International Trade, Its Pros, Cons, and Effect on the Economy
Four Reasons Why International Trade Is Slowing
International trade is the exchange of goods and services between countries. Total trade equals exports plus imports. In 2017, world trade was $34 trillion. That's $17 trillion in exports plus $17 trillion in imports.
One-quarter of the goods traded was in machines and technology. This includes electrical machinery, computers, nuclear reactor, boilers, and scientific and precision instruments. Automobiles, including cars, trucks, and buses contributed 9 percent. Mineral fuels like oil, gas, coal and refined products accounted for 14.4 percent. Commodities like plastics, iron, organic chemicals, pharmaceuticals, diamonds added up to 13.2 percent. The chart below shows a breakdown of the top commodities traded in 2017.
In 2017, global trade grew 10.5 percent. In 2016, it had contracted 4 percent. It had grown 2 percent in 2015, and 3.4 percent in 2014. It's returning to the average annual 10 percent growth rate between 1961 and 2013.
International trade contributes about 27 percent to the global economy. Until the 2008 financial crisis, world trade grew 1.9 times faster than economic growth. Until 2017, trade grew more slowly than the global economy.
Four Reasons Why Global Trade Had Slowed
There are four reasons for the recent slowdown. First, the Soviet Union collapsed in the 1990s. That allowed countries like Poland, the Czech Republic, and East Germany to catch up as they rejoined the global economy.
Second, China joined the World Trade Organization in 2001. These two events super-charged growth. But after 15 years, their contributions have stabilized.
Third, the 2008 financial crisis slowed trade and growth. Many companies became more cautious. Consumers were less likely to spend. Part of that is because they’d grown older. They had to rebuild their retirement savings. Younger people faced high unemployment rates. They had a hard time getting their career started. That meant they weren't as likely to marry and buy homes. Many of them also had large school loans to pay off.
Fourth, countries implemented more protectionist measures. In 2015, governments quietly added 539 trade restrictions. These included tariffs, government subsidies to domestic industries and anti-dumping legislation.
Advantages of International Trade
Exports create jobs and boost economic growth. They give domestic companies more experience in producing for foreign markets. Over time, companies gain a competitive advantage in global trade. Trade also makes companies more efficient. Research shows that exporters are more productive than companies that focus on domestic trade.
Imports allow foreign competition to reduce prices for consumers. It also gives shoppers a wider variety of goods and services. Examples include tropical and out-of-season fruits and vegetables.
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. It also leads to job outsourcing. That's when companies relocate call centers, technology offices, and manufacturing. They choose countries with a lower cost of living. Countries with traditional economies could lose their local farming base. That's because developed economies subsidize their agribusiness.
Both the United States and the European Union do this. That undercuts the prices of the local farmers.
U.S. International Trade
U.S. exports were $2.2 trillion in 2016. That added 13 percent to economic output as measured by gross domestic product. It also created 12 million jobs. Most of the U.S. economy is produced for internal consumption and doesn't get exported. In addition, a large part of the economy is services. Those are more difficult to export. For more on how trade fits into the economy, see GDP Components.
Despite everything it produces, the United States imports more than it exports. In 2017, imports were $2.9 trillion. Most of that is capital goods, such as computers, and consumer goods, such as cell phones. Domestic shale oil production has reduced imports of oil and petroleum products. Even though Americans benefit from imports, they are subtracted from GDP.
President Trump wants to reduce these deficits with protectionist measures. In March 2018, announced he would impose he would impose a 25 percent tariff on steel imports and a 10 percent tariff on aluminum. It came a month after he imposed tariffs and quotas on imported solar panels and washing machines. The stock market fell, as analysts worried Trump's actions might start a trade war.
U.S. Trade Agreements
Countries that want to increase international trade negotiate free trade agreements. Here are the most important U.S. trade agreements:
- The North American Free Trade Agreement is the world's largest free trade area. It's between the United States, Canada, and Mexico. It eliminates all tariffs between the three countries, tripling trade to $1.2 trillion. Here are its advantages, disadvantages and history and purpose. On January 23, 2017, President Trump signed an executive order to renegotiate NAFTA. If the negotiations don't succeed, Trump threatened to dump NAFTA.
- The Trans-Pacific Partnership was negotiated between the United States and 11 other countries. All of the countries border the Pacific. They were Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam. It would have enhanced trade and investment among the TPP partner countries. The TPP included new trade requirements addressing compatibility of regulations and support of small businesses. The Asian-Pacific Economic Cooperation supported it. President Trump signed an executive order to withdraw from the TPP on January 23, 2017.
- The Transatlantic Trade and Investment Partnership would have linked the United States and the EU. These are two of the world's largest economies. It would have controlled more than one-third of the world's total economic output. That would have made it the world’s largest free trade area. The biggest obstacle is agribusiness in both countries. Both trading partners have large subsidies for their food industries. The EU prohibits genetically modified organisms as food. It also restricts antibiotics and hormones in animals raised for food. President Trump's position on this agreement is not clear.
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. Although the GATT is technically defunct, its provisions live on in the World Trade Organization.