Global trade has become so efficient that it is often cheaper for firms to import goods from across the other side of the globe rather than from local, domestic producers. Should we favour local buying or just buy the cheapest from across the globe.
Advantages of local buying
- Lower carbon emissions due to less transport costs. There is an environmental cost of importing food from across the world – this is an external cost not included in the market price. There is even a case for taxing food imports to make consumers pay that external cost of increased carbon emissions.
- Support local business and jobs. Buying local helps to increase demand for local shops and business. Some feel that this helps to keep income within a local area and can help prevent structural unemployment from deindustrialisation.
- Reduce dependency on foreign imports. Imports may be subject to problems if there is a trade dispute or problems in other economies.
Advantage of buying from abroad
- Goods are often cheaper
- If goods are cheaper, it increases the discretionary income of consumers and enables them to purchase more goods and services – which will lead to some additional demand for other goods and services.
- Trade is increasingly specialised. If a country tries to manufacture everything, then it will lead to less economies of scale and higher prices. Buying imports and encouraging global trade, also helps exporters who do have a comparative advantage.
Example of how some firms may import from abroad rather than buy locally.
Here is an example of comparative advantage and international trade from today’s news.
In York, there is a Nestle Factory making Polo Mints.
Yet, a Poundshop in York has sourced cheaper Polo Mints from Indonesia – 7,300 miles away. Therefore in York, shops are selling both locally produced Polos and also Polos made 7,300 miles distant. (York Press)
The Poundshop is able to sell the eight packets of 20 Polos (160) for £1, which equates to just under 0.7p per mint.
While a typical shop sells UK-made Polos in tubes of 20 for 49p or 2.45p per Polo.
This shows that despite transport costs it can still be cheaper to import from across the globe. It also means that Indonesia is able to produce Polo mints at a lower unit cost than in the UK.
If a York shop is buying Polo mints, it makes sense to buy the cheapest deals, even if it means buying from Indonesia.
But, why, do we have a factory making Polo Mints in York if they can be produced cheaper in Indonesia?
Firstly, the comparison from the paper is misleading. The Poundshop is selling Mints in bulk – 160 at once. Whereas other shops are selling one packet (20) at a time. Selling in bulk usually enables shops to sell at a lower unit cost. Most people just want to buy one packet at a time, rather than 160 at once. Also, the difference in price may seem a lot – a Polo appears four times more expensive from a local shop. But, at 49p, Polos are still very cheap. Most people wouldn’t worry about a few pence for the convenience of buying just one packet at the local newsagent. The demand for a packet of Polos is likely to be quite inelastic because it is such a small % of income.
Indonesia has a unit cost advantage, but, the York factory must still be able to be competitive for selling to some local shops. If Indonesia was really much cheaper, the York factory would be going out of business.
Also, the manufacture of Polo mints is likely to be just one aspect of the York sweet factory. If it can produce other sweets relatively competitively, they can sell a range of confectionery within the UK.
External Costs of Global Trade
To import goods and food from across the world, may seem unnecessary if you are producing the good in the UK. You could argue that importing food 7,000 + miles adds an unnecessary carbon footprint to the food. The carbon emissions of transport contribute to global warming. In this case, economists could justify a carbon tax on imported food. This would create a cost advantage for buying locally rather than importing.
But, if external costs are included in the price, then if it is still cheaper to import from abroad, this can lead to an increase in economic welfare.
Further Reading