Today we're going to talk about international trade. So we all know our stuff is from everywhere.

Bangladesh, China, Vietnam, China again,

but what does it actually tell us about the global economy or the US economy?

And who's is benefitting from all this trade. And who's gonna clean all this up?

[Theme Music]

International trade is the lifeblood of the global economy. Basically when a good

or service is produed in, let's say, Brazil and sold to a person or business in the

US, that counts as an export for Brazil and as an import from US. As you might

expect, the United States is the world's largest importer because Americans love

their stuff. In 2014 Americans import over two trillion dollars worth of stuff,

like oil cars and clothing from countries all over the world. And if you

look around your local big box store, it feels like everything is made in China.

And we do import a lot of things from China but in terms of both imports, and

exports our largest trading partner's not China, it's Canada. The US and Canada trade

over six hundred billion dollars worth of goods and services each year.

The US imports a lot from Canada but exports almost as much. In fact, the United States is

the world's second-largest exporter. It sells high-tech things like

pharmaceuticals, jet turbines, generators and aircraft to countries all over the world.

It also exports intellectual goods like Kanye West albums and Pixar movies as

well as bulk commodities like corn, oil and cotton. The annual difference between

a country's exports and imports is called net exports. So if Brazil exports 250

billion dollars worth of goods and imports 200 billion that its net exports

are fifty billion. That means Brazil has a trade surplus. In 2014, net exports in

the usmore negative 722 billion dollars. That's what you call a trade deficit.

Some people assume that having a trade deficit is inherently bad. Why does the

US import nearly all of clothing? Why can't we clote ourselves?

US producers could easily make more than enough clothing to keep all of us

dressed. But they don't because they focus on other things that they're better at

producing. The US buys clothes from other countries because we can get them

cheaper than if we made them here. This is the value of international trade. It

doesn't make sense to make everything on your own if you can trade with other

countries that have a comparative advantage. It's worth mentioning here

that these savings sometimes come with other costs, especially for the people

who are producing these goods overseas. Unsafe and unfair working conditions, and

environmental degradation can be ugly side effects of

internnational trade. And we're gonna talk about that. For today though let's get a handle

on trade deficits. It can seem like exporting would make a country wealthy

while importing would make it poor. After all, if we buy products produced in other

countries than were shipping jobs overseas, right? Well only to an extent.

Imagine that I have a choice of buying an American made TV or a TV made in

Malaysia. Because of lower labor costs in Malaysia the imported TV cost $200 less

than the American made one. So I buy the imported TV. That may cost jobs at a TV

factory in the US but I saved $200 by buying the imported TV. And what am I

gonna do with those $200? I'm gonna spend them on something I couldn't have

afforded if I bought the US TV. Like maybe taking my family out to a baseball game

or to a restaurant. That creates jobs in those industries that wouldn't have

existed if I'd bought the more expensive TV. Economic theory suggests that

international trade reshuffles jobs from one sector of the economy to another, like

from the TV factory to the restaurant. But the quality of these jobs can be

markedly different. The guy assembling TVs at the US factory was probably

making a lot more at his manufacturing job before he got reshuffled to the burrito

assembly line at Chipotle. Which is just to say all this is really complicated

and what is good in the aggregate is not necessarily good for individuals. For

example, look at the North American Free Trade Agreement or NAFTA. It was

established in 1994 to drop trade barriers between Canada, the United

States and Mexico. Critics point out that NAFTA significantly increased US trade

deficits and they say it decreased the number of manufacturing jobs in many

states, as companies moved out of the US. Proponents of free trade point out that

the US economy boomed in the 1990's, creating millions of jobs including manufacturing jobs, and that free trade

has decreased the prices of all sorts of consumer goods, from vegetables to cars. So despite the fact

that some workers and industries were clearly hurt, economist would tell us

NAFTA's had a net positive impact on all three countries. By the way, you know

Thought café, the makers of the Thought Bubble? They're Canadian. These

graphics are imported. The debate over the value of specific trade agreements

continues. But it's unlikely that the world's largest economies will return to

strict protectionism. Protectionist policy, like placing high tariffs on

imports and limiting the number of foreign goods, usually hurts an economy

more than it helps. There are now several organizations designed to eradicate

protectionism, most notably the World Trade Organization or WTO. The WTO has been

effective in getting countries to agree to specific rules and help settle

disputes but it's also been accused of favouring rich countries and not doing

enough to protect the environment or workers. Trade between countries depends

on the demand for a country's goods, political stability and interest rates,

but one of the most important factors is exchange rates. Basically this is how

much your currency is worth when you trade it for another country's currency.

And let's engage in some foreign trade now by going to the Thought Bubble. Suppose the

US-Mexico exchange rate is 15 pesos to the dollar. If an American's on vacation in Mexico and wants to

buy some sunscreen that cost 60 pesos, they'll have to trade four dollars for pesos. Likewise if someone from

Mexico is on vacation in the US and wants to buy a $20 t-shirt she will need to exchange 300 pesos for

dollars. Now one let's think about what happens if the exchange rate goes up to twenty

pesos per dollar. Now to buy that 50 peso sunscreen in mexico it'll cost the American

tourist $3 instead of four. We say that the dollar has appreciated. At the same

time the Mexican tourist who wants to buy the $20 t-shirt will need four

hundred pesos instead of 300. It works the same way with imports and exports.

When the dollar appreciates, it gets cheaper for US consumers to import

foreign goods, and US exports to other countries get more expensive. US imports

rise and export fall. On the other hand

what if the exchange rate fell to 10 pesos per dollar? Now to buy that

sunscreen, the american tourist needs $6. Each dollar has gotten less powerful. We

say that the dollar has depreciated. At the same time, the Mexican tourist who

wants to buy the $20 t-shirt needs only two hundred pesos. So when the dollar

depreciates, foreign imports get more expensive which means they fall, and US

exports to other countries get cheaper which means they rise.

Most currencies, like the peso and the dollar have floating exchange rates that

change based on supply and demand. Like when the US imports more products from

Mexico, they exchange dollars for pesos. This will increase the demand for pesos,

and peso will appreciate. At the same time, the dollar will depreciate. Now some

countries have elected to peg their currency to another currency. This is

when a country's central bank wants to keep the exchange rate in a certain

range, and they buy or sell currencies to keep it in that range. The Chinese

government was well known for buying US dollars to keep the Chinese currency

artificially depreciated. When the US's importing goods from China, the yuan

would appreciate. Than the Chinese government would turn around and buy

dollars which kept the exchange rate about the same. This kept Chinese exports

cheap for Americans. Up to this point, we focused on exporting and importing goods

and services but there's a whole other side of international trade that involves

financial assets. Let's look at something called the balance of payments. It might

feel more like accounting than economics, but it helps to show how flows of money and

flows of goods and services are opposite sides of the same coin. Every country

keeps an accounting statement called the balance of payments that records all

international transactions. It's made up of two sub-accounts, the current account

and the financial account, sometimes called the capital account. The current

account records the sale and purchase of goods and services, investment income

earned abroad, and other transfers like donations and foreign aid. So when the US buys

fifty billion dollars of computers from China, that's recorded in the US current

account. So this is a simplification, but when Americans spend money on Chinese

goods, the people in China, in theory, have only two things they can do with that

money. They can buy US goods, or they can buy US financial assets, like stocks and

bonds. These transactions are recorded in the other side of account, the financial

account. There is a reason why the flow of goods and the flow of money are

symmetric. If consumers, businesses, and government want to buy more stuff than their

country is producing domestically, they have to import it. So there's a trade deficit. That country has to sell

assets to pay for those imports, and that's recorded in the financial account. The United

States has a very low savings rate which means it's consuming everything it's

producing and it sells assets to pay for the additional output it brings in from

overseas. Americans are choosing to run a trade deficit. International trade, like

everything else in economics, is about trade-offs and choices and winners and

losers. In purely economic terms trade deficits and surpluses are the result of

people and nations seeking their own self-interests. But while everyone is

acting in the self-interested way, international trade doesn't always meet

our individual interests. What might be good for the wider global economy, might

be really bad for me or my hometown. But in the aggregate, trade does improve the

global standard of living. It's just sometimes hard to see up close. Thanks for watching, we'll see you next week.

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