Should The Adverse Trade Balance With India Be A Matter Of Concern
RMB Senanayake
Minister G.L Pieris is reported to be discussing with the Indian government the adverse balance of trade Sri Lanka has with India and presumably to ask India to buy more from us. India is a large country several times our size and it is natural that the trade balance is adverse to us. But if every country seeks to balance its trade with each other, then international trade would be seriously reduced. Economists have proved the benefits of free trade. Trade is beneficial to both parties, a fact that our politicians don’t seem to realize. This debate is going on strongly in USA where various lobbies want the U.S government to ban or impose protectionist taxes on Chinese goods like tyres and solar panels. Seeking exports’ as a rationale for protectionism is centuries old; it has been addressed countless times by economists.
Free Trade benefits both countries and tariffs to curb imports from a country which runs a favorable trade balance with us is condemned by economists since Adam Smith. This isn’t as intuitively obvious as economists think it is. Pointing it out won’t be sufficient. It needs to be explained in a way that makes it clear to people who are more used to believing the evidence of their eyes than thinking in terms of “the seen and the unseen”.
The trade account is only part of the external transactions of one country with another. There are the services provided by residents to non-resident Indians such as the spending of Indian tourists in Sri Lanka. India is today a large supplier of tourists to Sri Lanka. We need to know the current account in our Balance of Payments with India.
Since India runs a surplus with Sri Lanka it means that Indians are investing in assets in Sri Lanka –either real assets or financial assets. If there is a trade account imbalance it will be offset by either other transactions in the Current Account or in the Capital account. I tried to compile such an account for our Balance of Payments with India but couldn’t find any published data. It only means Sri Lanka is a net borrower from India. Since India is running a large trade surplus with Sri Lanka the Indian government should allow Indian banks and companies to lend to Sri Lankan companies in Indian Rupees.
Suppose my neighbor sets up a factory here does it make me poorer? If not, why would my global neighbor, an Indian opening a factory here make me poorer?
I like to close with a quotation from Adam Smith in his Wealth of Nations. Adam Smith’s Wealth of Nations - a quotation that proves that concerns such as our policymakers have proven again and again to be without merit, and have been addressed by serious economists since the launch of the discipline:
“There is no commercial country in Europe of which the approaching ruin has not frequently been foretold by the pretended doctors of this system from an unfavorable balance of trade. After all the anxiety, however, which they have excited about this, after all the vain attempts of almost all trading nations to turn that balance in their own favor and against their neighbors, it does not appear that any one nation in Europe has been in any respect impoverished by this cause. Every town and country, on the contrary, in proportion as they have opened their ports to all nations, instead of being ruined by this free trade, as the principles of the commercial system [i.e., mercantilism] would lead us to expect, have been enriched by it.”
Nepal has special payments agreement with India . We should explore possibility of using the Indian Rupee for carrying out our trade with India. The Asian Clearing Union has not been successful . Our Central Bank does not list the Indian currency notes as acceptable by our banks. If we do so we might be able to promote more services to Indians which will earn us extra foreign exchange. Of course the Indian government too should allow Indian Rupees repatriated to India through banks to be convertible to US dollars when our banks surrender them to Indian banks against dollars. Since Sri Lanka currency is too weak India will have to extend such a concession to us without reciprocity by Sri Lanka.
