Op-Ed

Understanding our trade deficit 

“Trade has been a cornerstone of our growth and global development. But we will not be able to sustain this growth if it favors the few, and not the many.” – Barack Obama

Trade is the voluntary action of buying and selling commodities, goods, and services. Trade can take various forms. It can include barter, which is exchanging goods and services for mutually agreed upon other goods or services. However, trade is most frequently accomplished by exchanging money or money’s worth for a product or service.

Trade is an indispensable activity. Whenever we go to the food store or pay for vitally needed utilities, pay our children’s school tuition, buy clothing, secure housing, or simply fuel our automobiles with gasoline, we are engaging in trade.

The same applies to tourists in The Bahamas who purchase room nights, food and beverage, entertainment, or similar activities. They are also engaged in trade. When clients pay for financial services, the client and the service provider are involved in trade.

Trade has become such a natural thing in our daily lives that we frequently take it for granted. We often do not consider such everyday behavior as trade. However, that is precisely what we do every day, many times each day.

One of the essential activities affecting the well-being – or lack thereof – of countries is the quantity of trade between nation-states and the level of international trade.

This week, we will consider this – how can we better understand the importance of trade deficits to The Bahamas, and how does reducing our balance of payments improve our standard and quality of living?

GDP and GNP

A country’s gross domestic product (GDP) and gross national product (GNP) are essential trade indicators.

The GDP is the value of goods and services exchanged in the domestic market or the measure of trade within national borders.

GDP typically includes aggregating private consumption or consumer spending, government spending, capital spending by businesses, and net exports, that is, exports minus imports. A country’s GDP is important because it indicates whether the economy is growing or contracting.

A good example is the fishing industry in The Bahamas. The value of fish and other animals or products harvested from our ocean and sold in the domestic market is factored into the country’s gross domestic product.

On the other hand, the gross national product (GNP) is the total value of goods and services exchanged at the national and international levels. GNP, therefore, includes a country’s net overseas economic activity.

Let’s look at the same fishing industry in The Bahamas. The value of all things harvested from the seas surrounding The Bahamas and sold in the international market is factored into the country’s GNP.

GDP is the most commonly used measure of a country’s economy and represents the market value of goods and services produced over a specific time frame.

Many factors affect the important GDP metric. In 2019, before the COVID-19 pandemic, the GDP of The Bahamas was $13.58 billion.

In the following year, that same metric significantly diminished because of the substantial decrease in economic activity in many sectors of the Bahamian economy.

Accordingly, the country’s GDP fell to $9.7 billion at the height of the pandemic in 2020.

The country’s GDP significantly declined during the pandemic because of the closure of many businesses where Bahamians would normally spend their money, like restaurants, gyms, barber shops and beauty salons, and clothing stores, to name just a few businesses that were shuttered.

Thousands were furloughed during that period. Consequently, those job losses resulted in Bahamians losing large amounts of disposable income. Many sectors, such as tourism, financial services, and construction, suffered an enormous contraction, thereby reducing our GDP.

GDP is also used to compare the performance of two or more economies. It is used as a critical input for investment decisions and helps the government to draft policies to drive economic growth.


The trade deficit

It is important to understand the relationship between trade surpluses and deficits to truly appreciate the effects of these relationships on our domestic economy.

If a country exports more than it imports, a trade surplus will be created, which is usually a favorable outcome for a nation’s economy. The corollary to this is a trade deficit – an unfavorable outcome — because trade deficits mean that we import more than we export.

Therefore, if we import $500 million worth of goods but only export $300 million, we will incur a trade deficit of $200 million.

The Bahamas National Statistical Institute recently released The Bahamas’ 1st Quarter 2022 Foreign Trade figures and they are revealing.

Data on merchandise trade for the 1st quarter of 2022 reflects that the value of commodities imported into The Bahamas totaled approximately $839 million, an increase of 20 percent, compared to the same period last year, where the comparative figure was approximately $699 million.

The 1st quarter of 2022 exports of $124 million (compared to $81 million in the same period last year) resulted in a trade deficit of $715 million and $618 million, respectively.

The balance of trade in the first quarter of 2022 represents an increase of approximately 16 percent over the same period last year. This is not a positive outcome.

The major groups of merchandise were “Food and Live Animals” which totaled $157 million, “Machinery and Transport Equipment” at $149 million, and “Mineral Fuels Lubricants and Related Materials” which totaled $137 million. The combined value of these categories represented 53 percent of total imports.

Other categories that contributed to total imports were “Manufactured Goods Classified Chiefly by Materials” which accounted for $117 million, “Miscellaneous Manufactured Articles” valued at $107 million, and “Chemicals” at $88 million (these groups together represented 37 percent of total imports).

Categories that showed significant increases were “Animal and Vegetable Oils and Fats” and “Beverages and Tobacco” which increased by 90 percent, and 42 percent respectively when compared to the same quarter last year.


What does this mean?

The important question that we should ask is: what does this all mean? First, what can we do to reduce the trade deficit? The obvious answer is that we should find ways to reduce our import bill, primarily through import substitutes. But how realistic is this?

If we drill down on the statistics presented, some things can be done in several categories. For example, curtailing our import bill for “Food and Live Animals” by producing more items in this category domestically.

What, if anything, can we do to domestically produce more beverages to reduce the import of these goods?

Apart from these adjustments that offer some hope for further study and analysis, most of our imported goods do not lend themselves to import substitutes.

Nevertheless, we should explore the considerable local entrepreneurial activity that can result from encouraging import substitutes.

The more we produce at home, the less we will have to import and the more money we can leave in the domestic economy. The other significant benefit of generating import substitutes is the number of jobs we can create for the domestic economy.

We should not forget that our import bill depletes our foreign reserves that must be used to pay for imported items.


Conclusion

Healthy, robust trade with lower trade deficits is vital to our economic development. Considerable work must be done in determining how best to focus on this activity to reap the greatest benefits for our citizens and residents.

We can no longer take trade for granted or minimize its impact.

We must engage in a deliberative, comprehensive approach to consider how we can educate and inspire our citizens to appreciate the indispensability of better balancing our trade for our economic development. We must all come to the realization that trade affects each of us in so many ways.

To do this more comprehensively, we must bring about a consciousness of the importance of developing sustainable import substitutes, in as many categories as possible.

We must also ensure that everyone knows how vigorous and dynamic trade will provide diverse opportunities that our citizens can take full advantage of to reap enormous benefits.

Strong, resilient trade, and its many facets, can and will play a vital role in creating the kind of Bahamas we all want for our future and beyond.

• Philip C. Galanis is the managing partner of HLB Bahamas, Advisors and Chartered Accountants. He served 15 years in Parliament. Please send your comments to pgalanis@gmail.com.

Show More

Related Articles

Back to top button