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 were machines and technology. This includes electrical machinery, computers, nuclear reactor, boilers, and scientific and precision instruments. Automobiles, including cars, trucks, and buses contributed 9%. Mineral fuels like oil, gas, coal, and refined products accounted for 14.4%. Commodities like plastics, iron, organic chemicals, pharmaceuticals, and diamonds added up to 13.2%. The chart below shows a breakdown of the top commodities traded in 2017.
In 2017, global trade grew 10.5%. In 2016, it had contracted 4%. It had grown 2% in 2015 and 3.4% in 2014. It's returning to the average annual 10% growth rate that occurred between 1961 and 2013.
International trade contributes about 27% of 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. 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
In 2018, U.S. exports were $2.5 trillion. That added 12% to 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. GDP components are in four major categories: personal consumption, business investment, government spending, and net exports.
Despite everything it produces, the United States imports more than it exports. In 2018, imports were $3.1 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.
The United States has a trade deficit. In 2018, international trade subtracted $621 billion from GDP. Data on America’s import and export components show that goods and services purchased by the nation outweighs those which it sells on the global marketplace.
The deficit has increased despite the trade war initiated by President Donald Trump. One reason is that the dollar strengthened between 2014 and 2016, according to the U.S. dollar index. It weakened a bit in 2017 but strengthened again in 2018. A strong dollar makes imports cheaper and exports more expensive.
Trump's protectionist measures include a 25% tariff on steel imports and a 10% tariff on aluminum. China, the European Union, Mexico, and Canada have announced retaliatory tariffs, hurting U.S. exports. The tariffs depressed the stock market. Analysts worry that Trump has started a trade war that will hurt international trade.
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. When you consider its history and purpose, NAFTA's advantages outweigh its disadvantages. On November 30, 2018, U.S., Mexican, and Canadian leaders signed the United States-Mexico-Canada Agreement. The new deal changes NAFTA in six areas.
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. 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. 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 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. Although the GATT is technically defunct, its provisions live on in the World Trade Organization.