The Role Of Trade

Americans have not had to pay nearly as much attention to international trade as people in other countries, such as Britain or Holland, whose economies have been more dependent on such trade for centuries. Still, American overseas trade has been growing in recent years, not only absolutely but also as a percentage of the U.S. economy. The ratio of the total international trade of the United States-combining exports and imports to the total output of the American economy was just 8 percent in 1950 but was 26 percent by 2000. Moreover, even in the past, the modest share of international economic transactions in the American economy was nevertheless significant in transforming the United States from a predominantly agricultural nation into a major industrial power.

In addition to the large foreign investments that went into creating leading American railroads in the late nineteenth century, as noted in chapter 20, even earlier-in the 1820s and 1830s-foreign purchasers of state bonds financed the digging of canals, the construction of urban public works, and the creation of banks in the United States. Later, in the post-Civil War period, foreign investments financed 15 percent of all the net capital formation in the United States from 1869 to 1875. In short, while international trade and international financial transactions have not played as large or as visible a role in the economy of the United States as in the economies of some other countries, that role has not been negligible.

International trade is basically a further extension of the division of functions that marks every modern economy. There was a time, not many centuries ago, when farm families provided themselves with food, shelter, and even clothing made with their own hands. They grew their own fruits and vegetables, raised their own livestock to provide meat, milked their own cows and even made their own cheese. Homespun clothing was common as well on the American frontier. A remarkable degree of economic self-sufficiency is possible, even at the level of the individual family. But that only raises the question: Why did this way of doing things die out? Why did people begin to purchase all these things from other people who specialized in producing particular goods?

The answer is of course that specialists could produce better products at lower costs. But, so long as family farms were isolated-that is, could receive specialized products only with high transportation costs added-a self-sufficient way of life made sense. But, once the transportation system was able to bring a wheat farmer numerous consumer products at affordable prices, and to carry his wheat to market at lower cost, it made more sense for the family to spend their time growing more wheat, instead of making homespun clothing, because they could buy their clothing with what they earned from selling more wheat, and still have something left over. Everything depends on whether the time and efforts required to produce their own clothing directly would yield more clothing in the end if put into growing wheat to sell.

That same principle applies not only to clothing but to other products as well-and regardless of whether those products are produced within the same national borders or on the other side of the world. That is the basis for international trade. Although this is often described as trade between nations, it is in fact trade between individuals. Each individual decides whether what is bought is worth it, in the light of other options available. Each Frenchman decides for himself whether he wants to see a movie made in Hollywood and each person in Singapore decides whether to buy a camera made in Germany or Japan.

International trade is not a zero-sum contest between nations, but a wide array of voluntary transactions between individuals living in different countries, who must all gain if these transactions are to continue. International trade is just one more way of getting more output from scarce resources which have alternative uses.

Just as trade restrictions such as the American Hawley-Smoot tariffs of the 1930s damaged the already ailing U.S. economy of the Great Depression, the North American Free Trade Agreement of 1993 helped enhance the prosperity of the 1990s, creating more jobs and reducing unemployment to record low levels, despite the cries of protectionists that NAFTA would lead to a massive flight of jobs from America to low-wage countries elsewhere. .

The growth of international trade and international finance over the years is one sign of the benefits it produces. This growth has generally exceeded the growth of the national economies involved, so that international transactions have become a larger proportion of all transactions. Even an economy like that of the United States, where international trade played a relatively small role at one time, has seen its international component rising, both in trade and in investment in and from other economies.

Third World countries and formerly Communist countries which once severely restricted their international economic transactions have increasingly opened up their economies to the international economy. The term "globalization" has been used to describe this process of expanded international commerce and investment, though there has long been much global economic activity by particular countries and enterprises. The British, for example, built the first railroads in many countries, from India to Argentina and from Australia to West Africa. The leading manufacturer of agricultural machinery in czarist Russia was the American firm International Harvester.

During the colonial era in East Africa, entrepreneurs from India were so dominant in the economy that rupees became the common currency in the region. In short, "globalization" is a new name for an old phenomenon, but one that has become even more important in recent times.

Globalization undoubtedly harms some businesses and industries and costs some people their jobs. But so do any other ways of creating greater efficiency in the allocation of scarce resources which have alternative uses. Opponents of free trade try to depict it as harmful to the society as a whole, and appeal to a sense of "us" against "them," as if other countries are in some way making Americans worse off by selling them things that they want to buy.

Like anything else that allows goods and services to be produced more cheaply or better, international trade benefits the consumers while reducing profits and employment among those who produce more costly or obsolete products. Protecting the less efficient producer makes no more sense internationally than it does domestically. Whatever jobs are saved in either case do not represent net savings for the economy as a whole, but only the saving of some jobs by sacrificing others, along with sacrificing the consumer. When particular jobs and businesses succumb to more efficient competition, whether domestic or international, resources which have alternative uses can go to those alternative uses and thus add to the national output. It is not a zero-sum game. Conversely, preventing such transfers saves relatively few jobs at very high costs per job, as in the European Union countries, or saves jobs in one industry at the expense of more jobs in other industries, as in the case of the American steel tariffs.

International trade is one way of sharing in the advantages that other countries have in producing particular products. Together with international investments, this is also a way to share in the technology and organizational advances made in other countries, as well as in agricultural produce transplanted from other parts of the world, such as the rubber transplanted to Malaysia and the cocoa transplanted to Ghana-with each of these countries becoming the world's leading producer of their respective transplanted products at one time.

Perhaps the most important international transplants have been human beings. The vast majority of the populations of the Western Hemisphere have been transplanted, mostly from Europe, but also from Asia and Africa.

With them have come widespread changes in the prevalent technology of the hemisphere, as well as changes in political and other ideas. Nor has this transfer of "human capital" stopped in later centuries. The 1990 U.S. Census revealed that there were more than two and a half million highly educated people from Third World countries living in the United States, not counting students. Meanwhile, 40 percent of all emigrants from the Philippines were college educated.

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