International trade is the exchange of goods and services among countries. Total trade equalsexportsplusimports. In 2019, the total international trade was just under $19 trillion.
More than 25% of the goods traded are machinery and electronics, like computers, boilers, and scientific instruments. Almost 12% are automobiles and other forms of transportation. Next comes oil and other fuels contributing 11%. Chemicals, including pharmaceuticals, add another 10%.
Key Takeaways
- International trade opens new markets and exposes countries to goods and services unavailable in their domestic economies.
- Countries that export often develop companies that know how to achieve a competitive advantage in the world market.
- Trade agreements may boost exports and economic growth, but the competition they bring is often damaging to small, domestic industries.
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 acompetitive advantagein global trade. Research shows that exporters are more productive than companies that focus on domestic trade.
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Imports allow foreign competition to reduce prices and expand the selection, like tropical fruits, for consumers.
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. That also leads tojob outsourcing, which is when companies relocatecall centers, technology offices, and manufacturing to countries with a lowercost of living.
Countries withtraditional economiescould lose their local farming base as developed economies subsidize their agribusiness. Both the United States andEuropean Uniondo this, which undercuts the prices of the local farmers in other countries.
U.S. International Trade
In 2019,U.S. exportswere $2.5 trillion, which contributed 11.7% togross domestic product (GDP). Most of the manufactured goods the U.S. economy produces are for internal consumption and don't get exported. Services also make up a large portion of the economy, and those are more difficult to export.GDP componentsare typically divided into four major categories: personal consumption, business investment, government spending, and net exports.
Despite everything it produces, the U.S.importsmore than it exports. In 2019, imports were $3.1 trillion. Most of this wascapital goods(computers) andconsumer goods(cell phones). Domesticshale oilproduction 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 atrade deficit. When you compare America’simport and export components for 2019, the total is a trade deficit of more than $480 billion.
While the deficit isn't at an all-time high, it has grown in recent years despite thetrade warinitiated byPresident Donald Trumpin March 2018. Trump'sprotectionist measuresincluded a 25%tariffon 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 Canadian and Mexican tariffs in May 2019. The tariffs depressed the stock market, and, according to the National Bureau of Economic Research, reduced U.S. investment growth by nearly 2% by the end of 2020.
U.S. Trade Agreements
Countries that want to increase international trade aim to negotiatefree trade agreements. TheNorth American Free Trade Agreement(NAFTA) between the United States, Canada, andMexico is one of the largest free trade deals. Trade between the three countries totaled $1.2 trillion in 2018. When you consider itshistory and purpose, NAFTA'sadvantagesfar outweigh itsdisadvantages.
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On November 30, 2018, U.S.,Mexican, andCanadianleaderssignedthe United States-Mexico-Canada Agreement (USMCA), which updated NAFTA in areas such as digital trade and intellectual property.
TheTrans-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. However, despite being signed by all 12 countries in 2016, President Trump withdrew the U.S. from the deal in January 2017. On March 8, 2018, theother 11 TPP countries signeda modified agreement to keep the deal intact without the United States.
Separately, theTransatlantic Trade and Investment Partnershipwould have linked the United States and the European Union (EU), two of theworld's largest economies. It would have increased trade by removing all tariffs between the two entities. However, like with the TPP, the Trump administration didn't favor the deal as much as the Obama administration. Negotiations stalled, and the EU declared the talks obsolete in 2019.
The United States has many otherregional trade agreementsandbilateral trade agreementswith specific countries. It also participated in the most importantmultilateral trade agreement, theGeneral Agreement on Tariffs and Trade(GATT). Although the GATT is technically defunct, its provisions live on in theWorld Trade Organization.
Frequently Asked Questions (FAQs)
How does international trade affect consumers?
Generally, international trade gives consumers access to a greater variety of goods. It also drives prices on those goods down, because trade enables countries to access them at a lower cost. These consumer gains may be at least partially offset by job losses due to trade, though.
Why do high tariff levels restrict international trade?
High tariffs raise the cost of selling imported goods. This reduces the demand for those imported goods and drives down trade.
When did international trade start?
The rise of international trade correlated with the Age of Discovery from the 15th century to the 18th century. As European explorers moved west, they opened up new avenues of trade across the world.
