International Trade: Pros, Cons, Effect on Economy

Four 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 2016, world trade was $30.98 trillion. That's $15.64 trillion in exports plus $15.34 trillion in imports. That's down from $32.27 trillion total trade in 2015. One-quarter of trade was in electrical machinery, computers, nuclear reactor parts, and scientific instruments.

Automotive contributed 9 percent. Commodities, like oil, iron, and diamonds, added 19 percent. (Source: CIA World Factbook.)

Global trade growth is slowing. It was 2 percent in 2015, down from 3.4 percent in 2014. That's much slower than the average annual 10 percent 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 in 2001.

These two events super-charged growth for twenty years.

Third, the 2008 financial crisis slowed global trade and growth. Many companies became more cautious. Consumers were 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 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. That gives domestic companies more experience in producing for foreign markets. Over time, they gain a competitive advantage in global trade. 

Imports allow foreign competition to reduce prices for consumers. It also gives shoppers a wider variety of goods and services. Example include tropical and out-of-season fruits and vegetables. 

Disadvantages

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 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 the European Union, subsidized their agribusiness. That undercuts the prices of the local farmers. 

U.S. International Trade

U.S. exports were $2.2 trillion in 2016. It added 13 percent to economic output as measured by gross domestic product and 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. 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 2016, imports were $2.7 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. 

The United States has a trade deficit.  As a result, international trade subtracted $502 billion from GDP. For more, see Import and Export Components. (Source: "National Income and Product Accounts Tables, Table 1.1.5., Gross Domestic Product," U.S. Bureau of Economic Analysis.) 

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, history and purpose. On January 23, 2017, President Trump signed an executive order to renegotiate NAFTA. Find out What Happens If Trump Dumps NAFTA.
  • The Trans-Pacific Partnership was negotiated between the United States and 11 other countries bordering the Pacific. They included 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. It was supported by Asian-Pacific Economic Cooperation. President Trump signed an executive order on January 23, 2017, to withdraw from the TPP.
  • The Transatlantic Trade and Investment Partnership would have linked two of the world's largest economies,  the United States and the European Union. It would have become the world’s largest free trade area, controlling more than third of the world's total economic output. The biggest obstacle is agri-business on both countries. Both trading partners heavily subsidize their food industries. The EU also prohibits genetically modified organisms in 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

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