International Trade: Pros, Cons, Effect on Economy

Four Reasons Why International Trade Is Slowing

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. 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 declined 4 percent from $32.27 trillion in trade in 2015.  It had grown just 2 percent in 2015, and 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 growth in the global economy is also slowing. International trade was 26 percent of the global economy in 2016. It makes companies more efficient. Research shows that exporters are more productive than companies that focus on domestic trade. Until the 2008 financial crisis, world trade grew 1.9 times faster than economic growth. Since then, trade has grown more slowly than the global economy.

Four Reasons Why Global Trade Is Slowing

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

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. 

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. That's because 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

U.S. exports were $2.2 trillion in 2016. That added 13 percent to economic output as measured by 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. For more on how trade fits into the economy, see GDP Components.

Despite everything it produces, 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 imports, they are subtracted from GDP. 

The United States has a trade deficit.  In 2016, 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.) 

 [KA1]Wow, I hadn't even registered that. Thanks for pointing it out. That's very disconcerting. It's very bad for the prognosis for global growth.

 [KA2]I feel like I've used "slowing" "global" "growth" and "trade" way too much in these paragraphs. Can you take a look at them again and help rewrite it. Perhaps it just needs to be better expressed in general. Thanks!

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 advantagesdisadvantages and 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. 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. President Trump signed an executive order to withdraw from the TPP on January 23, 2017.
  • 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 on 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 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