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

Four Reasons Why International Trade Is Slowing

International cargo
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International trade is the exchange of goods and services between countries. Total trade equals exports plus imports, and in 2019, world trade value was at $38.96 trillion, up 10% from 2018. 25% of the goods traded are machines and technology like electrical machinery, computers, nuclear reactor, boilers, and scientific and precision instruments. Automobiles, including cars, trucks, and buses, contributed 9%, and 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%.

International trade accounts for about 27% of the global economy, and 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 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, as well as give domestic companies more experience in producing for foreign markets. Over time, companies gain a competitive advantage in global trade, and research shows that exporters are more productive than companies that focus on domestic trade.

Imports allow foreign competition to reduce prices for consumers and gives shoppers a wider variety of goods and services—like 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, as well as 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 U.S. and European Union do this, which undercuts the prices of the local farmers. 

U.S. International Trade

In 2018, U.S. exports were $2.5 trillion, which added 12% to gross domestic product and created 12 million jobs. Most of the U.S. economy is produced 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 in 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 2018, imports were $3.1 trillion—most of which were 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. 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 outweigh those which it sells on the global marketplace. 

The deficit has increased 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 tariffs in May 2019. The tariffs depressed the stock market, and analysts worried that Trump started a trade war that would hurt international trade to the point of devastation.

U.S. Trade Agreements

Countries that want to increase international trade aim to negotiate free trade agreements. The North American Free Trade Agreement (NAFTA) is between the United States, Canada, and Mexico, and is the world's largest free trade area. It eliminates all tariffs between the three countries, tripling trade to $1.2 trillion. 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, which changed NAFTA in six areas.

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. The Asian-Pacific Economic Cooperation supported it, but 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, the world's largest economies, and it would have controlled more than one-third of the world's total economic output. The biggest obstacle is agribusiness in the countries, as both trading partners have large subsidies for their food industries. The EU also prohibits genetically modified organisms as food and 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, and 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.

Article Sources

  1. The Wall Street Journal. "U.S., Mexico and Canada Sign Pact to Replace Nafta," Accessed Dec. 20, 2019.

  2. Asian Pacific Economic Corporation. "APEC and Trans-Pacific Partnership Mutually Useful: Research," Accessed Dec. 20, 2019.