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Clarifying a Point about Exporting

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Naturally I am upset with myself when an economist as astute and as accomplished as David Henderson claims to catch me in an error. Upon encountering any such claim, my presumption is that I did indeed commit some mistake in reasoning or understanding of the facts.

Yet this presumption is rebuttable. In this EconLog post [2], David writes that I committed an error (in an earlier reply [3] to Steve Moore’s rejection of a policy of free trade) when I wrote that

First, exporting, as such, no more enriches a country than does vandalism or arson. Exporting enriches a country only insofar as the people of that country receive imports in return for their exports. Unlike Mr. Moore, every true free trader understands that exports lead to growth only if and to the extent that exports bring in more imports.

David acknowledges that exporting to bring in more imports is one way in which exporting leads to more growth, but he rejects my claim that bringing in more imports is the only way in which exporting promotes growth. (By ‘promoting growth’ here I mean ‘improves the material well-being of people in the exporting country.’)

David explains:

But imports are not necessary for exporters to gain from exporting. In the extreme case where they buy zero imports, they will typically use the money to buy (1) bonds from foreign governments, (2) commercial bonds from foreign firms, (3) shares in foreign firms, or (4) real estate in foreign countries. Or they may (5) directly invest in plant and equipment in the foreign country.

I agree that the proceeds from an increase in exporting can be – and indeed often are – used in these ways. But I disagree that these ways are ones that don’t involve an increase in imports. True, these uses of the proceeds of export sales do not bring in imports directly and immediately, but what is the point of any of these investments if not to acquire from foreigners more goods or services for consumption in the future?

Suppose that I get paid 69,100 yuan to teach an economics course to Chinese students. (69,100 yuan is roughly equal in value to $10,000.)

I love teaching economics, but I agree to spend my time and effort teaching this class only because I expect that doing so will enable me to increase my (or my household’s) consumption over time.

Let’s say that I use all of my 69,100 yuan to buy bonds issued by the Chinese government. What’s my motivation in doing so? It is not to enrich the Chinese government or Chinese taxpayers. My hope is that the bond – either in the form of interest paid to me or through increased market value – will yield to me in the future spending power greater than the 69,100-yuan-worth of spending power that I gave up today when I bought the bond.

Assume that I redeem my bond one year later for 72,500 yuan. What will I do with my yuan? I will use them to buy Chinese goods and services – meaning that my exporting last year of my economics-teaching services to China resulted in me importing, one year afterward, more Chinese goods and services than I would have imported had I not exported my teaching services to the Chinese.

Of course, I might instead roll over my bond for another year. But my motive in doing so remains the hope of increasing my ability to buy more Chinese goods and services.

Or I might instead use my 72,500 yuan to buy ownership shares (passive or active) in a Chinese company. Yet here, too, my motivation is the hope of importing more from the Chinese in the future.

Nothing essential changes if the bond that I initially bought with my 69,100 yuan is issued by a private entity in China.

Nothing essential changes if I take my 69,100 yuan to Stockholm, convert them into euros, and buy a financial instrument issued by a Swedish entity – or buy 69,100-yuan worth of Swedish goods to import to my home in Virginia. If I buy a Swedish financial instrument, my hope is that it will appreciate enough in value to enable me in the future to import more goods and services into my home.

(And note that the Swede who gives me euros in exchange for my yuan does so because she or someone she knows wishes either to import goods and services now from China, or to import goods and services in the future from China after first purchasing – and later selling – yuan-denominated financial instruments).

Suppose now, instead, that I buy with my 69,100 yuan a condo in Shanghai for my own private use. This purchase is not reckoned as an American import; it is, as a matter of accounting convention, recorded on each country’s capital (or financial) account and not on its current account. Yet this accounting convention should not blind us to the reality that, economically, this condo is indeed the equivalent of an American import. I exported to China my teaching services and ‘imported’ from them the ability to enjoy having a place to hang my hat in Shanghai.

No matter how I first use my 69,100 yuan, it is impossible to escape the conclusion that – barring philanthropic motives on my part toward Chinese students – my intention in exporting my teaching services to China is to receive, either in the present or in the future, some imports of at least equivalent value, either directly from China or indirectly from some other non-American country. (Update: It’s possible that I might want at no time any goods or services from outside of America. Nevertheless, for me to spend my yuan buying American-made goods, some other Americans must wish to import from China an equivalent value of goods or services.)

…..

Nothing essential changes if I am paid for the export of my teaching services to China in U.S. dollars. The Chinese got those dollars by earlier producing real goods and services that they sold to Americans. (Yes, the Chinese might instead have gotten those dollars by selling their exports to, say, the Germans. But then we must ask from where the Germans got the dollars. Answer: they supplied Americans with imports that Americans paid for with dollars – dollars that the Germans later used to buy imports from the Chinese).

And so I believe that David is mistaken when he writes that “imports are not necessary for exporters to gain from exporting.” Putting aside utility gains from philanthropic production for foreigners, imports are indeed necessary for exporters to gain from exporting.

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