International Trade: Pros, Cons, and Effect on the Economy

Four Reasons Why International Trade Is Slowing

International cargo
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International trade is the exchange of goods and services among countries. Total trade equals exports plus imports. In 2018, total world trade was $39.7 trillion. That's $20.8 trillion in exports and $18.9 trillion in imports. Trade drives 46% of the $86 trillion global economy.

More than one-fourth of the goods traded are machinery and electronics, like computers, boilers, and scientific instruments. Almost 12% are automobiles and other forms of transportation. Next comes oil and other fuels contributing 11%. Chemicals, including pharmaceuticals, add another 10%.

Key Takeaways

  • Percentage-wise, international trade comprises almost half of global economic activity.
  • International trade opens new markets and exposes countries to goods and services unavailable in their domestic economies. 
  • Countries that export often develop companies that know how to achieve a competitive advantage in the world market.
  • Trade agreements may boost exports and economic growth, but the competition they bring is often damaging to small, domestic industries.
  • NAFTA currently covers the largest free trade area in the world. 

Advantages of International Trade

Exports create jobs and boost economic growth, as well as give domestic companies more experience in producing for foreign markets. Over time, companies gain a competitive advantage in global trade. Research shows that exporters are more productive than companies that focus on domestic trade.

Imports allow foreign competition to reduce prices and expand the selection, like tropical fruits, for consumers.

Disadvantages of International Trade

The only way to boost exports is to make trade easier overall. Governments do this by reducing tariffs and other blocks to imports. That reduces jobs in domestic industries that can't compete on a global scale. That also leads to job outsourcing, which is when companies relocate call centers, technology offices, and manufacturing to countries with a lower cost of living.

Countries with traditional economies could lose their local farming base as developed economies subsidize their agribusiness. Both the United States and European Union do this, which undercuts the prices of the local farmers.

U.S. International Trade

In 2019, U.S. exports were $2.5 trillion, which contributed 11.7% to gross domestic product. Most of the manufactured goods the U.S. economy produces is for internal consumption and doesn't get exported. Services also make up a large portion of the economy, and those are more difficult to export. GDP components are in four major categories: personal consumption, business investment, government spending, and net exports.

Despite everything it produces, the U.S. imports more than it exports. In 2019, imports were $3.1 trillion. Most of this was capital goods  (computers) and consumer goods (cell phones). Domestic shale oil production has also reduced imports of oil and petroleum products. Even though Americans benefit from imports, they are subtracted from GDP.

Trade Deficit

The United States has a trade deficit. In 2019, international trade subtracted $576.8 billion from GDP. Data on America’s import and export components show that goods and services purchased by the nation outweigh those which it sells on the global marketplace.

The deficit has lowered because of the trade war initiated by President Donald Trump in March 2018. Trump's protectionist measures included a 25% tariff on steel imports and a 10% tariff on aluminum. China, the European Union, Mexico, and Canada announced retaliatory tariffs, hurting U.S. exports, and a deal was reached to remove the tariffs in May 2019. The tariffs depressed the stock market. Analysts worried that Trump started a trade war that would hurt international trade.

U.S. Trade Agreements

Countries that want to increase international trade aim to negotiate free trade agreements. The North American Free Trade Agreement (NAFTA) is between the United States, Canada, and Mexico, and is the world's largest free trade area. It eliminates all tariffs among the three countries, tripling trade to $1.2 trillion. When you consider its history and purpose, NAFTA's advantages far outweigh its disadvantages.

On November 30, 2018, U.S., Mexican, and Canadian leaders signed the United States-Mexico-Canada Agreement, which changed NAFTA in six areas.

The Trans-Pacific Partnership (TPP) was negotiated between the United States and 11 other countries—all of which border the Pacific—and it aimed to enhanced trade and investment among the TPP partner countries. The countries involved were Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam. The TPP included new trade requirements addressing the compatibility of regulations and support of small businesses. The Asian-Pacific Economic Cooperation supported it, but on January 23, 2017, President Trump signed an executive order to withdraw from the TPP. On March 8, 2018, the other 11 TPP countries signed a modified agreement without the United States.

The Transatlantic Trade and Investment Partnership would have linked the United States and the EU, the world's largest economies. It would have controlled more than one-third of the world's total economic output. The biggest obstacle is agribusiness in the countries, as both trading partners have large subsidies for their food industries. The EU also prohibits genetically modified organisms as food and restricts antibiotics and hormones in animals raised for food. President Trump's trade war has complicated negotiations on this agreement.

The United States has many other regional trade agreements and bilateral trade agreements with specific countries. It also participated in the most important multilateral trade agreement, the General Agreement on Tariffs and Trade (GATT). Although the GATT is technically defunct, its provisions live on in the World Trade Organization.

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