I here try once more to explain why I disagree – uneasily, to be sure – with my dear friend David Henderson on the question of the relationship between imports and exports. (My previous post in this vein was convoluted although, I think, correct.)
The passage that sparked this intellectual disagreement is this one, written by Veronique de Rugy:
One of the biggest fallacies about trade is that the ultimate value of trade for a country is found in that country’s exports, with imports being valuable only insofar as they better enable the country to export. But in reality, the opposite is true: Imports are the end and exports are the means. If we could acquire imports without exporting anything, that would be the best of all worlds for us. Unfortunately, foreigners won’t work for us for free. They want things in return for what they produce for us, and so we must export.
David expressly agrees with the first sentence. So do I.
David expressly disagrees, though, with the remainder of Vero’s paragraph. Specifically, about Vero’s second sentence, David objects that “There are two ends: imports and exports. We want imports: that’s one end. But our exporters want to export: that’s their end.”
As I wrote in my earlier post, wanting to do something does not imply that that something is an end. “I want to sell my car” does not mean that my end – my goal – is to get rid of my car. I want to sell my car only because, by doing so, I will get money that I can then spend on some other consumption goods today, or to invest, which will increase my access to consumption goods tomorrow.
Selling my car is a means toward the end of improving my consumption. If I were prevented from receiving anything in exchange for my car, I would not sell it or otherwise get rid of it.
David writes that “our exporters want to export: that’s their end.” I disagree – or, rather, I think this wording is too confusing to be justified. Because exporters demand payment in return for their exports, their end is not to export but, instead, to receive something in exchange. Their exports are a means.
What exporters receive in exchange, of course, is money (just as money is what I receive when I sell my car). But clearly the money isn’t the exporters’ end any more than the money is my end when I sell my car. If, just before shipping their goods abroad, the exporters were informed that the moment they receive the (say) $1M worth of euros they must stuff those euros into mattresses and never retrieve them, the exporters would immediately become not-exporters.
Exporters accept money as payment only because they’re confident that they can exchange that money, now or in the future, for real goods and services. And ultimately the real goods and services are consumption goods and services. The exporters’ end is to increase their standard of living by increasing their access to real goods and services.
The exporters can spend their export earnings today on consumption goods. Or the exporters can invest their export earnings. David might say that, in this latter case, the investment was the exporters’ end, but I would disagree. People invest, ultimately, to increase their or their families’ or heirs’ spending power – that is, to increase their or their families’ or their heirs’ future access to consumption goods and services. Investing, in short, is a means to greater consumption.
In reality, the individuals who export need not be – and frequently are not – the individuals who import. This fact might be taken as indicating that exports cannot correctly be said to be the means and imports to be the end. After all, if exporter Smith has no desire to purchase foreign-made outputs, how can it be that importing is the end of his exporting?
It indeed cannot correctly be said that importing is the end of Smith’s exporting. But at least two relevant things can correctly be said. The first is that Smith’s exporting was, as explained above, nevertheless a means to his increased consumption. The second is that Smith’s exports are a means to increase imports of the country in which Smith resides. Smith’s fellow citizen Jones is able to import only because Smith exported.
Suppose Smith, a resident of Texas, exports cloth to Italy and is paid one million dollars worth of euros. Smith, having no desire to buy or invest abroad, asks Jones to convert his (Smith’s) euros into $1M. Jones agrees. Jones accepts Smith’s euros and, in exchange, gives Smith one million U.S. dollars. Smith is now out of our picture.
But why did Jones willingly give up $1M of U.S. purchasing power in order to get equivalent purchasing power over European goods? Clearly, Jones wants either to spend or to invest the euros in Europe (or Jones knows someone – or knows someone who knows someone – with $1M who wants to spend or invest in Europe). Let’s say that Jones sends the euros to France as payment for $1M worth of French wine.
If Jones drinks this wine himself, he acquired it for his personal pleasure; his purchase of it is a consumption expenditure. If instead Jones is a restaurateur who sells the wine in his restaurant, or if he is a wine retailer, the wine is consumed by Jones’s customers. In either case, Americans’ increased consumption of French wine is made possible by Smith’s earlier exportation to Italy of $1M worth of cloth. Had Smith not exported, the euros would not have come into the U.S. and Jones would not have been able to use these euros to buy French wine.
This simple example can be made more complicated by introducing investment uses of the euros, but as I argue above, that complexity only means that the consumption end of exporting is delayed in time. Alternatively, we could introduce exchange-rate changes or other more detailed institutional features. But these complications would do nothing to alter the conclusion that exports are a means of increasing the exporters’ or the exporters’ fellow citizens’ ability to import.
…..
People must be paid to export. This fact proves that exports are not an end in themselves. They are a means. People pay to import, with the ultimate payers – either Jones who drinks the wine himself, or Jones’s customers who enjoy the wine that he imports – expecting nothing in return other than the subjective utility they receive from consuming the imported goods.
