WE NEED TO IMPORT IN ORDER TO EXPORT

Lahiri, S. (2023). We Need to Import in Order to Export. Ecofunomics, 6(1), 11-14.

Abstract

During economic crises, governments often implement trade barriers to protect domestic industries and employment. This essay challenges the common belief that imports hurt local jobs by presenting two case studies from India. The first case study focuses on India’s software industry, which initially heavily relied on imported computer hardware. In the pursuit of self-reliance, India imposed high import tariffs, causing IBM to leave. This led to a stagnation in software production. However, when tariffs were reduced in 1991, software production and exports soared.

The second case centers on India’s pharmaceutical industry, now a major producer of generic medicines. Importing low-cost chemical intermediate inputs, particularly from China, played a pivotal role in this sector’s growth. Recent trade policy changes, which include restrictions on imports, pose potential challenges to the pharmaceutical industry’s export potential. The essay concludes by referencing studies that support the idea that imports can enhance exports, emphasizing the critical role of imports in fostering productivity and economic growth.

Introduction

Whenever there is an economic crisis there is a tendency among governments to put up barriers to international trade. This is done with the declared intention of increasing employment at home or stabilizing prices. Modern history is full of such examples. Imports are a soft target in times of crisis, but exports are also restricted when prices go up. In this essay, I shall focus on restrictions on imports.

Should we seriously reduce imports?

Every country wants to export more and import less. The popular belief is that imports destroy local jobs. Does reducing imports increase employment at home? The evidence says that the answer is an emphatic no.
I shall consider two examples from India to suggest that imports often are necessary to be able to export in large quantities and thereby increase total employment.
The first example that I want to take up is the case of the software industry in India. Until 1970 almost all computers in India were imported. In 1972, India decided to become self-reliant (atmanirvar) in computer production. It introduced high tariffs on imports of computer hardware. IBM left India within months. Electronic Corporation of India Limited was handed monopoly power by the Government of India to produce computers. Software production remained low because Indian programmers could not excel with low-quality hardware. In 1991, tariffs on computers were reduced, and soon software production and exports skyrocketed.
The second example is pharmaceutical production in India. India is now a major producer of generic medicines. Indian pharma companies produce 60% of the world’s vaccines and 20% of generic medicines. India exports pharmaceutical products to over 200+ countries. India’s market share of generics is over 50% in Africa, 40% in the US, and 25% in the UK. India supplies 60% of global vaccines. For 2021-22, exports of drugs and pharma products were $24.6B in 2021-22 and $24.4B in 2020-21. The Indian pharma industry witnessed a growth of 103% during the period 2014-22: $11.6 billion to $24.6 billion. Such high growth was possible in part by liberalized policies for Foreign Direct Investment (FDI). 100%-FDI is allowed in the pharmaceutical sector. But, more importantly, allowing cheap imports (mainly from China) of chemical intermediate inputs for the pharmaceutical firms has helped India to be an efficient producer of pharmaceutical products. India’s imports from China of organic chemicals went up from $5 billion in 2013 to $12 billion in 2021.

However, recent changes in trade policies in India are a matter of concern to many in this respect. The 2023 budget has seen new trade restrictions on imports of electronic items, imitation jewelry, chemicals, umbrellas, etc. In the 2021-22 budget, targets of tariffs were cotton, ethyl alcohol, chemicals, plastics, leather, gems and jewelry, capital goods, auto parts, metal products, and electronic items. We can see that India has been trying to restrict imports of chemical raw materials into the pharmaceutical industry. The worry is that this would hamper India’s exports of pharmaceutical products.

Conclusion

I shall conclude this essay with a discussion of some of the studies that support the hypothesis that imports increase exports. Using industry-level data, Halpern et al. (2015) and Acharya et al. (2009) analyzed the importance of imports for productivity and exports. Kasahara and Rodrigue (2008) used firm-level panel data to analyze the impact of technology transfers via imports on productivity. Amiti and Konings (2007) show that cheaper intermediate inputs can raise productivity via quality effects.

Reference

• Acharya, R. C., Keller, W. (2009). Technology transfer through imports. Canadian Journal of Economics 42(4), 1411-1448.
• Amiti, M., and Konings, J. (2007). Trade liberalization, intermediate inputs, and productivity: Evidence from Indonesia. American Economic Review, 97(5), 1611-1638.
• Halpern, L., Koren, M., Szeidl, A. (2015). Imported inputs and productivity. American Economic Review, 105(12), 3660-3703.
• Kasahara, H., and Rodrigue, J. (2008). Does the use of imported intermediates increase productivity? Plant-level evidence. Journal of Development Economics, 87(1), 106-118

Author

Prof. Sajal Lahiri

Southern Illinois University Carbondale.

Department: Economics

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