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Definition of Imports:
are goods and services that consumers, businesses, or governments of one country acquire from another country.
In the United States oil purchased from Saudi Arabia is an import, but oil purchased from South Dakota is not an import. When the United States sells grain to Japan, Japan imports the grain and the United States exports grain. Why do countries import goods or services? Perhaps a country is unable to produce a good, so it must import it. This is true of many raw materials. Switzerland does not have any oil, so it must import its petroleum products. Countries import goods because the exporting country has the ability to produce the good or service at a lower opportunity cost than the importing country. Economists call this a comparative advantage. Wealth is maximized because countries produce goods and services they are the most efficient at and rely on others to provide their other needs.
Unfortunately, inefficient producers are hurt when production is delegated to the most efficient producers. As companies close or cut their production drastically, pressure mounts for governments to reduce the incentive to outsource manufacturing overseas. Governments may restrict imports by charging a tariff or imposing a quota. The objective is to protect manufacturing jobs in their respective countries by either charging an import tax or tariff to make imports more expensive, or by legally limiting the quantity of a good that can be imported with a quota. Sometimes governments will support an industry by paying it a subsidy. Yet, most economists believe these measures have long-term costs that policymakers frequently ignore.
One cost of restricting trade is the resulting higher prices for the consumer. Assume Country A and Country B manufacture widgets. Who benefits if Country A can produce a better product and ship it while charging less than Country B? Certainly Country A, but the citizens of Country B also benefit because they pay less for a better product. The workers in Country B may be displaced. Watch our video to better understand the dilemma our political leaders find themselves in.
The Cost Of Protecting Jobs
When someone hurts an individual, the injured party is incentivized to retaliate. Countries are no different. When Country A imposes a tariff or quota on Country B, there is a tendency for Country B to respond by issuing a new tariff or quota. This can lead to trade restrictions spiraling out of control. Most economists believe that instead of building up barriers, governments should strive to tear them down and negotiate agreements promoting free trade.
Supply and demand analysis can be used to measure the short-term and long-term implications of restricting supply. See our lesson Supply and Demand – The Costs and Benefits of Restricting Supply
for a detailed analysis.
A balance of payments equals total exports minus total imports. A trade surplus means exports exceed imports, while a trade deficit means imports exceed exports. During recessionary periods a trade surplus is more beneficial. The exports add jobs and help grow the economy when it needs it most. Trade deficits are best when a country is in an expansion and inflationary pressures are rising. The added competition from foreign producers helps restrain price increases.
Governments recognize the benefits and costs of trade. They strive to protect the jobs of their citizens while opening markets for companies domiciled within their borders. Trade agreements recognize the mutual benefit and provide the conditions of exchange between parties in all the nations that are party to the agreement. The North American Free Trade Agreement (NAFTA) created a free-trade zone, which removed all barriers to trade between the participating nations. It remains a controversial agreement between the United States, Canada, and Mexico. American opposition centers on the number of jobs lost to less expensive workers. Supporters argue that it has opened new markets and reduced costs, which enabled American companies to compete globally. The Trans-Pacific Partnership is an agreement negotiated between twelve Pacific-rim nations (It does not include China.), signed February 4, 2016, but presently not ratified by the United States Congress. Its objective is to lower tariff and non-tariff barriers to trade. Supporters say it will advance economic growth. Opponents say it will cost too many jobs and raise concerns about enforcement. The European Union also provides a free trade zone that includes 27 countries.
Dig Deeper With These Free Lessons:
Supply and Demand - The Costs and Benefits of Restricting Supply
Gross Domestic Product - Measuring An Economy's Performance
Opportunity Cost - The Cost of Every Decision
Comparative Advantage and Specialization