And they say imports are a bad thing?

According to the mercantilist view which for long shaped trade policies, imports were considered to be a bad thing while exports, a good thing. The reason for this thinking was that imports depleted a country’s gold reserves (foreign exchange reserves) or its national wealth making the country poorer and weaker. On the other hand, exports had the opposite effect.

With the establishment of GATT/WTO, the “imports are bad” hypothesis got a new rationale - lowering import barriers worsened a country’s terms of trade (ratio of export prices to import prices) lowering the country’s national welfare. Hence, allowing more imports was considered a “concession” by the importing country that had to be compensated for through greater access to its partners’ markets. This “reciprocity” in trade concessions was the founding principle of GATT.

However, a small but growing literature suggests that imports may not be all that bad. That is, a country could benefit from lowering its import barriers even if its partner countries do not reciprocate. These benefits from imports accrue in two ways: increased competition from imports forces domestic firms to become more efficient and imports of intermediate inputs raise productivity of domestic firms via learning, variety and quality effects. For example:

• Amiti and Koenings (2007, American Economic Review) find that for Indonesian plants between 1991 and 2001, trade liberalization increased imports of intermediate inputs and that this in turn led to substantial gains in the productivity of the plants.
• Halpern et al. (2006, Federal Reserve Bank of New York) use a panel of Hungarian firms to examine two different mechanisms, a quality and a variety channel, through which imports can affect firm productivity and find that importing inputs increase firm productivity by 14% during the 1990s, of which about two thirds is attributed to an increase in the variety of intermediates used in production.
• Kasahara and Rodrigue (2008, Journal of Development Economics) study Chilean manufacturing plants between 1970 and 1996 and find strong evidence that productivity of Chilean plants improved by at least 13% due to improved access to new technology embodied in intermediate goods imports.

The most recent addition to this literature is a study by Seker (2009, Forthcoming) using Enterprise Surveys data on about 10,000 firms in 40 developing countries. Interestingly, this study goes beyond the ones mentioned above by showing that firms that export and use imported inputs grow much faster via improved productivity and greater innovation than firms that merely export or import inputs. In short, importing makes exporting doubly good.

One must caution that the results above are far from universal and a consensus on the beneficial effects of imports is yet to emerge. In fact, some studies such as Van Biesebroeck (2003, NBER) finds that productivity improvements do not happen through more advanced inputs in Columbia and, similarly, Muendler (2004, UCSD) shows only a small contribution of foreign materials and investment goods on output for Brazil (although the study does find substantial positive effects of imports on productivity through increased competition). These studies provide a promising start with more research needed to ascertain how beneficial imports truly are.