Should international trade be re-thought?
Published February 10, 2022
As the country recovers from the Covid-19 recession, numerous questions are being raised about the future course of the economy. One of them involves international trade. While international trade has been embraced in recent decades, some questions are being asked about its relative benefits and costs. So, it may be time to have a new debate about trading with other countries.
In general, economists strongly support all forms of trade. Indeed, trade is a key – some may say, “the” key - part of the economy. Trade is based on the idea of specialization. Individuals have different talents and skills. If individuals specialize in what they do best, and then trade with others having different skills, then trading can make everyone better-off.
When I was teaching introductory economics to undergraduates, here’s the example I used. Assume Darius is a great cook, but knows nothing about fixing vehicles. Darius’ neighbor, Leslie, has a father who is a mechanic, so she knows much about vehicle repair. But she never found cooking to be fun!
One day Darius finds his car won’t start. He could try to find the problem himself, but this would likely be a waste of his time. Then Darius remembers Leslie’s skill with engines. He asks Leslie if she would look at his car, and in exchange, he’ll cook her a fabulous meal. Leslie happily agrees. She quickly finds the problem with Darius’ car is simply a lose connection. After making the repair, she sits down to a home-cooked meal of grilled chicken, twice-baked potatoes, and salad covered by Darius’ secret dressing.
What happened here was both Darius and Leslie used their expertise in cooking and car repair to trade services. They’re both better-off as a result.
Specialization and trade are pervasive in our economy and – economists argue – these concepts allow us to get the most from our resources, which leads to a higher standard of living.
Specialization and trading can also be used to explain international trade. If Country A can make trucks cheaper than Country B, but Country B can make clothing less costly than Country A, then there’s a natural motivation for A to trade trucks to B in exchange for clothing. Both get trucks and clothing, but at a cheaper cost than if each produced trucks and clothing on their own.
When I was in college fifty years ago studying economics, this is where the story of international trade stopped. International trade was viewed as simply an extension of domestic trade between people and companies. International trade, like domestic trade, allowed the economic pie to grow larger.
As a result, over the last quarter century the U.S. has entered several agreements that fostered free and unfettered international trade. Two important ones for North Carolina were NAFTA (North American Free Trade Agreement) and an agreement to allow China to join the World Trade Organization.
Proponents said these agreements would lower costs to consumers, and studies show they did. But studies reveal there were also significant job losses in many manufacturing sectors, including in North Carolina. Textiles, apparel and furniture - industries that propelled North Carolina throughout much of the 20th century - were devastated as foreign producers with much lower costs undercut them on price. Many workers who were released had to take jobs in lower-paying service sectors. Middle-income jobs shrunk while higher-income and lower-income jobs grew. The result was widening income inequality.
Federal programs were established to help displaced workers. Yet they’ve not been enough to prevent many workers, households, and communities from falling behind.
There’s another worry about international trade, particularly with China. China is now our largest trading partner for products. However, China sells $300 billion more each year in products to us than we sell to them. Some worry this trade surplus is helping China develop its military and espionage capabilities that could be used against our country and our allies.
The conclusion is there are significant socioeconomic and political implications to international trade that make the simplistic view I was taught fifty years ago outdated. Does this mean we should reduce foreign trade and rebuild the industries we have lost, even if it means we may pay more for products? You decide.
Walden is a Reynolds Distinguished Professor Emeritus at North Carolina State University.