Why do Nations Import?
Why do Nations Import?

The motivation for a country to import goods and services from other countries is perhaps less obvious than its motivation for selling exports (making a profit on goods not consumed by the domestic market). As with exports, the purposes served by imports vary from country to country.  Let’s explore these various purposes by starting with asking why a country like the United States, with its massive and extraordinarily diverse economy, would need to import anything from other countries.

In fact, there are only a handful of goods or services that the United States absolutely must import from other countries. With a land area spanning several climatic zones, immense natural resources, and a dynamic workforce, the United States is able to produce, mine, or grow almost every item its citizens need to lead reasonably prosperous lives.

Yet no country today, including the United States, can be totally self-sufficient without suffering a high cost. All countries need to—or choose to—import at least some goods and services for the following reasons:

  1. Goods or services that are either a. essential to economic well-being or b. highly attractive to consumers but are not available in the domestic market
  2. Goods or services that satisfy domestic needs or wants can be produced more inexpensively or efficiently by other countries, and therefore sold at lower prices.

It is helpful to illustrate these points by looking at the case of the United States, precisely because it comes closer to being self-sufficient than any other country for the reasons mentioned above (several climactic zones, resources, able workforce).  Coal, copper, iron, silver, and nickel are just a few of the natural resources the United States possesses in large quantities that other countries do not possess.

There are some economically essential goods, such as tungsten and oil, which the United States either does not produce at all or does not produce in sufficient quantities to serve domestic needs at a reasonable price.

The United States cannot meet its oil consumption needs exclusively through domestically produced oil; in 2012 the US consumption of oil dropped to a 16 year low, a total of 18.56 million bpd, as a result of a weak economy (Reuters, 2013). Meanwhile, the domestic production of oil rose sharply in 2012, with 6.4 million bpd being produced in the U.S. (Fowler, 2013). This means that the U.S. will need to import less and steadily become more self-reliant, with projections stating that U.S. output will overtake Saudi Arabia by 2020, making it the largest producer for about five years (Nguyen, 2012).

The United States could, in theory, abandon foreign oil imports, but it would be a costly decision because:

  1. It is not clear that domestic reserves of oil, both those that are known and those that have yet to be discovered, could satisfy current domestic demand.
  2. Even if U.S. oil reserves were adequate, generating the extra oil necessary to fill the gap now filled by imported oil would be extremely costly. Many foreign countries are able to produce oil much more cheaply. Besides, accessing the additional U.S. reserves would require many years of research and development.
  3. Other energy sources—for example, coal, nuclear power, or hydro-electric power—could conceivably be substituted for oil imports, but complying with the respective environmental regulations, along with the cost of producing additional energy from these sources, would be very expensive. After all, oil currently satisfies more than 40 percent of America’s energy needs (including more than 99 percent of the fuel for cars and trucks) precisely because other domestic sources of energy are either not sufficiently abundant to cover demand or are signficantly more expensive to produce than oil (DOE, 2008).

Of course, energy conservation measures could also reduce the need for oil imports by decreasing the energy consumption of the average American citizen. Energy conservation would be prudent, regardless of which energy supply the United States favors in the future; however, foreign producers would still be able to produce the oil more cheaply, regardless of the level of production. In addition, the scale of energy-saving measures needed to substantially reduce U.S. imports of oil would require dramatic changes in economic activity and lifestyles and have thus far have not been politically viable.

Electricity produced by hydropower plants built into dams is another example of an essential resource that the United States does not produce in sufficient quantity to meet its consumption needs. The United States imports large quantities of hydropower from Canada.

The United States will continue to depend upon imports to meet its energy needs into the foreseeable future. This, however, is not the same as saying that the United States has no choice but to import oil from other countries. As the preceding discussion suggests, there are alternatives. Unfortunately, those alternatives are less economically and politically feasible than simply continuing to import oil from countries endowed with generous petroleum reserves.

The same logic applies to any resource or product whose domestic supply is limited although the domestic demand is high. The United States—-though not most other countries—-can often find ways to increase the production of a commodity, reduce domestic consumption, or identify domestic substitutes. These alternatives often prove more costly than continuing to import from other countries, though.

The United States and other nations choose to import many other products that, unlike oil, are not economically essential, but differ in quality or features from equivalent products made at home. One prominent example is foreign-made cars which, starting in 2007, accounted for more than 50 percent of all cars sold in the United States (WTO, 2009).

Americans do not buy imported foreign cars because foreign manufacturers produce certain kinds of vehicles that American manufacturers do not; U.S. carmakers produce an extraordinary variety of vehicles at a wide range of price levels. Many Americans have demonstrated, through their purchases, that they will opt for Asian and European cars. These imported cars posses a combination of qualities or features that satisfy their preferences more so than vehicles manufactured by U.S. carmakers.

The same holds true for simpler products like wine, cheese, or shoes, and so on. All of these and thousands of other items that the United States imports from other countries are available through the domestic market. Some American consumers believe imported versions of these items offer a level of quality that American varieties do not.

The United States has almost entirely stopped producing some goods because of foreign competitive efficiency. In other words, firms in other countries are able to produce these goods faster, more cheaply, and of possibly better quality. This is the case with many types of clothing because clothes can be produced at a much lower cost in other countries. Clothes can be manufactured more cheaply in developing countries due to the low cost of labor. Imagine that you are a t-shirt manufacturer. You can have your t-shirts made in a developing country with abundant cheap labor—workers who you only have to pay the equivalent of pennies an hour. This allows you to maintain large profit margins (by not spending so much on paying workers), and to sell your product at a cheaper cost (making consumers happy as well).  This practice is a source of controversy that we will discuss later.

The goods that the United States has almost ceased to produce because of foreign competitive efficiency include not only low-tech products, but also some electronic equipment. For example, the United States used to produce VCRs, but it completely abandoned their production because of the superior efficiency of foreign competitors (most notably Japan).

It is worth noting that the country where a good is produced need not be the same as the country where the corporation that manufactures and sells the good is established. Several American clothing companies, such as The Gap, manufacture most of their clothes in developing countries.

Closet Check: Grab a pen and paper and go to your closet. Take out the items that you wear the most and see what percentage is made in other countries. How many items from China? India? How many made in the U.S.?  

 

Next:  Trade Specialization