As the country recovers from the COVID-19 recession, many questions arise about the future course of the economy. One of them concerns international trade. As international trade has been embraced in recent decades, questions are being asked about its relative benefits and costs. It may be time to have a new debate on trade with other countries.
In general, economists strongly support all forms of commerce. Indeed, trade is a key element – some may say “the” key – 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 with different skills, then trading can make everyone better off.
When I was teaching introductory economics to undergraduate students, here is the example I used. Suppose Darius is an excellent cook, but he doesn’t know anything about vehicle repair. Darius’ neighbor, Leslie, has a father who is a mechanic, so she knows about vehicle repair, but she’s never found cooking fun.
One day, Darius discovers that his car won’t start. He could try to find the problem himself, but that would probably be a waste of time. Darius remembers Leslie’s skill with engines. He asks Leslie if she would mind looking at his car, and in exchange, he will cook her a fabulous meal. Leslie happily accepts. She quickly discovers that the problem with Darius’ car is simply a loose connection. After making the repair, she sits down to a homemade meal of grilled chicken, twice-cooked potatoes, and salad slathered in Darius’ secret dressing.
What happened here was that Darius and Leslie used their cooking and car repair expertise to trade favors. They are both doing better.
Specialization and trade are pervasive in our economy and, according to economists, these concepts allow us to make the most of our resources, which leads to a higher standard of living.
Specialization and trade can also be used to explain international trade. If country A can make trucks cheaper than country B, but country B can make clothes cheaper than country A, then A is naturally motivated to trade trucks with B in exchange for clothes. Both get trucks and clothes, but at a lower cost than if each produced trucks and clothes themselves.
When I was in college 50 years ago and studying economics, that was the view of international trade. It was seen as a mere extension of internal commerce between people and businesses. International trade, like domestic trade, has allowed the economic pie to grow.
As a result, over the past quarter century, the United States has entered into several agreements that have promoted free and unfettered international trade. Two important agreements for North Carolina were NAFTA (North American Free Trade Agreement) and an agreement allowing China to join the World Trade Organization.
Proponents have said these deals would reduce costs for consumers, and studies show they have. But studies show that there have also been significant job losses in many manufacturing sectors, including in North Carolina. Textiles, clothing and furniture — the industries that powered North Carolina for much of the 20th century — were devastated as foreign producers with much lower costs slashed them on price. Many freed workers had to take jobs in lower-paying service sectors. Middle-income jobs have declined while high- and low-income jobs have increased. The result has been widening income inequality.
Federal programs have been put in place to help displaced workers, but they have not been enough to prevent many workers, households and communities from falling behind.
There is another concern regarding international trade, particularly with China. China is now our biggest commodity trading partner. However, China sells us $300 billion more each year in products than we sell to them. Some fear that this trade surplus will help China develop its military and spy capabilities that could be used against our country and our allies.
The bottom line is that there are significant socio-economic and political implications for international trade that render obsolete the simplistic view I was taught 50 years ago. Does this mean that we should reduce foreign trade and rebuild the industries we have lost, even if it means we could pay more for the products? You decide.
Walden is the Reynolds Professor Emeritus at North Carolina State University.