Exports: a key concept in Economics

EXPORTS

by Valentino Piana (2001)

Contents

1. Significance

2. Composition

3. Determinants

4. Impact on other variables

5. Long-term trends

6. Business cycle behaviour

7. Data

8. Formal models

9. Related papers

The structure of world exports

Bilateral import promotion as a key to integration in a hierarchical world

10. Links

Significance

Goods and services sold to foreigners. For instance, OPEC countries export oil to many industrialised countries.

One can abstract at least 9 possible reasons for which a country may be able to export a certain good or service:

1. the country is provided with a specific good which does not entirely uses, as it happens with oil in agriculture-oriented nations;

2. the country has been the first to introduce a new product that is demanded worldwide;

3. the country has the cumulated knowledge to produce better quality products that are recognised by foreign public;

4. goods are there horizontally different by those produced abroad (e.g. domestic firms have a specific brand connotation);

5. competition may be less intense abroad and quality requirements be lower;

6. the process of production is characterised by economies of scale, i.e. a falling price/better quality for larger and larger quantities produced, and the domestic market is not wide enough for reaping those benefits;

7. for whichever reason, production cost is lower than in other countries;

8. the price at which the good can be sold abroad is larger than domestic prices (even taking into account transport, tariffs and other export costs);

9. a domestic contraction of demand may have pushed the producers to find out new markets for their existing production capabilities;

10. historical links make the country participate to global value chains as location for certain intermediate productions.

Exporters often approach new markets just by participating to trade fairs, meeting there potential importers and building business relationships with them by trial and error. But a systematic overview of foreing markets can offer a more structured approach. For an instance of the information set available to export managers see here.

One should note that there is a crucial asymmetry between imports and exports: in order to be able to export, a country needs a specific competitiveness and determination, whereas purchasing power (or credit) is enough for imports. It's easier to import than to export.

This means that an import promotion policy reaches faster results, as the new policy we propose in this paper: the bilateral import promotion, while traditional export promotion should take into account also wider societaly problems like literacy.

Composition

Export is usually decomposed by product sold and by target country. To identify critical issues in the trade of a country, you need to understand its degree of concentration, i.e. whether there are only very few countries and commodities representing the bulk of exports and imports. An example of a similar analysis - with data and methodology - is offered here. Top export market play a disproportionate role in a country's development, as you can see in this paper.

To underline the export specialisations of the country, it is common to aggregate products according different criteria:

1. largely-defined branches of the economy, as agriculture, mining, manufacturing, services;

2. their labour-intensity and capital-intensity, maybe with sub-items, as different skill levels or specific technologies;

3. Pavitt taxonomy of sources of innovation in different macro-sectors of industrial dynamics, described as follows: supplier dominated (where the main source of innovation is new machinery), science-based (where Research & Development activities as well as linkages among firms, universities and science institutes are the keys to advancements), specialised supplier (where incremental innovations take place thanks to co-operation between capital-good supplier and industrial users), scale-intensive (where large dimensions allow for experience and innovation).

Relative export specialisations of a country can then be assessed by an analysis of export composition. A very simple indicator is a ratio: the country’s share in world market for a specific aggregate divided by its share for all products.

Interestingly, the export structure is often different from global domestic production structure. Therefore external trade and its fluctuations will have a differentiated impact on sectors and on the country’s regions that host them. Similarly, an export-led growth will have a different impact in comparison to a growth driven by domestic demand.

Determinants

Arguably, exports mainly depends on:

1. import dynamics in other countries and the way the country participates to global value chains;

2. price competitiveness of production, arising from cost advantages, high productivity, state aids, favourable exchange rate, higher inflation abroad than domestically;

3. non-price competitiveness, arising from branding, technology, product quality, innovative products;

4. levels of hindering factors, like information lack, trade barriers, transport costs, cultural discrepancies;

5. levels of services provided by complementary players, like international banks, guarantee funds, fairs, consulting firms;

6. historical links with certain target countries;

7. structural trends toward economic integration with other countries.

In other words, exports should grow when:

1. income rises in other countries;

2. consumer tastes shift, so that other countries become more import-prone;

3. domestic production becomes more price competitive;

4. domestic production becomes more competitive as far as non-price buying determinants are concerned;

5. hindering factors are reduced;

6. complementary services are developed;

7. economic integration takes off.

Temporary issue can affect expors. For instance, strikes for getting higher wages may lead to a fall in the production of a good which is mainly exported. If it has a relevant share in total exports, this might lead to a temporary fall in exports.

It customary to say that a currency devaluation should boost exports. In fact, one should note that export costs consist of two main components:

1. costs that depend on domestic conditions only, like direct production costs;

2. costs that depend on prices and conditions in the target country, like advertising and the building of reliable distribution channels.

Incidentally, one can note that the former are typically variable costs, growing together exported quantities, while the latter are often fixed costs, independent from actual quantities.

A devaluation will reduce the first type of costs (in target foreign country’s currency) but at the same time it will increase the second in domestic currency, thus impacting exporters’ marketing strategies and the possibility of fully reaping the benefits of devaluation itself.

Export will indeed been boosted by devaluation to the extent the first type of costs dominate and the prevailing competition weapon is price.

In micro-economic terms, routines allow firms to choose in which country to export, to adjust prices and product features to its market and distribution conditions, to establish contracts and clauses in terms of payment currency, timing and other issues.

In more structural terms, exports depend on core productive competences of the country, nurtured over time by private and public forces (firm competences, education, R&D sector, infrastructure) and their productive use for world markets.

Impact on other variables

Trade balance, i.e. the difference between export and import, is clearly the first variable influenced by export dynamics. Export is a source of foreign currency, easing import expenditure and increasing central bank reserves of foreign currency.

If for exporting a country needs raw materials and semi-manufacturer goods from abroad, then export growth will increase imports as well.

Provided export does not simply replace production previously directed to domestic demand, the increase of export will increase production, GDP, employment. Through Keynesian multiplier, this will engender a higher consumption and higher production again, giving rise to a positive feedback loop. Probably, imports will rise as a consequence.

On the supply side, firms may compensate slower domestic dynamics with export, stabilising their production and eventually profitability. Growing exports usually mean a firm strategy of market diversification.

Given the fact that exporting firms often need to update their plants to match foreign specificity of demand, a positive link has also been mentioned in the literature between export and investment, the more so as export increase profits, investment self-financing and international credit rating (thus reducing credit risk). For instance, in Tanzania this study provides relevant evidence.

Long-term trends

Exports has been growing much faster than GDP in most countries. As a consequence, their share on GDP is much larger now than 30 years ago.

For some developing countries, exports are indeed the main element of production, apart from some agricultural (subsistence) sector and from basic services. For example, some oil producers use oil receipts to buy everything else they need (from food to manufactured goods).

Business cycle behaviour

Exports are quite erratic and their pattern is often different from GDP cycles, also because they heavily depend on other countries’ events.

During a recession, a jump in exports may invert the cumulative negative dynamics and put a country back to its growth path.

To the extent that during a domestic-demand driven recovery the interest rates rise and currency appreciation takes place, at the end of recovery period export might fall and trade balance may deteriorate. Depending on many other factors, this may conduct to policy actions to restrain growth. A weak peak-leading behaviour may then emerge.

Data

Exports, Imports and the other GDP components (1946-2007)