International Trade: Pros, Cons, Effect on Economy

4 Reasons Why International Trade Is Slowing

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International trade allows Americans to sample a variety of exotic fruits and vegetables.. Photo: Thoas Kokta/Getty Images

Definition: International trade is the exchange of goods and services between countries. Total trade equals exports plus imports. In 2015, world trade was $32.9 trillion. That's $16.67 trillion in exports plus $16.2 trillion in imports. One-quarter of trade was in electrical machinery, computers, nuclear reactor parts, and scientific instruments. Automotive contributed 9%. Commodities, like oil, iron, and diamonds, added 19%.

(Source: World Factbook.)

Global trade growth is slowing. It was 2% in 2015, down from 3.4% in 2014. That's much slower than the average annual 10% growth rate between 1961 and 2013. 

That's one reason why the global economy is slowing. International trade is a key driver by making companies more efficient. Research shows that exporters are more productive than domestically-focused companies.  Until the 2008 financial crisis, world trade grew 1.9 times faster than economic growth. Since then, trade has grown at the same pace as the global economy.

There are four reasons for this 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. These two events super-charged growth for twenty years.

Third, the 2008  financial crisis slowed global trade and growth.

Many companies have become more cautious. Consumers are less likely to spend. Part of that is because they've grown older, and are saving for retirement.

Fourth, countries are implementing more protectionist measures. In 2015, governments quietly added 539 trade restrictions. These include such as tariffs, government subsidies to domestic industries, and anti-dumping legislation.

(Source: "World Trade Growth Is Slowing," Global Finance, January 2016.)

Advantages

Exports create jobs and boost economic growth. Imports allow foreign competition to reduce prices for consumers. It allows a wider variety of goods and services, such as tropical and out-of-season fruits and vegetables. 

Disadvantages

The only way to boost exports is to make trade easier overall by reducing tariffs and other blocks to imports. That reduces jobs in industries that aren't competitive on a global scale. It also leads to job outsourcing. That 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. That's because developed economies, like the United States and EU,  subsidized their agribusiness and undercut the prices of the local farmers. 

U.S. International Trade

U.S. exports were $2.23 trillion in 2015, adding 13% to economic output as measured by GDP, and creating 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. That is more difficult to export. For more on how trade fits into the economy, see GDP Components.

Despite everything it produces at home, the United States imports more than it exports. In 2015, imports were $2.762 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 variety of selection and low prices of imports, they are subtracted from GDP. 

As a result, the United States has a trade deficit.  As a result, international trade subtracted $532 billion from GDP. For more, see Import and Export Components. (Source: U.S. Bureau of Economic Analysis, National Income and Product Accounts Tables, Table 1.1.5., Gross Domestic Product) 

U.S. Trade Agreements

Countries that want to increase international trade negotiate free trade agreements. Here's the most important U.S. trade agreements:

  • NAFTA, currently the world's largest free trade area, is 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, history and purpose.
  • The Trans-Pacific Partnership is between the United States and eight other countries bordering the Pacific. These are Australia, Brunei Darussalam, Chile, Malaysia, New Zealand, Peru, Singapore, and Vietnam. Since then, Canada, Japan, and Mexico have entered the agreement. The goal is to enhance trade and investment among the TPP partner countries. It will promote innovation, economic growth and development, and support the creation and retention of jobs. The TPP includes new trade requirements addressing compatibility of regulations and support of small businesses. This agreement is in keeping with the work of APEC
  • The Transatlantic Trade and Investment Partnership, or TTIP, would link the world's two largest economies,  the U.S. and the European Union. As a result, it would become the world’s largest free trade area, controlling more than third of the world's total economic output. However, the biggest obstacle is agri-business in both the U.S. and EU. Both trading partners heavily subsidize their food industries. Furthermore, the EU prohibits the use of GMOS and the addition of antibiotics and hormones in animals raised for food. 

The United States has many other regional trade agreements,  bilateral trade agreements with specific countries, and 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 (WTO)

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