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If a country enacts a program that successfully reduces its imports, eg:

  • A 'buy local' advertising campaign
  • A program of training mechanics to maintain older cars, rather than buying new imports
  • An extensive public transport program that reduces the country's oil imports.

(These programs aren't reducing imports by imposing tarrifs).

What would the effect on that country's economy be?

Under existing trade rules, are any of these examples likely to breach free trade agreements?

On the face of it, a reduce demand for imported goods would correspond with a lower supply of that country's currency, as they need to sell less of their own currency to buy the imports they need. This would raise the price of their currency, and that would in turn reduce demand for the country's exports.

However, I'm wondering I'm missing another side of the equation here - eg, selling currency for international investment.

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  • $\begingroup$ @dwjohston, should also include reduced competition in the market, and hence high prices. $\endgroup$ – london Sep 30 '17 at 8:06
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The short unqualified answer is 'it depends'. Are we talking about a 'small' or a 'big' economy? Is that economy 'wide' open or sealed tight to factor movements? Does it issue its own currency? What's the exchange rate regime it uses? Furthermore, what are its developmental goals, in general? The answers are going to be different, depending on what kind of countries we are talking about eg US vs Belgium, or Singapore, to take two extreme cases.

In general, directing consumers towards domestically produced commodities would increase the demand for local commodities at the expense of imported ones as long as there are local substitutes for foreign imports. It seems plausible to substitute imported beer for domestic wine. The catch is that the domestically produced substitutes should actually be price competitive to foreign alternatives otherwise no amount of 'national pride' can compensate for a price tag eg twice as high (I'm assuming that quotas, tariffs and the like are not sought for).

As far as the 'training program' is concerned, it could be a more all-encompassing venture that extended beyond cars. The 'training' could affect the total of local manufacturing and durables' production. Such a substitution of 'old' for 'new' would probably reduce manufactured imports, industrial machinery imports etc at a significant cost of maintaining and operating an aging infrastructure.

Practically that means higher costs for operation and maintenance and higher prices for the finished products (although that could be offset with appropriate industrial policies-in a hypothetical scenario, using appropriate subsidies etc). It could also mean an increase in imports of spare parts because old equipment tends to break down more often.

The major drawback would be the impact on the distance of the domestic economy from the technological frontier. To the extent that technological innovations are embedded in new equipment and machinery (and tools and parts), 'shutting down' imports implies skewing the age-structure of the domestic capital stock to less productive older technologies (such an occasion might not be necessarily as bad as it sounds as long as the consumption structure is similarly skewed).

Finally, when it comes to overhauling public transport, that is something that would require significant investment. Usually, such 'efficient' technologies are more likely to be 'modern' than 'mature' ones hence this consideration introduces the reservations related with the previous point regarding the age-structure of the domestic capital stock and the distance from the technological frontier. Nevertheless, the significant cost of such an investment could be-in principle-justified by an appropriate investment horizon.

Also, without playing down the costs of oil imports, the price of oil is really not where it used to be and supposedly with the advent of fracking that is going to continue indefinitely. Oil is generally related to energy production, so having a small energy footprint would be more effective in curbing energy needs and related imports.

Where do all that leave us?

Directing resources from tradables to non-tradables will change relative prices. Investing in public transportation infrastructure will have a similar effect of what constitutes productive investment.

A plausible scenario is that resources will be pulled away from the tradables sector (exports) and will be directed to the non-tradables sector (which will now be more profitable that before). That will decrease the output of the tradablers sector. Also, the product mix of exports will be skewed to older technologies (courtesy of the 'training' policy). That would imply decreased price competitiveness in the international market. Such an occasion by itself could imply a deterioration of the trade deficit which is arguably the opposite of the intended result of the proposed reforms. Also, incomes might increase courtesy of the multiplier effect (assume that the non-tradables sector is labor intensive). That could potentially introduce another snag, to the extent that the income elasticity of imports is significantly large. Although, the 'buy local' campaign could potentially be effective in this regard.

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