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

pros & cons of international trade. Pros: spurs economic growth, facilitates competitive advantages, and provides domestic companies experience in foreign markets. Cons: leads to job outsourcing and fewer dmoestic roles, causes other countries to lose agricultural base, and undercuts the prices of local farmers

The Balance / Caitlin Rogers

International trade is the exchange of goods and services among countries. Total trade equals exports plus imports. In 2019, the total international trade was just under $19 trillion.

More than 25% 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

  • 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.

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 in other countries.

U.S. International Trade

In 2019, U.S. exports were $2.5 trillion, which contributed 11.7% to gross domestic product (GDP). 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 typically divided into 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. When you compare America’s import and export components for 2019, the total is a trade deficit of more than $480 billion.

While the deficit isn't at an all-time high, it has grown in recent years despite 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 Canadian and Mexican tariffs in May 2019. The tariffs depressed the stock market, and, according to the National Bureau of Economic Research, reduced U.S. investment growth by nearly 2% by the end of 2020.

U.S. Trade Agreements

Countries that want to increase international trade aim to negotiate free trade agreements. The North American Free Trade Agreement (NAFTA) between the United States, Canada, and Mexico is one of the largest free trade deals. Trade between the three countries totaled $1.2 trillion in 2018. 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 (USMCA), which updated NAFTA in areas such as digital trade and intellectual property.

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. However, despite being signed by all 12 countries in 2016, President Trump withdrew the U.S. from the deal in January 2017. On March 8, 2018, the other 11 TPP countries signed a modified agreement to keep the deal intact without the United States.

Separately, the Transatlantic Trade and Investment Partnership would have linked the United States and the European Union (EU), two of the world's largest economies. It would have increased trade by removing all tariffs between the two entities. However, like with the TPP, the Trump administration didn't favor the deal as much as the Obama administration. Negotiations stalled, and the EU declared the talks obsolete in 2019.

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.