International Trade Winners and Conflicts
By admin August 9, 2018

Undeniably, international trade has boosted economies. Consumers have benefited with cheaper price on goods and services than they are willing to pay. Producers also have benefited with higher price on goods and services than they are willing to sell. In economic terms, we call it consumer and producer ‘surplus.’ This condition has been sustained because international trade connects each of different economies around the world, serving as one big global market. What I mean by ‘different economies’ here is that there are labor-abundant and capital-abundant countries. This difference makes labor-abundant countries focus on labor-intensive industry such as manufacturing while capital-abundant countries focus on capital-intensive industry such as service industry. We can find this example quite easily: The United States and China.

The Trade War between two countries, perhaps, was expected to happen long time ago. Both countries imposed a high tariff on each other’s products. As for China, China is not what it used to be. China’s labor is no longer cheaper than other economies. China has seen a remarkable economic growth over the past decades, making itself as the second largest economy in the world. As a result, the domestic economic activity is vibrant, and people are demanding a higher wage. Even with 1.3billion people, the country can no longer be defined as a labor-abundant country. The total employable population is also decreasing, which will force China to pursue more advanced and less labor-intensive industry in the future.

The United States, with a competitive service industry, has invested in advanced technology for a long time. Therefore, China’s industrial and economic change signaled the U.S. that producers in the U.S and China will now compete with each other for the global market consumers. However, two countries are now very closely linked in terms of economy.

We can begin to explain this interdependence using the “Balance of Payment.” In 2017, the U.S. had a trade deficit of $566 billion. Out of its trade deficit, $375 billion is held by China. On the other hand, capital is coming back to the U.S. as the foreign governments are lending money, contributing to a huge financial account surplus for the U.S. Balance of Payment. In other words, the US consumers have enjoyed a low price of goods and services because foreign governments have kept lending money to the U.S.

Secondly, are American producers, mainly companies, losing in the international trade? The answer to this question is complicated by multinational corporations. U.S. multinational corporations are the biggest winners of international trade. Nowadays, multinational corporations account for over 50% of global trade. In the U.S., the top 500 industrial corporations reap over 70 percent of all US profits. Now, with high tariffs affecting this global value-chain network, multinational companies are facing a huge loss in sales.

To sum this all up, both consumers and producers can benefit from ‘International Trade’ as long as both parties can participate in international trade with competitiveness.


Further reading

Trade wars, Trump tariffs and protectionism explained

U.S. Trade Deficit With China and Why It’s So High

The U.S. Current Account Deficit — Threat or Way of Life?

Thanks for sharing !

Comments are disabled.