In today’s blog we discuss ‘Why Does Bangladesh Export Garments and Germany Cars?”. In our last blog, we examined why some countries are poor and others rich. We also discussed how India globalised and started trading with the world. This probably would have gotten you thinking why countries export or import, in the first place and how is it decided which country will export what! In this blog, we would attempt to answer some of these questions. While the field of international trade has evolved a lot over the years, this blog would cover the basics of international trade.
Akhilesh Verma: So let’s begin by discussing the most basic question – how does the world trade today and how is this different from the trade that used to take place earlier?
Garima Dhir: World trade has evolved significantly over the years. Earlier, even with respect to international trade, goods were exchanged for other goods and this exchange would take place mostly between the governments of the two countries. Times have changed now. Today, goods are exchanged for currency. Instead of government to government exchange, the market for international trade is dominated by private players in one country exporting to private players in another country.
Another interesting thing that has happened is the reduction in cost of communication and transportation. This has led to a drastic increase in volume, geographic coverage and product coverage. In fact you might be surprised to know that the laptop or phone that you are using to read this blog, in all likelihood, would have undergone its manufacturing process across different countries, where one country would have exported some parts to another. The second country would have processed these parts and further exported them to the 3rd country and finally the 3rd country would have assembled all the imported parts to have your phone or laptop ready for you! Let’s take the example of iPhone – to manufacture an iPhone, the R&D takes place in United States; thereafter parts are sourced from different countries across the world, like, Germany, Europe, US; finally the assembly would take place in China, from where it is exported to the world.
Akhilesh Verma: But why at all is there a need for countries to export?
Garima Dhir: There are many reasons why countries export, these are listed below:
- Initially, exports happened as countries figured out that they had the capacity to produce more than what can be consumed domestically, therefore a search for new markets began. This is usually observed in case of agricultural products and seen mainly in developing countries. For example, export of Cocoa from Ivory Coast or rice from India
- Another reason is price difference. In some cases, prices that can be fetched in foreign markets are higher than those in domestic markets, therefore firms or countries would want to export to earn higher profits
- When a country exports, that is, sells its products to a foreign country, it is paid in the foreign currency, also called forex. Therefore, countries also export to earn Forex which in-turn is used for other purposes.
- Another reason why countries export is that production for export generates employment opportunities within the exporting country which is important for any country
- You might be surprised to know that another reason for exporting is political, by that I mean world dominance. Countries that are heavy exporters, have many other countries dependent on them for their exports. Heavy exporters also have large forex reserves, that again is a measure of dominance.
Akhilesh Verma: What is troubling me here is that if exports have so many benefits, what is the benefit of importing? Why do countries want to be on the receiving end?
Garima Dhir: You’ve asked a very relevant question. While exports have several obvious benefits, reasons to import are not that straightforward. A few reasons for import are
- Some goods might be essential for a country or highly-liked by people but producing them at home might not be a viable option. This is why German cars are in demand by other countries as producing that quality of cars might not be possible for all countries. In today’s context, countries are importing COVID-19 vaccines from other countries who were able to manufacture it.
- Now, it is also possible that countries are able to produce some goods, yet they import it from outside. This is because each country has limited resources and they would want to use these limited resources in the most cost effective ways. It may thus sometimes be cheaper to import than to produce domestically. For instance, most developed countries import goods that require a lot of manual labour, from countries where labour is cheaper. One example is USA and other developed countries like Singapore, Hong Kong, Korea importing a lot of garments from Bangladesh.
Akhilesh Verma: What I take away from this is that reasons for import vary from local demand to cost effectiveness and that developed countries are not just exporters, but also import from developing countries. But coming to our main question, how is it decided that a country like Bangladesh will export garments and a country like Germany will export cars?
Garima Dhir: You’ve hit the nail right on its head! Trade happens between all sorts of countries and which country is exporting what is decided primarily by country-by-country differences in the cost of producing goods and services. Now what are production costs influenced by?
- Typically, to start with, by natural endowments, that is, what kind of resources are available in abundance in a country. For example, countries with a large population, will have relatively lower wage rates, than countries where population is low. Thus, for these countries products which require a lot of labour for production would be cheaper and would be exported in greater proportion by them. Thus, Bangladesh with low wage rates, is able to manufacture garments at a much cheaper rate, thus dominating world exports in that segment.
- Another reason is technological advancements. Developed countries are usually ahead of developing countries in terms of technological advancements as they entered into industrial revolution and machine based production much before developing countries. As a result, over time, they have acquired more sophisticated and even cheaper means of production than developing countries. Low cost of technology in developed countries is why most sophisticated products like German cars and laptops from USA are imported by other countries.
- Expertise Gained Over time – less developed countries might enter into international trade by focusing on low-skilled processes of production. Overtime, however, as they gain more sophisticated skills like technical expertise, managerial capability, marketing skills etc , they slowly move away from low-skilled production processes to producing more complex products. Gaines expertise reduces their cost of production and helps them enter more advanced markets. This is also called ‘Learning by Doing‘. Many South and South-east Asian countries like Singapore, Philippines, Hong Kong have progressed over time by learning and following the foot-steps of countries that were more advanced than them like Japan and USA.
Akhilesh Verma: So, essentially it is a cost-benefit analysis that decides which country produces and exports what product?
Garima Dhir: You are absolutely correct! This cost-benefit analysis is also called ‘Comparative Advantage’ – that is, who can produce what most efficiently, given the resources that each country has! It is important to note that while Germany could use its resources to produce garments, it’s cheaper and more efficient for it to import it from Bangladesh. Similarly, it is cheaper for India to import a jet from France rather than produce it at home. Countries will thus specialize in things that they make best and export those commodities. Thus, along with comparative advantage, it is also ‘Mutual Gain’ that determines the direction of trade.
Which countries export what also determines why some are rich and some poor. For sure the country that is exporting cars would be richer than the country exporting garments as the former is more sophisticated and costs much more! Only a handful of countries have the wherewithal to manufacture such products, thus they would not only be catering to the world demand, which has huge volumes but also mark-ups or profits on such commodities are usually high, thereby leading to higher earnings.