6 Benefits of International Trade That Outweigh the Deficit

Trade, Deficit

6 Benefits of International Trade That Outweigh the Deficit

With all the talk of international trade and trade deficits, it’s a good time to ask ourselves who benefits from international trade. We’ll answer that for you right away—everyone.

Trade deficit is simply the ledger kept as countries exchange products and services. It’s a term defining when one country’s imports exceed the exports. A trade deficit is an outflow of domestic currency to foreign markets, not a debt owed to another country. It’s not necessarily a bad situation and corrects itself over time. Economists get worried when large amounts of the U.S. dollars are held by foreign nations, which may decide to sell at any time. The increase in dollar sales would drive the value of the currency down, making it more costly for the U.S. to purchase imports.

Let’s look at the most significant benefits of international trade:

  1. Greater variety of goods: Consumers in both nations enjoy wider variety of products that improve their quality of life and help their countries grow.
  2. Efficient resource allocation: Since countries tend to produce goods in areas where they have a comparative advantage, resources are better allocated, and waste is reduced. It provides countries with marketing power and helps the environment through reduced waste.
  3. Production efficiency: As countries adopt more efficient production methods to keep costs down and remain competitive, they become more efficient. Productivity and efficiency are key, because countries that produce a product at the lowest possible cost will be able to gain larger share in the market. Through this product standards and quality are increased for everyone.
  4. Employment opportunity: Employment opportunities arise for the country generating the goods and services as the market expands. Newer industries cater to new demands of various countries.
  5. Lower cost: The receiving country has cheaper access to goods and services that either cannot be produced within its borders or production costs may be high. The cost savings can be passed to the consumer.
  6. Fosters peace and goodwill: International trade fosters peace, goodwill, and mutual understanding among nations. Trade between countries with bad relations often improves the cultural relationship and can even prevent war between them.

Overall, international trade is a good thing for the U.S. The inflow of foreign capital allows our level of domestic investment to exceed our level of national savings, fueling productivity and growth. Cutting of the inflow of foreign investment would lead to higher interest rates.

Read more: 8 Benefits of International Trade

Free Trade Versus Protectionism

As with just about any topic, there are opposing views regarding how international trade should be managed from a U.S. perspective. These contrasting viewpoints are regarding the level of control placed on trade: free trade and protectionism. Free trade is the simpler of the two theories. It’s a laissez-faire approach (French for ‘leave alone’), with no restrictions on trade. The main idea is that supply and demand factors, operating on a global scale, will ensure that production happens efficiently. Therefore, nothing needs to be done to protect or promote trade and growth, because market forces will do so automatically.

In contrast, protectionism supports the theory that regulation of international trade is important to ensure that markets function properly. Advocates of this theory believe that market inefficiencies hamper the benefits of international trade and they aim to guide the market accordingly through tariffs, subsidies, and quotas. These strategies attempt to correct any inefficiency in the international market.

Read more: What Is International Trade? | Investopedia

Trump’s Plan

What’s President-Elect Donald Trump’s Plan for International Trade? Let’s take a look at the plan described on his website, https://www.donaldjtrump.com/policies/trade , which leans heavily in favor of free trade:

  1. Withdraw from the Trans-Pacific Partnership, which has not yet been ratified.
  2. Appoint tough and smart trade negotiators to fight on behalf of American workers.
  3. Direct the Secretary of Commerce to identify every violation of trade agreements a foreign country is currently using to harm our workers, and also direct all appropriate agencies to use every tool under American and international law to end these abuses.
  4. Tell NAFTA partners that we intend to immediately renegotiate the terms of that agreement to get a better deal for our workers. If they don’t agree to a renegotiation, we will submit notice that the U.S. intends to withdraw from the deal. Eliminate Mexico’s one-side backdoor tariff through the VAT and end sweatshops in Mexico that undercut U.S. workers.
  5. Instruct the Treasury Secretary to label China a currency manipulator.
  6. Instruct the U.S. Trade Representative to bring trade cases against China, both in this country and at the WTO. China’s unfair subsidy behavior is prohibited by the terms of its entrance to the WTO.
  7. Use every lawful presidential power to remedy trade disputes if China does not stop its illegal activities, including its theft of American trade secrets – including the application of tariffs consistent with Section 201 and 301 of the Trade Act of 1974 and Section 232 of the Trade Expansion Act of 1962.

Read Donald J. Trump’s 7 Point Plan To Rebuild the American Economy by Fighting for Free Trade, here.

As an outside reference, a recent Wall Street Journal article indicated a Trump administration would focus U.S. trade policy on trying to reduce trade deficits. “Mr. Trump hasn’t released a blueprint for his new vision of NAFTA, but his comments and those of his advisers suggest they want big changes,” according to the newspaper. “Among the likeliest would be special tariffs or other barriers to reduce the U.S. trade deficit with Mexico and new taxes that would hit U.S. firms that moved production there, according to Trump advisers.”

Regardless of your outlook for how trade should be regulated, the bottom line is that trade opens up the opportunity for more efficient use of resources. It has the potential to maximize a country’s capacity to produce and acquire goods. Opponents of global free trade have argued, however, that international trade still allows for inefficiencies that leave developing nations compromised. What is certain is that the global economy is in a state of continual change, and, as it develops, so too must all of its participants.

At Paradigm Life our priority is to offer free financial education. And because continual economic change can create uncertainty, we always recommend that our clients build wealth outside of volatile markets. We know that a real financial plan must include other areas such as debt management, large expense planning, tax planning. We always recommend what we call The Perpetual Wealth Strategy. It’s a financial system that uses permanent life insurance as the investment vehicle.

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