"The only way that we can reduce our financial dependence on the inflow of funds from the rest of the world is to reduce our trade deficit."
— Martin Feldstein
Trade is the voluntary action of buying and selling commodities, goods, and services. Trade can take various forms. For example, it could 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. We engage in trade 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.
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 so natural in our daily lives that we frequently take it for granted. As a result, we often do not consider such commonplace behavior as trade. However, that is precisely what we do every day, many times each day. On a much larger scale, the level of trade between nation states is one of the essential activities that affects the well-being of countries.
This week, we will Consider This ... What can we say about the trade deficit of The Bahamas for the year ended December 31, 2022?
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.
A good example would be 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 overseas economic activity.
Let's look at the same fishing industry in The Bahamas. Again, the value of everything 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 timeframe.
Many factors affect the important GDP metric. For example, in 2019, before the COVID-19 pandemic, the GDP of The Bahamas was $13.58 billion. However, 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 during the pandemic in 2020.
The country's GDP significantly declined during the pandemic because of the closure of many businesses where Bahamians would typically spend their money, like restaurants, gyms, barber shops and beauty salons, and clothing stores, to name just a few shuttered businesses.
Thousands were furloughed during that period. Consequently, those job losses resulted in Bahamians losing considerable 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 a critical input for investment decisions and helps the government draft policies to drive economic growth.
The trade deficit
It is equally important to understand the relationship between trade surpluses and deficits to truly appreciate the effects of these relationships on our domestic economy. It would be helpful to note that, while goods and services are used to calculate our GDP and GNP, only goods are factored into the calculation of our trade deficit, not services.
A trade surplus will be created if a country exports more goods than it imports, which is usually a favorable outcome for a nation's economy. However, the corollary to this is a trade deficit - an unfavorable outcome — because trade deficits mean that we import more goods 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, which economists generally consider an unfavorable outcome.
The data for 2022 reflects that the value of commodities imported into The Bahamas totaled approximately $3.8 billion, an increase of 10.3 percent, compared to 2021, where the comparative figure was roughly $3.5 billion.
For the same period, exports of $585.9 million (compared to $543.4 million last year) resulted in a trade deficit of $3.3 billion and $2.9 billion, respectively. The balance of trade in 2022 represents an increase of approximately 11 percent over the preceding year. This is not a positive outcome.
The major groups of merchandise were "Food and Live Animals," which totaled $690 million (or 18 percent of all imports), "Mineral Fuels Lubricants and Related Materials", which totaled $686 million (or 19.9 percent of all imports), and "Machinery and Transport Equipment" at $685 million (or 17.8 percent of all imports). The combined value of these categories represented 49.4 percent of total imports.
On the other side of the equation, total exports (domestic and re-exports) for 2022 totaled $585.9 million. Domestic exports of $180 million accounted for 30.7 percent of total exports, while re-exports of $406 million accounted for 69.3 percent.
The major categories of domestic exports consisted mainly of Food and Live Animals totaling $106.9 million (59.4 percent of total domestic exports), and Crude Minerals totaling $33.1 million, 18.4 percent of total domestic export.
Mineral Fuels of $161 million and Manufactured Goods of $118 million together represented 68.9 percent of re-exports accounting for 39.7 percent and 29.2 percent, respectively.
Our major trading partners
The BNSI has also provided an informative table that depicts The Bahamas' major trading partners. The table tells an interesting story:
The United States is still The Bahamas' number one trading partner, with imports of $3.26 billion of the total imports of $3.89 billion and exports of $393 million of total exports of $543.4 million to that country in 2022.
That represents 85 percent of total imports and 72 percent of total exports, very significant metrics in our trade statistics. It also represents the most significant trade deficit of $2.8 billion of the total deficit of $3.2 billion in 2022. That means that 88 percent of the country's deficit is with our largest trading partner, the USA.
In 2022, The Bahamas conducted significant trade with China, Spain, Japan, Canada, Panama, and Switzerland. However, according to the data provided, it is interesting to note that the greatest increase in imports was derived from Spain, which increased from $13.7 million in 2021 to $34.2 million in 2022.
We also witnessed an impressive increase in imports from China in 2022 of $72 million compared to $49.4 in 2021, a 47 percent increase year-to-year.
During the same period, The Bahamas has doubled its exports to China from $200,412 in 2022 to $404,170 in 2022. However, the exports to China are a minuscule fraction of the value of goods we import from that country, resulting in the second-largest trade deficit of $71 million.
What does this mean?
The all-important question is: what does this all mean? What can we do to reduce our trade deficit? What will it mean for our economy and economic development if we do not? How do large trade deficits affect our economy and our standard of living?
Conclusion
Healthy, robust trade with lower trade deficits is vital to our economic development. However, considerable work must be done to determine how best to focus on this activity to reap the most significant benefits for our citizens and residents.
In our next column, the second part of this series, we will answer some of these critical questions. We will also examine the government's approaches to recognizing the debilitating effects of sustained trade deficits and what considerations have gone into developing a National Trade Policy. Finally, we will look at what we can do to reduce the trade deficit and how reducing our balance of payments would improve our standard and quality of living.
Trade is an intrinsic part of our daily lives. We learn very early in life that there is a need to balance what we wish to acquire with what we actually have to pay out for it. It is important for us to appreciate just how crucial this mundane action of trading is when viewed on an international scale. Just as it is on the personal level, we must learn the importance of trying to achieve balance in what comes in and what goes out so that we are better able to craft a more vibrant economy and a more secure and promising future.
• 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.
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