Personal Wealth Management / Market Analysis
The Pros and Cons of International Trade
Trade is the exchange of goods and services between countries. This exchange can carry with it both advantages and disadvantages for the economies, businesses and individuals that are affected. This article will examine why countries trade with one another, how that trade is measured and whether trade benefits or hinders the economies, businesses and individuals that are affected by it.
Why countries trade with one another
Countries trade with one another to help meet their consumption needs and find new markets for their products. One side of the trade equation is imports—goods and services brought into a country from overseas. The other side of the trade equation is exports, which are goods and services sent to other countries.
International trade allows an economy to focus on its comparative advantages. That’s the ability to produce goods and services more efficiently than another country. Any two countries will have relative comparative advantages with one another.
For example, between the United States and France, the US has comparative advantages in a diverse array of products and services—from aircraft and financial instruments to entertainment and sports. Similarly, France has comparative advantages in wine and cheese production and designer clothing.
By focusing on comparative advantages and trading with other countries, economies—and the businesses and individuals that they comprise—can do what they do best, become more efficient over time and give their citizens access to goods and services from abroad that they may not have had access to otherwise.
Two ways of measuring trade
Measuring a country’s trade means assessing the levels of both imports and exports. A common way of measuring trade is the “balance of trade.” This simple equation subtracts the value of a country’s imports from the value of its exports.
If a country ships more goods and services abroad than it brings in from other countries, the result is a “trade surplus.” Trade surpluses are uncommon for the United States. The last time the US exported more than it imported was 1970.
If a country imports more than it exports, it has a “trade deficit.” According to the Bureau of Economic Analysis, the United States has an overall trade deficit with the rest of the world. In 2019, that deficit stood at around $576 billion.
Trade deficits are commonly portrayed as an economic disadvantage. That’s understandable since, by subtracting imports from exports, the balance-of-trade view treats imports as a literal negative. However, what’s common isn’t necessarily what’s most accurate.
A different way of measuring trade is combining exports and imports to arrive at “total trade.” The total-trade view casts both imports and exports as positive economic activities. At Fisher Investments, we view total trade as a more meaningful concept when assessing a country’s economic growth and the potential impact for financial markets. Rising exports mean US goods are in high demand overseas. A rise in imports is a positive signal that US businesses and consumers are willing and able to spend—indicating healthy domestic demand.
Is trade good for individuals, businesses and economies?
The overall pros and cons of international trade to an economy are collections of their advantages and disadvantages to the businesses and individuals that make up that economy.
International trade can offer businesses access to more customers, lower-cost labor, and more resilient supply chains. Contrary to popular belief, the benefits of trade don’t just accrue to big businesses and multinational corporations. According to 2018 data from the US Census Bureau, almost 98% of US exporting companies had fewer than 500 employees. Further, over 97% of importing companies were small businesses, too.
International trade can also open businesses up to competition from lower-cost imports. While this presents a challenge to domestic companies, it also gives them the opportunity to differentiate their offerings in the eyes of consumers. Competition with foreign companies can also force domestic companies to improve quality or streamline their operations, which offers potential downstream benefits to consumers.
In their role as consumers, trade gives individuals vastly more choice. And the competition between domestic and foreign companies can drive costs lower for consumers. But in their role as labor supply, individuals can experience both positives and negatives. For example, analysis from the Peterson Institute for International Economics suggests that the US sees 100,000 net manufacturing job losses per year because of international trade—about 39% of all manufacturing job losses.
However, since World War Two, global trade has helped build US household wealth. Since 1945, annual US gross domestic product (GDP) per household has increased by over $18,000 because of international trade. Research also showed that companies that engage in importing or exporting tend to pay more than companies that weren’t involved in international trade. Plus, according to 2019 research from The Business Roundtable, a US trade industry group, every US state saw net employment gains from trade with other countries. The same research shows that around 39 million US jobs rely on international trade—about 20% of total employment.
While the effects of international trade can be detrimental to individuals and businesses adversely affected in competition for jobs, resources and customers, the overall economic benefit is positive. When trade is open, consumers and businesses benefit from access to more goods and services than their domestic economy can provide, often at a lower cost.
The information in this document constitutes the general views of Fisher Investments and should not be regarded as personalized investment advice or a reflection of the performance of Fisher Investments or its clients. We provide our general comments to you based on information we believe to be reliable. There can be no assurances that we will continue to hold this view; and we may change our views at any time based on new information, analysis or reconsideration. Some of the information we have produced for you may have been obtained from a third party source that is not affiliated with Fisher Investments.
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