You Decide: Is there trouble with trade?

Dr. Mike Walden
North Carolina Cooperative Extension

One of the first principles I teach my new economics students is the benefits of trade. I use the following example (remember, I’m talking to 18- to 20-year-olds): Two students live across the hall from each other. One student has some minor car trouble and discovers the across-the-hall neighbor is a fairly good amateur mechanic. The student with mechanic skills is having problems with physics and learns the neighbor with car trouble is a whiz at physics.

After the two students talk about their problems, a trade is set up. The mechanically inclined student agrees to look at the car, while the car-owning student reciprocates by providing some help with physics. Fortunately, each student is quickly able to help the other. The car just had a loose spark plug, while physics was made clear once the role of electrons and protons was explained.

This simple example shows the logic of trade. Most of us can’t be good at everything, so we specialize. One of my grandfathers was a farmer; the other was an electrician. My father was a carpenter, and I am a teacher. My ancestors and I worked at what we were good at and – hopefully – enjoyed. We didn’t try to do it all. Instead, the money we earned from our work was used to trade with others for those things we needed but didn’t make ourselves.

So specialization is the basis of trade. Economists argue specialization and trade improve the economy and make everyone better off. With specialization and trade, I don’t use my time trying to do things I’m not very good at – such as repairing my car. Instead, I focus my time doing what I am good at – teaching  – and trade with others for their mechanical help. With everyone doing what they excel at and then trading, the economic pie is made bigger.

Now the same logic can be applied to nations. Nations are collections of people with skills and both natural and constructed resources. Since nations can have different combinations of these characteristics, nations can have different economic advantages and disadvantages, which also lead to specialization and trade.

Consider Saudi Arabia and the United States. Most of Saudi Arabia is a dry and hot desert. It certainly is not ideal for farming. Yet very close to the land surface are large pools of oil. So although it is expensive to farm in Saudi Arabia, it is inexpensive to produce oil.

There has been oil in the United States, but it has never been as easily accessed as in Saudi Arabia. However, our country has some of the best agricultural land and climate in the world, making the United States ideal for farming and food production. Therefore, for decades a logical trade has occurred with the United States. selling food to the Saudis and the Saudis selling oil to the United States.

Recently, the logic of international trade has come under criticism. But why? We don’t hear the logic of trade between individuals similarly criticized.

One reason is national security. While economics is the motivating force behind international trade, sometimes geopolitics intervenes. We saw this twice in the 1970s when supplies of oil from the Middle East were reduced and used as a tool in the regional political conflict at the time. So the reliability of supplies of foreign products is sometimes questioned.

Another concern is whether international trade is always conducted on a level playing field. The issue arises if a foreign government subsidizes and keeps artificially low the prices of their products in order to gain some advantage, such as harming competitors in other countries or boosting employment at home.

Perhaps the biggest issue with international trade happens when the rules of the game are changed. Historically, international trade has occurred under treaties with rules governing the terms of trade. The rules might deal with the kinds of allowable subsidies supporting domestic production as well as taxes (called “tariffs”) on products imported from other countries.

In the last quarter century, two major trade deals – NAFTA (North American Free Trade Agreement) and GATT (General Agreement on Tariffs and Trade) – changed the rules for international trade and profoundly impacted North Carolina. One of the changes opened the U.S. market to foreign-made clothing. Prior to the agreements the textile and apparel was a major player and employer in North Carolina. Since the deals textile and apparel employment in our state has declined by almost 200,000.

Supporters of NAFTA and GATT say the agreements increased the economic benefits from specialization and trade in the world, as evidenced by the drop in clothing prices since the mid-1990s. However, detractors say not enough has been done to share these benefits with workers displaced by the trade deals. For example, federal data show only 30,000 workers in North Carolina have received help from a trade displacement program in the last seven years. Studies show that counties in North Carolina with the most challenging job market have been those most adversely impacted by international trade.

In a textbook world, international trade improves the economies of both countries and people. But, as even teachers know, the real world doesn’t always follow the textbook. International trade has created winners and losers. The question is, can a system be created where everyone wins? You decide.

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Dr. Mike Walden is a William Neal Reynolds Distinguished Professor and North Carolina Cooperative Extension economist in the Department of Agricultural and Resource Economics of North Carolina State University’s College of Agriculture and Life Sciences. He teaches and writes on personal finance, economic outlook and public policy. The College of Agriculture and Life Sciences communications unit provides his You Decide column every two weeks.

Previous columns are available at http://www.cals.ncsu.edu/agcomm/news-center/tag/you-decide

Related audio files are at http://www.cals.ncsu.edu/agcomm/news-center/category/economic-perspective