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Kristen DiMeco

Principles of Microeconomics

I agree that International trade benefits US consumers and businesses, and it ultimately leads

to a higher standard of living. There are many ways that it has a positive impact on

consumers and businesses and leads to a higher standard of living.

Trade allows each country and/or person to specialize in what they do best and also allows

society to enjoy a greater variety of goods and services. Exporting and importing allows for

greater competition and variety within a global market.

Domestic price Vs World price/ Comparative Advantage

Countries that export goods are better off because the price they can charge for a product is

based on the world price, rather than limited by the domestic price that they could charge

within their limited domestic markets. This means they could increase sales to other places

within the world and not be limited to only selling their products in their home countries.

The world price is the price of the good that prevails in the world market for that good.

Producers compare the domestic price of producing a product to the world price, or what

they would receive from selling the product internationally. This allows

them to determine if they have a comparative advantage to producing and selling the

product. The domestic price is the opportunity cost of producing the goods.

It reveals how much we would have to give up in order to produce one unit of something. If

the domestic price is low, the cost of producing the good is low. Meaning there is a

comparative advantage. If the cost is high, then production costs are high, meaning foreign

countries have a comparative advantage to producing that product. When trade is allowed

in a country, the domestic price of the goods adjusts to equal the world price, causing

the domestic quantity supplied to differ from the domestic quantity demanded. If the world

price is higher than the domestic price then the country would benefit from exporting the
goods. If the world price is lower than the domestic price they would benefit more from

importing the product. We can determine if the country is better or worse than other

countries at producing the good and if there is a comparative advantage. Countries will gain

more from importing certain products and exporting others. When there is a comparative

advantage the country can focus on what it can produce efficiently, while realizing the most

profit from the sales of the goods. This leaves the countries that can produce other goods

more efficiently to focus on their comparative advantage of production of the goods they

can produce more efficiently and choose not to produce products that they cannot produce

efficiently for a profit. Trade raises the economic well-being of each nation because it

allows people to focus on the activities where they have a comparative advantage. When

prices rise the producers of the product gain an advantage and the consumer loses. If the

prices fall the consumers win and the producers suffer the loss. However, although there is a

winner and a loser, the gains of winners exceed the losses of losers, therefore everyone

benefits.

Trade also benefits smaller countries that may be considered very poor and economically

unstable. It allows them to trade for capital, which benefits the private sector. Trade is also

believed to lead to more stable and stronger governments in these small countries.

Economies of scale

Businesses are more competitive and can compete in a global market when there

are economies of scale. This allows smaller companies to produce larger quantities of a

product which they can sell in other markets outside of their domestic market. If they are

limited to selling within their domestic markets, it is not economical or feasible to produce

items in large quantities, especially if there is not enough demand for the product in their

limited market. However, if these companies can produce a larger quantity of their products

with economies of scale, this allows them to be more competitive and keep their production

costs low.
International trade also increases competition and keep the prices within the range of the

market price. Prices cannot or would not rise above the market price, as consumers would

not want to purchase the products of the same variety and quality for a higher price.

Benefits to consumers

Consumers are better off because they can purchase the goods they desire and need at the

world price, which is in equilibrium. Because products are produced at economies of scale,

they ultimately have a lower price to the consumer. International trade increases the variety

and quality of the goods available in the market. The products produced in one country are

not the same quality and/or variety as products being produced in another country. An

example of this is French wine vs Italian wine vs. Australian wine. They are all very good,

however they are all different and the consumer is free to choose the variety and type they

prefer due to international trade.

Trade also increases employment. Although there is some debate that US jobs are often

outsourced to countries that are required to pay a lower minimum wage, there are also many

jobs right here in the US that rely on international trade to support their production.

According to the US Chamber of Commerce website the United States is dependent on

international trade as it contributes 41 million jobs to the US economy. Economic data from

the Federal Reserve Bank of St. Louis states that output from manufacturing in the US has

risen by over 80% in the past 25 years and roughly 300,000 US companies that do export are

small and medium sized companies doing business here. These companies account for 1/3 of

US merchandise exports according the the US department of Commerce. They also estimate

that the manufactured goods that are exported by the US account for approximately 6 million

factory jobs in the US. Manufactured goods that are exported contributed $1.3 trillion dollars

to the US economy in 2016.

The number of these companies, both small and medium sized, has risen substantially in the
last 20 years. Automation and Information Technology have also helped US companies growth

and competitiveness in the global markets over the past few years.

Cons of international trade

Tariffs are a tax placed on goods produced abroad and sold domestically. A tariff raises the

price of imports above the world price by the amount of the tariff. This impacts both sellers

and buyers because it affects the quantity demanded, causing it to decrease.

Tariffs can have a negative impact on consumer and producer surplus and results in a

deadweight loss, which is why free trade raises the total welfare of all involved.

Some additional negative impacts noted by opponents of international trade include value

added taxes on imports imposed by other countries. Multinational companies are also often

accused of poor working conditions, lack of environmental protection laws, unfair and

unethical practices, technological advances being copied and/or stolen, and increases in

human trafficking. Although each of these issues raises some very serious concerns, overall I

think the gains realized through international trade outweigh the negatives.

World Trade Organization & Free trade

The World Trade Organization is the international organization that over sees trade between

nations through negotiating and monitoring trade agreements of the nations that are

members. This organization ensures that trade flows freely between the countries that

participate, and ensures that the rules of free trade are being observed. It also negotiates

trade agreements for member countries. For countries to become members of the

organization their economic and trade policies must align with those of the WTO. This

organization is also responsible for handling any disputes that may arise between trade

countries. This WTO is what allows and promotes free trade throughout the

world. Currently there are 160 members representing 98% of world trade.
The United States currently has free trade agreements which expand to twenty countries.

These countries represent 6% of the worlds population, yet these countries purchase nearly

half of all US exports. Two the most popular free trade agreements are the North American

Free Trade Agreement between the United States, Canada and Mexico and the KORUS FTA,

between the United State and Korea.

The North American Free Trade Agreement has helped numerous small companies within the

US to export their goods and services to Canada and Mexico. This agreement also is said to

support 14 million American jobs and generates 1.3 trillion dollars annually to the US

economy.

The US-Korea Free Trade agreement was entered into in 2012 and is the US’s strongest and

most current agreement. Not only is it creating opportunities and expanding the American

job market, but it is allowing for Korean investment within the United States. These

agreements, as does all international trade, contributes to the continue economic growth and

prosperity of the industries and manufacturing within the United States

Although there are some arguments for restricting foreign trade such as the feeling that free

trade results in domestic job loss, poses risks to national security, promotes unfair

competition when all countries are not forced to play by the same rules, and the “Infant-

Industry” which protects new industries with temporary trade restrictions, the gains realized

from International trade are far greater and outweigh the potential losses than if

International trade was restricted.

When there is international trade there are winners and losers. However, the

gains of the winners exceed the losses of the losers. In closing I’ll quote one of the 10

Principles of Economics which states: “Trade makes everyone better off.”


References

The benefits of International Trade, US Chamber of Commerce

www.uschamber.com/international/international-policy/benefits-internationlal-trade

World Trade Organization

www.wto.org

Free Trade Agreement Benefits by Dana Griffin

http://smallbusiness.chron.com/trade-agreements-benefits-3832.html

What is NAFTA? Definitions, Effects & History

https://study.com/academy/lesson/what-is-nafta-definition-effects-history.html

The Pros & cons of Globalization By Mike Collins

https://www.forbes.com/sites/mikeecollins/2015/05/06/the-pros-and-cons-of-globalization

The Benefits of Free Trade: Addressing Key Myths

Mercantus Center-George Mason University/Policy Briefing 1/31/2017 by Donald J. Boudreaux

and Nita Ghei

https://www.mercantus.org/publications/benefits-free-trade-addressing-key-myth