Imports and exports play an important role in determining the overall health of an economy. Countries use the data they require from imports and exports to determine if they are experiencing a surplus or deficit. International business is the core theme in conducting business in the current era of globalization. In the competitive environment, businesses are competing at global level and a company can engage in either import or export since they are the two basic and primary ways of conducting the business.
However, there has been a constant growing obsession towards the use of imported goods in most countries especially, the developing countries. Foreign imported goods consumption has been regarded as a status symbol in our society due to their quality and consistently huge price difference as compared to local goods. So what are the causes and how can we overturn this status quo in favour of local brands?
One of the major factors is the quality of local products and lack of quality standards and laws to implement them in local markets. The fact is that, quality refinement is not the ultimate objective in the production of local products. Due to the high inclination towards imported goods consumption, local producers just strive to increase their profits through lowering their own production costs and in turn, compromising on quality. Beyond, the shadow of doubt, local producers or assemblers are not striving much in the quality refinement of end-user products and also the increase in prices is almost never accompanied by quality enhancement.
Nonetheless, the bigger dilemma is what measures could be taken to change this perception. Definitely, a mere humble request to prefer local goods over imports from any President will not help. For instance, a developing nation is not matured enough to behave responsibly in such grave macroeconomic situation and will find it next to impossible to let go of their affection for the imported stuff. Hence, some strict alternative measures are inevitably required.
WHAT ARE IMPORTS
Imports are foreign goods and services that are purchased from the rest of the world by governments, businesses or residents, rather than buying domestically produced items. Imports lead to an outflow of funds from the country since import transactions involve payment to sellers’ residing in another country. It doesn’t matter what the imports are or how they are sent. They can be shipped, sent by email, or even hand-carried in personal luggage on plane, since they are produced in a foreign country and sold to domestic residents, they are imports (Source: The Balance, 2022)
While most countries try to export more goods and services than they import to increase their domestic revenue, a high level of imports can indicate a growing economy. This is especially true if the imports are mainly productive assets such as equipment and machinery, since the receiving country can use these assets to improve their economy’s productivity. For example, a paper manufacturing company in China may choose to import a new machine from Italy because it’s more cost effective than building the machine themselves or purchasing it from a domestic supplier. Once manufacturers install the machine, it may increase the manufacturing company’s ability to produce paper products, thus increasing their revenue and ability to export more of their goods in the future.
WHAT IS IMPORT-DRIVEN ECONOMY
Import-driven economy refers to the economic characteristic of a country that cannot produce enough goods and services to sustain its citizens and must depend on importing the majority of its forms of sustenance. In other words, an import-driven or oriented economy is one where, imports dominate exports. This means that, exports are not possible or are not close to the import rate (Source: IGI Global).
Such an economy will reap the problems of high debt which in the long run have negative consequences on the cost and standard of living of its citizens.
KEY FACTORS INFLUENCING THE VALUE OF A COUNTRY’S IMPORTS AND EXPORTS
Since international trade can significantly affect a country’s economy, it is important to identify and monitor the factors that influence it. These factors include:
INFLATION RATE OF THE COUNTRY
If a country’s inflation rate increases relative to the countries with which it trades, its current account (ie. a record of a country’s international transactions with the rest of the world) will be expected to decrease, other things being equal. Consumers and organizations in that country will most likely purchase more goods overseas (due to high local inflations), while the country’s exports to other counties will decline.
THE COUNTRY’S EXCHANGE RATE
Each country’s currency is valued in terms of other currencies through the use of exchange rates, so that currencies can be exchanged to facilitate international transactions. As a result, a fall in a country’s exchange rate will lower export prices and raise import prices. This will be likely to increase the value of its exports and lower the amount spent on imports.
The more productive a country’s workforce is, the lower the labour costs per unit and the cheaper its products. A rise in in productivity is likely to lead to greater number of households and firms buying more of the country’s products- hence exports will rise and imports fall.
IMPACT OF NATIONAL INCOME
If a country’s income level (National Income) increases by a higher percentage than those of other countries, its current account is expected to decrease, other things being equal. As the real income level (adjusted for inflation) rises, so do consumption of goods. A percentage of that increase in consumption will most likely reflect an increased demand for foreign goods.
IMPACT OF GOVERNMENT POLICIES
A country’s government policies can have a major effect on its balance of trade due to its policies on the following:-
Subsidies for exporters – Some governments offer subsidies to their domestic firms, so that those firms can produce products at a lower cost than their global competitors. Thus, the demand for the exports produced by those firms is higher as a result of subsidies.
Many firms in China commonly receive free loans or free land from the government. These firms incur a lower cost of operations and are able to price their products lower as a result, which enables them to capture a larger share of the global market.
Restrictions on imports – If a country’s government imposes a tax on imported goods (often referred to as tariff), the prices of foreign goods to consumers are effectively increased. Tariffs imposed by the U.S. government are on average lower than those imposed by other governments. Some industries, however, are more highly protected by tariffs than others. American apparel products and farm products have historically received more protection against foreign competition through high tariffs on related imports.
In addition to tariffs, a government can reduce its country’s imports by enforcing a quota, or a maximum limit on what can be imported. Quotas have been commonly applied to a variety of goods imported by the United States and other countries.
Lack of restrictions on piracy: In some cases, a government can affect international trade flows by its lack of restrictions on piracy. In China, piracy is very common; individuals (called pirates) manufacture CDs and DVDs that look almost exactly like the original product produced in the United States and other countries. They sell the CDs and DVDs on the street at a price that is lower than the original product. They even sell the CDs and DVDs to retail stores. It has been estimated that U.S. producers of film, music, and software lose $2 billion in sales per year due to piracy in China.
As a result of piracy, China’s demand for imports is lower. Piracy is one reason why the United States has a large balance-of-trade deficit with China. However, even if piracy were eliminated, the U.S. trade deficit with China would still be large.
The reciprocal demand signifies the intensity of demand for the product of one country by the other. If the demand for cloth, exportable commodity of country A, is more intense (or inelastic) in country B, the latter will offer more units of steel, its exportable products, to import a given quantity of cloth. On the contrary, if the demand for cloth in country B is less intense (elastic), then B will offer smaller quantity of steel to import the given quantity of cloth.
INTERNATIONAL CAPITAL FLOWS
An increased flow of capital from abroad involves larger demand for the products of the creditor country and consequent rise in the prices of imported goods. The rise in prices of imports relatively to the prices of exports causes deterioration in the terms of trade. When the borrowing country makes repayments of outstanding loans, there is outflow of capital. In order to get hold of required foreign currencies for making repayments, there may be sale of home-produced goods at rather low prices. The fall in export prices relative to import prices will again result in the deterioration in the net terms of trade.
ADVANTAGES OF IMPORTING
Importation of goods and services is a major aspect of international trade which cannot be ignored by any country. Below are the key advantages of importing:-
REDUCTION IN MANUFACTURING COSTS
All companies try to figure out the best possible way by which they can easily cut down the manufacturing cost and sell products with a good profit margin. The cost of manufacturing a product depends on multiple factors such as:
raw material costing
intermediate goods cost
Sometimes, you may get raw material in your country at higher prices as compared to other countries. In these conditions, you need to be smart and try to import such items quickly. In some cases, companies from other countries are selling intermediate goods at lower prices. These types of goods can be used for producing a final product. Here, you can save money on a specific processing channel as well. It is also a big reason for choosing the option for importing goods.
HELPFUL DURING EMERGENCY SITUATIONS
There are different types of situations occurring in different parts of the world. In case of emergency due to drought, floods, or other natural calamity, some countries suffer a lot and may not be able to produce enough to fulfill the basic needs of residents. In such a situation, import is the only way because without importing, the country can face a severe shortage of essential items. Imports in a way helps a country in averting any anarchy by avoiding a temporary shortage of resources.
RELEVANT IN STRATEGIC RELATIONS
Imports can be very helpful if country wants to develop and maintain strategic relations with other nations because international trade is all about give and take. Businessmen can easily build a stronghold in the market as well where they have good connections by which they can become a big part of the international business industry.
RUNNING AN IMPORT-DRIVEN ECONOMY – CHALLENGES
Some countries are blessed with almost every natural resource that one can think of, however, they heavily depend on foreign goods. Such situation has become chronic from governments to governments who are not putting in much efforts to end it.
Yes, it is true that importation in some instances has some considerable merits as discussed above. However, over dependence on importation of goods and services by a country without a corresponding export revenue, brings untold hardships and negative consequences on the economy. Typical of these adverse effects on the economy include:-
Outflow of foreign exchange: – The major disadvantage of importing is that, it results in outflow of foreign exchange of a country. The reason is that, when companies purchase goods from other parts of the world than it has to pay them in their currency, these importers have to buy foreign currency which leads to pressure on the domestic currency. The danger here is that, there will be a sudden large change in the currency exchange rate.
Country and currency risk:– There will be country as well as currency risk because if a company is completely dependent on other countries for its raw materials, the very time these countries impose tariffs or ban on their exports, it can be disastrous for the company. Besides, currency risk is possible if the company did not hedge against currency movements, it may lose more money than gaining from doing imports.
Domestic manufacturers affected: – When a country imports raw materials and other products than procuring from domestic industries, manufacturers are hit because, imports are cheaper than local goods. Few people will buy local goods and due to less demand ultimately, industries or companies will be closed down since they cannot keep absorbing losses for long periods. In other words, importing indirectly, affects local industries and manufacturers and in the long term can be a disaster for the economy.
For decades, this situation has been a subject of discussion and gained enough time on our airwaves. Ideas from professionals to the ordinary street people have been shared, but to no avail. Today, we face the wrathful consequences. In this period of global economic, political and health crisis, import-driven countries are in the red zone for another political crisis. Food stocks are likely to run out, prices of goods and services are going up day in and day out, not forgetting the energy sector thus fueling cost of living and finally affecting standard of living. This is unfortunate reality for countries with the most arable land that can feed the entire world.
In time of pandemic, everyone is a victim because such countries will be waiting for donations and emergency loans to procure some essentials. This brings to bear how such countries have not been ready for any uncertainty because their low level of investment into research and development summarizes their unpreparedness towards uncertainty.
I would not be far from right to say that most leaders of these countries have no plan – and even if they do, winning votes to stay in power is their plan. It is unfortunate the population keeps increasing but most of these countries are not putting enough plans in place to mitigate the negative consequences of this unpleasant situation.
Due to the ever-increasing influence of western lifestyle and brands on youngsters through mass media, a remarkable shift is evident in local spending patterns in the retail sector. These retailers are also liable for manipulating the existing perception of imported products to further increase their profit margins and pushing the average buyer to spend more on imported stuff.
Unfortunately, this continuous emphasis on imports by those retailers has reached a devastating state with the import of smallest items of daily usage from other countries. Apparently, there is no direction and supervision over these outrageous volumes of imports costing nations billions in foreign exchange.
STRATEGIES AND BEST PRACTICES TO MITIGATE CHALLENGES
Considering the above-mentioned challenges faced by import-oriented countries in times of global economic and political crisis, there is the need to institute effective strategies or best practices that can help achieve success at macro level where upon GDP will certainly beef up, the trade deficit will be reduced and the unemployment level will be curtailed. These include:-
SURVEY ON ALL IMPORTED ITEMS
It is necessary to survey all items currently imported into the country. The items should be re-categorized into luxury and essential and tariffs should be imposed on luxury items at the time of import (not at the consumer level). The more local alternatives available for imported items, the more the rate of tariffs should be.
GOVERNMENTS SETTING UP RETAIL MARKET REGULATIONS
Governments should adequately set-up and structure retail market regulations so that the economy is reshaped from import-driven to export-oriented.
MONITORING OF GROWTH IN DEMAND FOR IMPORTED ITEMS
There is the need for high authorities to monitor growth in demand for all types of imported products. This demand analysis will aid in determining the feasibility of replacing imports with in-house production. There are three (3) main possibilities of this holistic exercise and proactive approach that are required to deal with each of these situations:-
The first possibility is where an imported item is not at all manufactured locally but has high demand (eg. fully automatic washing machines). In this instance, there is the opportunity of launching viable products since there is growing demand or capacity to produce and the only missing factors are technology elevation. Consequently, national producers need to invest in research and development to revamp conventional processes and obsolete technologies, considering international standards of energy rating. Moreover, import of raw material and machinery should remain duty-free to foster domestic production of technologically advanced items.
The second option
Supermarkets are augmenting imported items to exploit the mindset of local buyers, ie. despite importing the items in question are abundantly produced locally. Heavy import duties or embargos should be imposed and incubation of new business ideas and opportunities is required to create awareness among local producers. The same argument could be made for apparel where there is a huge number of local retailers and good brands whereas the consumers are increasingly being influenced by glamorized foreign brands.
The third option
Local alternative products are seldom available and demand is also not very convincing to manufacture locally. In such a scenario, authorities have to evaluate the criticality of that import. At this point in time, rigorous administration of retail sector and stiff monitoring of imports is imperative to survive ongoing disastrous condition of balance of payment (BOP).
A public-private partnership is inevitable to drive prompt results in this economic transformation of the country, where the higher command has to ease the entrance of mid-tier producers and expedite the implementation of proclaimed one window solution for export-oriented new start-ups. Fast and quick measures in this regard are the need of the hour.
BEST EXPORT PROMOTION POLICIES
In addition to the above-mentioned strategies, there is the need to institute effective export promotion policies to boost export. These policies include:-
Increase trade protectionism
Countries need to increase exports by increasing trade protectionism. This will insulate their companies from global competition for a while because of the imposition of tariffs on imports making them more expensive. However, the problem with this strategy is that other countries soon retaliate. A trade war hurts global trade in the long run and this was one of the causes of the Great Depression.
As a result, governments are now more likely to provide subsidies to their industries. The subsidy lowers business costs so they can reduce prices. This strategy may lower the risk of retaliation. Protecting local industries give them the chance to catch up with technology in developed markets.
Once trade protectionism has lowered imports, the next way to boost exports is through trade agreements. Countries may see the wisdom in reducing tariffs. The World Trade Organization (WTO) almost succeeded in negotiating a global trade agreement. However, European Union and the United States refused to end their agricultural subsidies. Hence, countries rely on bilateral and regional agreements.
Lowering of currency value
Lowering of currency value is another step countries can use to increase their exports. This measure has the same effect as subsidies. It lowers the price of goods. Central banks reduce interest rates or print more money. They also buy foreign currency to raise its value. Countries like China and Japan are better at winning these currency wars.
ADDITIONAL BEST PRACTICES
Enhancing the domestic enabling environment for potential exporters in terms of infrastructure, regulations, access to finance, insurance and fiscal policies.
Fostering strategic cooperation between private and public actors and among domestic producers, exporters and policy makers.
Improving productivity and technological content of domestic goods and provide incentives to nurturing innovation.
Serve to build the country’s image in foreign markets through marketing, provision of information and advocacy.
Offer targeted and tailored assistance and rely on continuous evaluation.
Effective monetary and fiscal policies designed to improve the enabling environment.
Stimulating of institutional development.