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Markets and Economy

The Benefits of Global Trade

Recent sentiment notwithstanding, the benefits of international trade likely outweigh its associated costs.
Jim Glassman, Head Economist, Commercial Banking
February 1, 2017

International trade has recently become the villain to many Americans and U.S. politicians. But the resulting protectionist movement may be shortsighted. Focusing on the workers left behind by international commerce may be good politics, but today’s trade deficits are rapidly creating a more prosperous world for everyone. Free trade opponents tend to ignore the rise of what could eventually become a $100 trillion consumer market in the developing world.

In light of this, it can be helpful to focus on policies that have the potential to help workers who lost jobs as a result of trade without sacrificing the tremendous upside of a more interconnected world.

An Uneven Playing Field?

Free trade critics often point to America’s trade deficit as evidence of unfair practices. If trade is a two-way street, why aren’t Chinese consumers buying more American exports? The answer should be clear: Chinese consumers are poorer than their American counterparts. Per-capita income in the US is more than three times the average in China, so it should be no surprise that America’s demand for imported goods is significantly stronger.

From this perspective, the global playing field is incredibly uneven. America is the world’s richest nation; consequently, it runs deficits with most trading partners. Uneven wealth is the true driver of trade imbalances, not currency manipulation or weak labor protections. Moreover, access to the US market is driving rapid industrialization throughout the developing world, and the growth of export-driven manufacturing in poor nations is lifting citizens’ living standards. America’s trade deficits are helping create what promises to be the world’s largest consumer market.

Trade’s $100 Trillion Upside

The economies of China, India and Mexico are growing at three to four times the rate of the US, but tremendous potential remains untapped. If incomes in these three nations were to reach parity with the US, they would comprise a $125 trillion economy, 1.5 times larger than today’s entire global economy. If the world’s poorest 6 billion citizens were to achieve the living standards of developed nations, they would create a $100 trillion consumer market, hungry for American goods.

It's difficult to imagine the US economy suffering in a broadly prosperous world. Growing wealth abroad would likely create new markets for American exports, and the nation’s most dominant industries could produce more expensive products—such as jetliners, electronics and software—that would see stronger demand as economies abroad grow richer. Thus, policies that attempt to reverse the developing world’s growth could ultimately harm America’s economic interests in the long run.

What About the Workers?

The American manufacturing workforce has shrunk over the last few decades, but free trade is not to blame. Total manufacturing output is at an all-time high, and the real value of American exports has doubled since 2000. Employment, however, has steadily fallen as automation saps the demand for manufacturing labor.

Protectionist policies likely won’t do much to reverse this trend: even in the developing world, robotics and artificial intelligence are displacing humans. Instead of trying to bring back jobs that no longer exist, displaced workers should be taught new skills to help them adapt to the evolving industrial landscape. Roughly 5.5 million job openings are currently unfilled in the US, a sign that demand for labor is strong, but a skills mismatch may be keeping unemployed workers from taking advantage of new opportunities. Moving forward, policies should seek to secure America’s place in a more prosperous future, rather than making a futile attempt to reclaim a world of the past.

View our economic commentary disclaimer.

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