10 Economic Benefits of International Trade

Recent discussions about the impact of international trade agreements, like NAFTA (the North American Free Trade Agreement), CAFTA (the Central America Free Trade Agreement) and the Trans-Pacific Partnership, caused many Americans to reconsider the nation’s position......
 

Critics of the agreements argue that international trade can rob American workers of economic opportunities and only benefits companies that ship their jobs overseas. While there is some evidence to support their claims, a further analysis of the impact of international trade reveals 10 benefits for consumers and manufacturers.

 

1. Variety Of Goods

International trade gives Americans access to goods that would not be available otherwise. A classic example of this access is the availability of oranges in the middle of winter. The Senate’s Joint Economic Committee found that since 1972, trade variety has increased almost 400 percent, due in large part to international trade agreements. The variety of goods stretches across all sectors of the economy, giving Americans more choice in the items that they purchase, and exposing them to new products.

 

2. Outlet For Surpluses

Without international trade, a company’s potential market is limited to the population of the country in which it operates. During the 1920s, the United States experienced how damaging this situation could be. American companies flooded the durable goods market with products, then lacked an outlet for additional production. Economic historian Christiana Romer attributes the onset of the Great Depression, in part, to a saturation of the durable goods market and a lack of market opportunities for American companies due to American isolationism.
International trade expands the total market size to include every nation with which the United States maintains trade relations. American manufacturers can market to American audiences, and maintain an international outlet for products when American sales slow.

 

3. Reduction Of Market Fluctuations

In every sector, the market ebbs and flows. In one part of the year, consumers demand significantly higher quantities of an item, and in the rest of the year, demand plummets, a practice most often seen with seasonal clothing.
The sheer size of the international market helps to mitigate many of the wild fluctuations in sales. Seasonal sales become less impacted by conditions within the United States, and international demand provides a reason for American companies to continue producing.

 

4. Lower Costs

One of the most immediate benefits of international trade is lower costs to consumers. The lower cost is the result of two factors. First, companies can produce items overseas, saving money on labor and material costs. Second, an increase in competition forces companies to make their products more attractive to consumers either through product features or lowered prices.
An analysis of the CAFTA agreement found that retail prices decreased considerably as a direct result of the agreement. Consumers paid much lower prices for food imports, and a reduction of investment barriers prompted foreign investors to spend money building the domestic economies and infrastructures of member nations.

 

5. Production Efficiency

The increase in competition and price pressure from imported goods forces companies to become more efficient in their production practices and overall operation. Companies achieve better efficiencies in a number of ways. They may innovate new methods of production or improve the processes they already have in place. They may experiment with new materials, or seek alternative sources for the essential components of their product.
The drive for efficiency is a boon for consumers. As a result of the improved production, retail prices continue to drop, and in most cases, the competition for retail dollars forces companies to improve the quality of their products.

 

6. Resource Specialization

Large countries like the United States and China have access to almost every resource they need, from minerals to land, and even oil. Smaller nations are not as lucky, and must rely on imports to provide their citizens with basic necessities.
International trade allows nations to specialize their economies in the areas where their resources are best allocated. For instance, the rich oil reserves of Saudi Arabia make it a natural exporter of oil, while the wide-open spaces in Brazil make it an ideal location for ranchers.

 

7. Innovation

For companies, a central theme of international trade is innovation. They must innovate to distinguish their products from increased competition; innovate to improve their cost to consumers; and innovate to be first to market with new ideas.
The Office Of The United States Trade Representative (USTR) demonstrated that American firms that compete in international markets are far more likely to spend money on research and development than companies solely focused on the domestic market. The reason for the spending on innovation is ascribed to both the need to compete with other companies, and the potential for quick returns in international markets.

 

8. Investment

International trade prompts investment in two ways. First, companies invest in internal research and development to bring new products to market or improve on existing products. The large size of the international market means that companies can potentially see a return on their investment much faster than they could if they were only selling to domestic consumers.
 

The second way international trade affects investment is by opening new markets for American investment dollars. In the wake of the NAFTA agreement, billions of dollars from American investors flooded Mexico. These dollars built new factories and created new job opportunities for millions of Mexican citizens, who then had the money to purchase goods from American companies.

 

9. Jobs

The chief complaint about international trade agreements is that they take away American jobs, and while the trade agreements did lower opportunities in the manufacturing sector, trade does promote job growth in other areas.
The USTR’s data show trade agreements supported more than 11 million American jobs in 2013, the last year data are available. Furthermore, the USTR argues that in industries like agriculture, every billion dollars in exports created more than 6,500 additional jobs.

 

10. Peace

Thomas Friedman, in his book The Lexus and the Olive Tree, famously wrote that no two countries with McDonald’s have ever gone to war with each other. The assessment points out the importance of trade and economic incentives in promoting world peace.
 

Countries with strong international trade agreements rarely go to war with each other, because the economic and political cost of such a decision would be devastating. International trade creates economic interdependency and an incentive to find peaceful, diplomatic solutions to international conflicts, rather than military solutions.
 

International trade is a deeply divisive issue that evokes emotions on both sides. Understanding the positive outcomes of international trade, both for consumers and American companies, opens a broader view of the issue, and puts the role of international trade in perspective.