Not a Zero-Sum Game - Ludwig von Mises Institute

NOT A ZERO-SUM GAME
No matter what he produces, every exporter ends up with
foreign currency as his final product . . .
However, to cover his local production costs, he will need local
currency.
So he sells his foreign currency in the exchange market to local
importers.
In this very real sense, all exporters' markets are domestic, because
they all sell their final product (foreign currency) in the local market.
Thus, the higher the price of foreign currency, the greater the
exporter's income.
Why is it we never see exporters lobbying to lower import tar-
iffs? I suspect this is because they are not aware that the abolition
of import tariffs would increase their income. Consider the
extreme cases: if all import restrictions and tariffs were removed,
the increase in demand for consequently cheaper imported goods
would raise the price of the foreign currency they receive for their
exports. On the contrary, if tariffs were raised enough to prevent
all imports, exporters would go broke because the market for for-
eign currency would dry up.
Government manipulation of the rate of exchange has the same
effect as a tax on imports or a subsidy to exports. Imagine that all
of the foreign currency used to pay for imports is taxed at 10
percent when it is purchased. Whether it is a 10 percent duty col-
lected at the custom house or a 10 percent tax collected at the
bank on foreign currency used to pay for imports, the effect on the
cost of imports and on government revenue is exactly the same.
Since free market exchange always tends to balance the flows,
when a government intervenes in the foreign currency market, it
can only cause imbalance: an accumulation of reserves or an
accumulation of foreign debt.