Free Trade Agreements, Exports, Exchange Value of Currency and its downward movement

Free Trade Agreements, Exports, Exchange Value of Currency and its downward movement

There exists a profound misunderstanding in India - and in many countries with respect to the relevance of exports to domestic economy, exchange value of currency with other countries’ currencies, its downward movement, forex reserves, FDI, and the meaning of economic success. This misunderstanding is not merely academic; it has shaped policy in ways that suppress domestic prosperity while elevating nominal indicators that do not correspond to real wealth.

At the center of this confusion lies a failure to recognize a foundational truth:

The domestic economy is the total focus and fulcrum of economic policy.

Everything else - exports, exchange rates, capital flows - must be structured around it.

Real Wealth vs Nominal Constructs

Real wealth consists of goods and services: food, housing, healthcare, education, infrastructure, skills, and productive capability. These are tangible, consumable, and life-enhancing.

Currency, by contrast, is nominal. It is an accounting unit - a record of obligations and entitlements - not a consumable object. Exchange rates are relative prices between two accounting units; foreign exchange reserves are balances held in accounts. None of these are wealth in themselves.

Yet modern policy discourse routinely elevates nominal outcomes above real ones:

• Strong currency = national strength
• Export surplus = economic success
• FX reserves = financial security

This inversion leads to policy errors with real human costs.

Exports as Real Cost; Imports as Real Benefit

Exports require a country to give up real goods and services produced by its labour and resources. Imports allow a country to receive real goods and services produced elsewhere.

From the standpoint of real living standards:

Real Wealth = Domestic Output + Imports - Exports

This does not imply exports are undesirable. It clarifies their purpose.

As Warren Mosler succinctly states:

“The purpose of exports is to get imports.”

Exporting without importing confers no real benefit. Accumulating foreign exchange balances without using them to acquire real goods and services is economically sterile - numbers piled upon numbers, delivering no improvement in living standards.

The Export-Led Growth Illusion

Export-led growth strategies typically rely on:

• Suppressed domestic demand
• Wage restraint
• Tight fiscal policy
• Competitive currency depreciation

These policies can indeed generate net exports - but only by reducing the real income and consumption of the domestic population.

Such strategies benefit specific exporting sectors, not the nation as a whole. Lost output from unemployment and underemployment is permanent. Workers not engaged in productive activity today do not “catch up” tomorrow.

In effect, the population works harder so that foreign consumers may enjoy higher living standards.

The Reserve Currency Contradiction

A simple accounting identity governs international currency dynamics:

• A net exporter leaves the rest of the world short its currency
• A net importer supplies its currency to the rest of the world

A currency becomes a reserve currency precisely because non-residents accumulate it - which requires the issuing country to run trade deficits.

Attempting to be both:

• a persistent net exporter and
• an international reserve currency issuer

is logically incoherent. One objective negates the other. 

The Primacy of the Domestic Economy

The exchange value of a currency does not determine the strength of the domestic economy. The causality runs in the opposite direction.

A strong domestic economy is characterized by:

• Full employment
• High productivity
• Rising real incomes
• Robust domestic demand

When these conditions are present:

• The currency stabilizes naturally
• Capital seeks entry for productive investment
• Imports increase in real terms
• Exports emerge organically, not forcibly

Trade outcomes follow domestic strength; they do not create it.

India’s True Low-Hanging Fruit: Full Employment

India’s greatest unrealized source of wealth is not exports - it is unused labour.

The scale of underemployment and unemployment represents an enormous loss of real output. Mobilizing idle labor through a genuine full employment policy would generate wealth orders of magnitude larger than any conceivable export promotion program.

Full employment:

• Expands domestic output
• Raises household incomes
• Improves skill formation
• Increases private sector profitability
• Elevates living standards sustainably

This is the foundation upon which everything else rests.

FDI Reframed: Technology, Not Funds

In a sovereign fiat currency system, domestic spending is not constrained by foreign savings. Therefore, foreign direct investment should not be pursued for its financial inflows.

FDI matters only insofar as it brings:

• Technology
• Managerial expertise
• Process innovation
• Access to higher value chains

High wages and strong domestic demand do not deter productive investment. They attract it.

A Rational Trade Objective

A rational trade strategy seeks to optimize real terms of trade, not export volume:

• Export higher value goods and services
• Import lower value goods, except where high-tech imports raise productivity
• Move labor up the value chain
• Improve domestic living standards first

Exports are a means. Imports are the reward.

The domestic economy is the purpose.

Rajendra Rasu                                                                                                                                                        The author writes on monetary systems and political economy.