Civic Issue Blog #3 – The Role of International Trade Policy in Maintaining Economic Strength and Stability Within the United States

Introduction to Global Trade

The nature of the “global economy” has certainly evolved dramatically over time. While nations have traded goods and services to some extent for most of human history, there has been no period in history where nations exhibit such economic interdependence as the present. Industrialization, technological innovation, and globalization have made trade easier and more abundant than ever. To consider the profound effect that economic globalization has  on our everyday lives, one needs only to look carefully at a few of the consumer goods around them. For instance, the tags on your t-shirt and sweatpants could indicate that the products were manufactured in India, Taiwan, or China (these are just a few common examples) even though the company that sells them is probably American-based. On the other hand, there are also numerous examples of products that are actually produced and sold by foreign companies, and thus must be imported to the United States. While there are examples of many American car manufacturers like Ford, Tesla, Chrysler, and Chevrolet, a considerable portion of the market is dominated by foreign vehicles. For example, BMW and Mercedes-Benz are extremely popular car brands that are headquartered in Germany, while Toyota and Hyundai are headquartered in Japan and South Korea, respectively.  Additionally, the immersion of international products into the domestic consumer economy extends beyond clothing and automobiles, and is prevalent in electronics, appliances, food, and pharmaceuticals among many others sectors.

Why Trade?

While it is demonstrable that trade has become an integral part of our domestic economy and thus civic life, an important question remains: why trade in the first place? Discussions of the theoretical advantages of trade began to surface contemporary with the emergence of classical economics and received major contributions from the works of Adam Smith and David Ricardo. Smith first deduced how the ideas of specialization and division of labor could be utilized for prosperity in the domestic economy. He used an analogy with pins to convey how productivity became exponentially greater when individuals performed narrowly-specified tasks within a firm/business rather than attempting to produce by themselves. Smith asserted that “ten workers could produce 48,000 pins a day if each of the eighteen specialized tasks was assigned to particular workers; but absent the division of labor, a worker would be lucky to produce one pin per day” (Concise Encyclopedia of Economics). Ricardo then took this principle and amplified it too a broader picture that considered how nations could achieve greater prosperity through comparative advantage. The principle of comparative advantage supposes that certain countries, due to the nature of their factors of production, may have varying opportunity costs (the relative value of production compared to producing another good) compared to other nations. Thus, to achieve maximal efficiency, the nations with a low relative opportunity cost for a certain good should specialize in producing that good and trade with other nations for goods where there opportunity cost is higher. While this may sound like economic jargon, a simplified real-world example demonstrates the purity and efficacy of this principle. The United States, likely due to our abundant supply of engineers, and advanced industrial infrastructure, has an advantage in aviation part manufacturing and thus exports these goods to other countries. On the other hand, we are limited by our geography and climate to grow certain foods abundantly like avocados, sugar, and tropical fruits, and thus we must import these from other countries. By allocating more resources to aviation manufacturing, that would otherwise be diverted to inefficient raw material production if we had to produce everything ourselves, we are now a much richer nation in terms of total goods and services.

Framing the Controversy Surrounding Trade : Integration vs Isolationism

While the theoretical advantages of trade are self-evident, it becomes a much more complex issue in practice. Trade discussion provoke intense political attitudes either towards globalization and economic integration or nationalism and isolationism. While isolationism historically has typically meant an aversion for intervention in foreign affairs, it may also be applied to the arena of trade policy. For instance, recent President Trump was a considerable isolationist in economic policy and attacked United States involvement in multilateral trade agreements where he believed other countries weren’t paying their fair share. Other politicians, such as Joe Biden, have expressed more extensive support for global economic integration, as evident with his 2011 statement that “A rising China will fuel economic growth and prosperity and it will bring to the fore a new partner with whom we can meet global challenges together” (White House Archives). The controversy of whether the United States should be more or less involved in the global economy has manifested itself into two main policy outcomes of which I would like to explore deeper: involvement in NAFTA and the WTO.

Policy #1: NAFTA

The North American Free Trade Agreement (NAFTA) was enacted in 1994 and sought to end trade barriers between the United States, Canada, and Mexico. The bilateral agreement with Mexico was especially important since Mexico has become a major trade partner with the U.S and the 2nd greatest market for American exports, purchasing nearly $300 billion of American goods and services in 2018 (International Trade Administration). However, some people have strong opinions against NAFTA, mainly due to the significant loss of manufacturing jobs that followed its initiation. This is evident with employment data that shows a 29% drop in manufacturing employment, from 16.8 million to 12.1 million jobs, between 1993 and 2016 (Floyd). As introduced earlier, this is due to the fact that eliminating trade barriers made American manufacturing firms less competitive with Mexican firms that had a comparative advantage in this sector. Thus, while NAFTA certainly had positive overall effects on GDP for Canada, Mexico, and the United States, there were certainly groups that were winners as well as losers.

Policy #2: WTO

The World Trade Organization (WTO) was created shortly after NAFTA in 1995 and is by far the largest supranational trade organization in the world. It contains 164 member states and may be second only to the United Nations for its sovereignty and discretionary authority over individual nation-states. Broadly, the WTO seeks to eliminate protectionism and trade barriers among its member states and foster an environment conducive to economic liberalization and prosperity. However, some criticize the WTO for failing to consistently enforce its principles on all its member nations and routinely allow nations such as China to “cheat” in the realm of international economics without reproach. For example, Stephen Ezell of the Information Technology and Innovation Foundation notes that, “China’s state-led economic model, driven heavily by innovation-mercantilist practices, stands at odds with the foundational WTO principles of pursuing market-oriented policies while providing non-discrimination, national treatment, and reciprocity” (Ezell). Such unpunished dishonesty in the realm of international trade is what led Donald Trump to issue his own tariffs on Chinese exports, only to bring hurt to American consumers, farmers, and manufacturers in the process. While many disagree with his methodology, there is much consensus with Trump’s position that China has avoided playing by the rules for too long and their disregard for intellectual property, state dominated economy, and abuse of multilateral agreements should give rise to retaliation.

Works Cited

“Division of Labor and Specialization.” Econlib, 7 Aug. 2021, https://www.econlib.org/library/topics/highschool/divisionoflaborspecialization.html.