On Nigeria’s obsession with trade deficits
Nigeria’s economic reforms are yielding positive results as the latest statistics from the National Bureau of Statistics revealed a widening of the trade balance of N2.17 trillion in the first quarter of 2018. Balance of trade is the difference between the value of a country’s exports and imports for a particular period of time. And this is the largest component of a country’s balance of payments, also referred to as balance of trade. This shows that Nigeria is improving since trading with our partners at the end of 2017 was valued at N4.04 billion. That was achieved after recording a negative trade balance of N290.10 billion in the year 2016.
However, the notion that trade surpluses are a measure of a nation’s economic prowess dates back to centuries. In 16th century Europe, mercantilists from Britain to Venice sought to accumulate gold by promoting exports and discouraging imports. Their intellectual heirs today think trade surpluses boost national welfare, employment and economic growth while deficits do the opposite. This preoccupation with surpluses is based on dubious arithmetic: since a nation’s exports are another’s imports, it is impossible for all countries to be net exporters.
This also overlooks a more fundamental point about trade. The main benefit from trade is imports- foreigners sending the fruits of their labour for us to enjoy, allowing us to focus on what we do best. Working to produce exports is the price we pay to enjoy these benefits. A better goal is to reduce the export effort needed to obtain a given quantity of imports. Economists call this enhancing the terms of trade. This makes intuitive sense in our lives: you run a surplus with your employer in order to run deficits with your grocery supplier, your daughter’s football club and your favourite restaurant.
Now imagine if you could run those same deficits while spending only half as much time at the office. Adam Smith recognised in 1776 that the true wealth of a nation was not the gold and silver in its coffers, but the productivity of its labour force. In our own case in Nigeria, it would be the creativity of our workers. “Nothing can be more absurd than this whole doctrine of the balance of trade,” he wrote. Fast forward to the present day, and his warning is once again going unheeded by policy makers. Erecting protectionist barriers is unlikely to create jobs and prosperity, for two reasons.
First, current measures of trade on the basis of flows give a distorted view of bilateral trade balances, since they fail to account for components imported to make exported goods. Given the fragmentation of production across multi-country value chains, a far better gauge of a nation’s trade performance is how much value it adds to inputs. Focusing exclusively on goods exacerbates the misperceptions since it excludes trade in services, which typically accounts for more than two-thirds of output in advanced economies.
Second, there is no formal relationship between a country’s trade balance and its economic health or labour market dynamics. For example, U.S. job creation since the 1990s has been fastest during periods when imports were growing rapidly. The trade balance dramatically narrowed in 2009- because GDP growth and job creation were plummeting due to the financial crisis, which shrank demand for imported goods and services. Germany has big trade surpluses rather than deficits, but manufacturing’s share of total employment there, has been declining at the same pace as in the United States.
Third, a nation’s trade surplus or deficit is shaped less by the content of its trade agreements – tariff levels, quotas and regulations than by the balance between domestic saving and investment within her own economy. Take the European Union: the bloc has the same trade policy. Yet its member states perform very differently. The current account balance- is a function of internal saving and investment. Nations that run deficits spend more on imports than they earn from exports; they borrow from the rest of the world to make up the difference.
Conversely, surplus economies earn more from exports than they pay for imports; they lend the difference abroad, accumulating claims on foreigners in the process. The only way to shift the current account balance is to alter savings and investment behavior of households, firms and governments. Trade protectionism is an indirect way to accomplish this, but it could miss the target or backfire. Cross-country evidence suggests no clear link between tariff protection and current account balances. Indeed, higher tariff countries tend to have larger trade deficits. The World Trade Organization rulebook authorizes nations to take protective action against import surges or predatory pricing. But while such measures can fight unfair trade, they have little effect on trade deficits.
Trying to tackle trade deficits bilaterally won’t work. Balancing trade with individual countries would, in practice, require constant interference with purchase and sales of thousands of companies and households, raising prices and generating distortions. But this does not mean we should ignore large trade surpluses and deficits. The cross border financial flows are vulnerable to sudden stops that can be destabilising, as Asian nations learned in 1997, followed by the Eurozone a decade later. The solution lies in international cooperation to get frugal countries to spend and nations with big deficits to tighten their belts.
The group of 20 leading nations is the logical forum in which to do just that. The last meeting we were invited to, was held in Germany. Europeans knowing the terminal nature of the health of our president, declined to invite him to subsequent meetings. We might try to invite ourselves to the next meeting. Similarly, broad negotiations among trading partners are the most effective way to address unsatisfactory trade rules and industrial overcapacity.
Thus, governments need to develop policies and institutions that cushion the blow from changes brought by both competition and technology; constrain runaway inequality and equip people with businesses to share in the opportunities presented by the global economy. Crafting good policies is the real challenge in trade, current account balances are merely a distraction.