Importing Tiles and the Balance of Payments
A Bahamian construction supplier imports ceramic tiles from Spain. A container costs €18,000, freight and insurance add B$3,000, and the Bahamian dollar is pegged one-for-one to the US dollar. The euro has moved from US$1.05 to US$1.12 since the order was quoted. Import duty is 25% of the cost, insurance and freight value, and value-added-type taxes are not the issue here. The supplier sells the container's contents for B$32,000. The government is concerned about the widening visible trade deficit, and a local firm has begun making tiles at a higher unit cost but with local labour.
1. Calculate the effect of the exchange-rate movement on the supplier's landed cost and profit, then advise how the supplier could manage the currency risk.
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Before the movement. €18,000 × 1.05 = B$18,900. Add freight and insurance B$3,000 = B$21,900 CIF. Duty at 25% = B$5,475. Landed cost = B$27,375. Profit on B$32,000 = B$4,625.
After the movement. €18,000 × 1.12 = B$20,160. Add B$3,000 = B$23,160 CIF. Duty = B$5,790. Landed cost = B$28,950. Profit = B$32,000 − B$28,950 = B$3,050.
Effect. The euro's rise against the pegged Bahamian dollar raised landed cost by B$1,575 and cut profit by the same amount - a fall of about 34% in profit, even though nothing changed in Spain. Duty rose too, because duty is charged on a higher CIF value.
Management. The supplier could:
- buy euros forward or at the time of order to fix the rate;
- invoice and pay in US dollars, which is pegged to the Bahamian dollar;
- shorten the gap between quotation and payment;
- build a small exchange-rate buffer into the selling price;
- source some volume locally to reduce euro exposure.
Because the peg fixes B$ to US$, the risk is really the B$/euro rate, and it cannot be removed by holding Bahamian dollars.
2. Explain how this transaction affects the Bahamas' balance of payments and evaluate whether protecting the local tile maker would improve the trade deficit.
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Balance of payments effects.
- The tile purchase is a visible import, recorded as a debit on the current account. At the new rate it costs about B$28,950 landed before resale, worsening the visible trade balance.
- Freight and insurance paid to a foreign shipping line are invisible imports (services), another current-account debit.
- The Spanish supplier's payment is a outflow of foreign currency; if paid from foreign reserves, official reserves fall.
Would protection help? A tariff or quota on tiles would raise the import price, discourage imports and shift demand to the local maker. That could narrow the visible deficit and create local jobs. But the local tiles cost more, so construction costs rise, and if the local maker needs imported clay, glazes or machinery, some imports simply move to another line. Retaliation by trading partners could hit Bahamian exports such as crawfish or rum. The deficit may also reflect strong domestic demand rather than unfair trade.
Evaluation. Protection can help the balance of payments in the short run but at a cost to consumers and downstream industries. A better mix is to help the local maker lower unit costs through training and technology, while the importer manages currency exposure. The deficit should be judged alongside invisible earnings such as tourism, which often offset a visible deficit.