Exports and Their Effect on the Economy
3 Ways Countries Increase Exports.
Exports are the goods and services produced in one country and purchased by residents of another country. It doesn't matter what the good or service is. It doesn't matter how it is sent. It can be shipped, sent by email, or carried in personal luggage on a plane. If it is produced domestically and sold to someone in a foreign country, it is an export.
Exports are one component of international trade. The other component is imports. They are the goods and services bought by a country's residents that are produced in a foreign country. Combined, they make up a country's trade balance. When the country exports more than it imports, it has a trade surplus. When it imports more than it exports, it has a trade deficit.
As an example, the United States imported $1.68 trillion in goods between January and August 2018. During that same period, it exported $1.12 trillion in goods. This created a deficit of $565.6 billion. You can see a monthly breakdown from January to August 2018 below:
What Countries Export
Businesses export goods and services where they have a competitive advantage. That means they are better than any other companies at providing that product.
They also export things that reflect the country's comparative advantage. Countries have comparative advantages in the commodities they have a natural ability to produce. For example, Kenya, Jamaica, and Colombia have the right climate to grow coffee. That gives their industries an edge in exporting coffee.
India's population is its comparative advantage. Its workers speak English, which gives them an edge as affordable call center workers. China has a similar advantage in manufacturing due to its lower standard of living. Its workers can live on lower wages than people in developed countries.
How Exports Affect the Economy
Most countries want to increase their exports. Their companies want to sell more. If they've sold all they can to their own country's population, then they want to sell overseas as well. The more they export, the greater their competitive advantage. They gain expertise in producing the goods and services. They also gain knowledge about how to sell to foreign markets.
Governments encourage exports. Exports increase jobs, bring in higher wages, and raise the standard of living for residents. As such, people become happier and more likely to support their national leaders.
Exports also increase the foreign exchange reserves held in the nation's central bank. Foreigners pay for exports either in their own currency or the U.S. dollar. A country with large reserves can use it to manage their own currency's value. They have enough foreign currency to flood the market with their own currency. That lowers the cost of their exports in other countries.
Countries also use currency reserves to manage liquidity. That means they can better control inflation, which is too much money chasing too few goods. To control inflation, they use the foreign currency to purchase their own currency. That decreases the money supply, making the local currency worth more.
Three Ways Countries Boost Exports
There are three ways countries try to increase exports. First, they use trade protectionism to give their industries an advantage. This usually consists of tariffs that raise the prices of imports. They also provide subsidies on their own industries to lower prices. But once they start doing this, other countries retaliate with the same measures. These trade wars lower international commerce for everyone. For example, the Smoot-Hawley tariff lowered trade by 65% and worsened the Great Depression.
Countries also increase exports by negotiating trade agreements. They boost exports by reducing trade protectionism. The World Trade Organization tried to negotiate a multilateral agreement among its 149 members. The so-called Doha agreement almost succeeded. But the European Union and the United States refused to eliminate their farm subsidies.
As a result, most countries relied on bilateral agreements or regional trade agreements for years. But in 2015, the Obama administration negotiated the Trans-Pacific Partnership. In 2017, the Trump administration dropped out. But the other countries completed the agreement without the United States.
The third way countries boost exports is to lower the value of their currencies. This makes their export prices comparatively lower in the receiving country. Central banks do this by lowering interest rates. A government can also print more currency or buy up foreign currency to make its value higher. Countries that try to compete by devaluing their currencies are accused of being in currency wars.
How Exports Fit Into the Balance of Payments
- Current Account
- Capital Account
- Financial Account
The Bottom Line
Exports help a nation grow. As a trading component, it assumes importance in diplomatic and foreign policies.
Countries export goods and services in which they have a competitive or comparative advantage. Governments encourage exports because these:
- Increase revenues.
- Increase jobs and raise the standards of living.
- Increase its foreign currency reserves.
- Increase liquidity and enable governments manage inflation efficiently.
For these reasons, countries seek to boost their exports. Although not all measures to do so benefit them in the long run. These measures are:
- Trade protectionism – imposition of tariffs on imports and subsidies for industries. These provoke trade wars.
- Trade agreements.
- Devaluing the local currency to lower export prices.