Hi I'm Adriene Hill and I'm Jacob Clifford and welcome to Crash Course Economics. 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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Thanks for watching, DFTBA.
