Bilateral trade balances are irrelevant

Brian FrancisFor quite some time, Grenadians, and indeed most CARICOM citizens, have agitated about their respective countries’ trade imbalances with Trinidad and Tobago. Although articulated at various levels of CARICOM, this concern may not be as troubling as it appears. Why?

The trade balance measures the difference between a country’s exports and its imports with the rest of the world while the bilateral trade balance measures a nation’s trade balance with another specific nation. The question is: Which balance is more important for Grenada – the overall trade balance, or the bilateral trade balance with Trinidad and Tobago?

From a macro-economic standpoint, the answer to this question is the overall trade balance. This balance is linked to a nation’s saving and investment. Specifically, national saving is equal to the sum of a country’s level of domestic investment plus the net capital outflow (a measure of the imbalance between the amount of foreign assets bought by domestic residents and the amount of domestic assets bought by foreigners).

On the other hand, the bilateral trade balance has no such relationship with national saving and investment. Indeed, it is possible for a nation to have balanced trade overall or even a surplus, and still have a large trade deficit with a specific trading partner.

To put this into simpler perspective, consider the following anecdote by eminent economist and Nobel Prize winner, Robert Solow. He explains the irrelevance of bilateral trade balances by saying: “I have a chronic deficit with my barber, who doesn’t buy a darned thing from me.” The moral is, such personal bilateral trade deficits, do not stop individuals from balancing their finances monthly.




Bilateral trade deficits receive more attention than they deserve in the political arena. Of course this stems from the fact that politicians have to seek to appease their constituents, who may not be informed about the true context of bilateral trade balances. Second, the media is drawn to reporting country-to-country statistics whenever nations are holding bilateral meetings.

There are also some other misconceptions in the public that need to be clarified. First, the trade imbalance with Trinidad and Tobago does not exist because that country is dumping goods into the Grenadian market. The trade imbalance stems from the fact that Grenadians are demanding more Trinidadian goods than Trinidadians are demanding Grenadian goods.

Another misconception is that it is the country itself, Trinidad and Tobago, which is exporting these goods. In actual fact, it is Trinidadian businesses, largely from the manufacturing sector, which are exporting the goods. While this last fact may seem obvious to some and trivial to others, it cannot be denied that the relatively lower cost of doing business in Trinidad and Tobago provides Trinidadian businesses with the wherewithal to manufacture, supply and export goods at prices and level of quality that Grenadians find attractive.

To suggest to another country that it should seek to address a trade imbalance which lies in its favour is tantamount to asking that country’s business sector not to be “so successful.” If Grenada wants to achieve similar export success, it needs to first look after matters at home rather than bemoaning its bilateral trade imbalance with Trinidad and Tobago.

 

(Dr. Brian Francis, the former Permanent Secretary in the local Ministry of Finance, is a Senior Lecturer in the Department of Economics at the Cave Hill Campus in Bridgetown, Barbados of the University of the West Indies)

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