Import

"MADE IN CHINA" is a phrase that people in the United States often find printed on tags inside their clothes, on little stickers on the bottom of an item, or laser-etched on their electronics. Avocados drive in from Mexico, bananas sail in from Costa Rica and Honduras, and coffee flies over from Brazil and Colombia. Goods from other parts of the world are everywhere whether we take notice or not. These goods are called imports and they keep our prices low, our choices diverse, and connect us with other nations. In short: they are very important! Keep reading if you'd like to find out what imports are and what impacts they had on the economy. Let's get into it!

Import Definition

First and foremost, the definition of an import is a good or service that is produced or manufactured abroad and sold in the domestic market. Any good can be classified as an import so long as it fulfills the criteria of being produced in a foreign country and sold on the domestic market. When this process happens the other way around, the good is referred to as an export.

Goods can be imported in a variety of ways. A domestic firm can go abroad to source goods and bring them back to be sold domestically, a foreign company can bring their goods into the domestic market to be sold, or a consumer can buy a good from abroad.

Imports come in many forms. Food, cars, and other consumer goods are often what come to mind when we think of imported goods. The next is fossil fuels like oil and natural gas. Although the US produces most of its natural gas and oil, it still imported around 8.47 million barrels of petroleum per day in 2021.¹

Imports can also take the form of services like using software that was developed abroad. If you are conducting business internationally, you might require the services of a bank outside of your home country. In the medical field, hospitals and universities often exchange knowledge by having physicians spend time abroad learning new procedures and skills to employ back in their home country.

Difference Between Imports and Exports

The difference between imports and exports is the direction in which trade flows. When you are importing goods you are bringing foreign-made products into your home market. You are sending your money abroad which creates a leakage out of the domestic economy. When goods are exported, they are sent abroad to another country, and money from that country is entering the domestic economy. Exports bring injections of money into the domestic economy.

To import a good requires the good to meet the standards of the receiving nation. Oftentimes there are licensing requirements and certifications that the products are required to meet to be cleared for sale. At the border, the items are registered and inspected to ensure they have the correct paperwork and meet national standards. This is performed by customs and border patrol agents. They are also the ones who collect any import duties and tariffs that the goods fall under.

The exporting process requires similar documentation. The government keeps track of the goods that flow out of the country similarly to how it keeps track of those flowing in.

Types of Import Trade

There are a few different types of import trade. There are six main categories that items imported into the US fall into. These categories help keep track of the many goods that enter the US daily.

If you are looking to import goods into the US, they will likely fall into one of the categories outlined in Table 1. Altogether, the total value of imports for 2021 was $2.8 trillion.² The two largest types of imports in the US are consumer goods and capital goods.

Impact of Imports on Economy

The impact of imports on the economy is often reflected most strongly in the price of the goods or services being imported. When an economy engages in trade with the rest of the world, the price of goods decreases. This happens for two reasons. The first is that consumers can purchase goods from the international market and pay cheaper foreign prices. The second is because the domestic producers have to lower their prices to remain competitive with the foreign producers. If they did not lower their prices, they would end up not selling anything. Figure 1 below provides a visual explanation.

Fig. 1 - Effect of Imports on the Domestic Economy

Figure 1 is a picture of the domestic market. Before the country engages in foreign trade and imports goods the equilibrium price and quantity are at P_e and Q_e. The price P_e is how much domestic consumers are willing to pay for a good. Then, the government decides to allow imports, which expands the choices consumers have. The rest of the world has been engaging in free trade and settled at the world price of P_FT. The new equilibrium price and quantity for the domestic market are P_FT and Q_D.

Now, there is no way for domestic producers to satisfy demand at Q_D in the short run. They will only supply up to Q_S at the world price of P_FT. To meet the rest of the demand, the country imports goods to fill the gap from Q_S to Q_D.

Import: Gross Domestic Product

If imports affect domestic prices, you might wonder about their impact on Gross Domestic Product (GDP), which is the total value of all goods and services produced in an economy in a year. But, because imports are not produced in the domestic economy, they do not impact GDP.³ This seems counterintuitive if we consider that they are included in the equation for GDP when it is written as:

\[GDP=C+I+G+(X-M)\]

• C is consumer spending
• I is investment spending
• G is government spending
• X is exports
• M is imports

When calculating GDP, the government adds together all the money spent by consumers. Let's say Joe bought an imported car for $50,000. This $50,000 is added to GDP under consumer spending. However, since the car was produced abroad and imported its value of $50,000 is subtracted from GDP under imports. Here is a numerical example:

Import: Exchange Rate

Imports can affect a country's exchange rate because the level of imports and exports influences the demand for the currency. To buy goods from a country, you need that country's currency. If you are selling the goods, you want to be paid in a currency that has value in your market.

When a country imports goods, it creates demand for foreign currency because the foreign currency has the capability of buying goods that the domestic one does not. When the demand for a currency increases, it results in a higher exchange rate. Consumers must give up more of their domestic currency for the same amount of foreign currency, or the same foreign product, as before.

Import: Inflation

The number of goods that a country imports can influence the level of inflation that the nation's economy experiences. If they are purchasing a lot of cheaper foreign goods, then inflation is reduced. In this way, imports benefit the economy since inflation is typically seen as a negative occurrence.

A degree of inflation is to be expected and is a sign of economic growth. However, if inflation is decreased too much, meaning a country sees very many imports, deflation begins to take effect. Deflation, or a total decrease in the general price level, is often seen as a worse phenomenon than inflation because it indicates that the economy is no longer developing and growing. This makes sense because if a country is mostly importing its goods, to the point of deflation, it is not producing enough to counterbalance the imports.

Benefits of Importing

Countries enjoy several benefits of importing goods and services from abroad. Some benefits include:

• Product Diversity
• More goods and services available
• Reducing Costs
• Allowing for industry specialization

Importing goods from abroad allows products to enter the market that may not have been available domestically. An increase in product diversity can expose different cultures to one another. An example of increased product diversity is fruits that are native to one area but cannot be grown in another. While bananas can be easily grown in the tropics of South America, the plant would have a very hard time in the cool and damp climate of the British Isles. Product diversity also furthers innovation by encouraging companies to develop goods meant to satisfy multiple different markets, and cultures.

On top of product diversity, simply having more goods available in the market is good for the everyday consumer since they have more choices. Having more choices allows them to be more selective and hunt for the best prices as well. The reduced cost associated with imported goods is a benefit to consumers because they can buy more goods and their disposable income goes further.

The money saved through the reduced cost can be spent in other areas of the economy. For example, if a country no longer has to spend resources on producing lumber to build houses, it can focus its efforts on expanding its agricultural production, mining endeavors, or investing in higher education. If a country does not have to worry about covering all of its production needs, it can focus on a few areas of specialization where it can excel.

Import Examples

For the US some major import examples are pharmaceuticals, cars, and electronics like cell phones and computers.² Many of these goods come from developing nations like China and Mexico, which are two of the US's main sources of imports.²

Although the US is very technologically advanced, many of its electronics are manufactured in nations like China, where the cost of labor is cheaper than in the US. Although a good might be designed in one country, companies will often choose to move their manufacturing operations to economies that may not have as many regulations and requirements regarding labor conditions and wages.

Passenger cars are another large import into the US with around $143 billion in cars being imported in 2021.² Although the US has several popular domestic vehicle companies like General Motors Company and Ford Motor Company who manufacture most of their vehicles domestically except for a few plants in Mexico and Canada, the US still imports many cars from both China and Germany.

Pharmaceutical preparations such as their active ingredients amounted to more than $171 billion in imports mainly originating from facilities in countries like China, India, and Europe.^2,4 Like in the case of pharmaceuticals, sometimes it is only a component of the good that is imported. This import is then used to finish the production of a final good domestically.