International trade has a far-reaching effect on the economy. Every consumer who buys a foreign-made product or a product with foreign-made components participates in international trade. Given the global economy, understanding how international trade works as well as its impact is important.
The Role of Trade
Trade occurs because different people have different skills. You take your car to a mechanic because he is skilled in auto repair. You buy orange juice from Florida because the climate there is suited to growing oranges. By the same token, you buy products from overseas because they can be made more efficiently in another country. The importance of specialization in trade has been recognized for centuries. Individuals, cities, regions and countries specialize in what they do best and trades the surplus. Specialization and trade raises the standard of living for all trading partners.
Trade and the Economy
Net exports – exports minus imports – is one of the four major components of the Gross Domestic Product, the other three being personal consumption, business investment and government spending. Exports generate income in the United States and have a positive effect on the GDP, while imports represent money earned elsewhere and are a drag on our economy. Exchange rates influence both exports and imports. When the dollar depreciates – loses value against other currencies – foreign-made goods become more expensive and consumers buy less of them, while US-made goods become cheaper abroad and exports increase.
Since the 1980s the United States has had a trade deficit – consistently importing more than it exports. This deficit is caused by consumers who buy perceived value regardless of the country of origin. Some raise questions about fairness in foreign trade. All presidents have the authority to slap tariffs on imports if they are being unfairly subsidized by their country of origin or if it meets the interest of domestic interests to do so. Some argue, for example, that “infant industries" should be protected from foreign competition until they are strong enough to compete on their own. Whether governments should outsource national security is another concern.
Loss of Jobs
One of the most common complaints about international trade concerns loss of jobs. “All the jobs are going overseas” is a common cry. While jobs have been lost in specific industries, those losses do not necessarily change the level of employment in the economy as a whole. Past attempts to protect industries from foreign competition have resulted in higher prices and possibly lower quality. Americans with no choice but to buy protected products because foreign competition was blocked essentially saw their income transferred to the subsidized industry. As a founding member of the World Trade Organization, the United States is now committed to free trade with minimal quotas and tariffs.
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