goods and services to U.S. in exchange for U.S. dollars.

It is a wonderful deal for the U.S. But the willingness of foreign individuals and businesses to export goods and services to the U.S. in exchange for U.S. dollars that they merely hold is limited. For the most part, at least in the long run, foreigners are going to spend the proceeds from their exporting to the U.S. on – you guessed it – U.S. goods and services (i.e., U.S. exports). This means that over the long haul international trade is pretty much a two-way street. If a county is going to be able to import, it is going to have to export. And over the long haul, the value of a country’s exports is going to be approximately equal to the value of its imports.

News Type: