Trade, Trade Barriers, and Trade Deficits: Implications for U.S. Economic Welfare

Publication Date: May 2006

Publisher: Library of Congress. Congressional Research Service

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Research Area: Economics

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Abstract:

This report provides an overview of the economics of international trade that may be helpful for consideration of many recurring international economic policy issues. It is intended as a general explanation of mainstream economic principles that may be considered in gauging the economic significance of trade issues as well as the trade-offs inherent in many policy choices. A fundamental tenet of economics is that international trade is a means to a higher standard of living for all trading nations. The post-war era has seen a rapid expansion of trade and the United States has been a major participant in this process both as a trading nation and as a leader in the steady lowering of barriers to trade worldwide. The significant benefit of trade does not come without disruption and cost, however. Gaining the benefit of trade and also treating equitably those hurt by trade is often a difficult public policy issue.

There is recurring congressional concern about the effect of trade on U.S. economic welfare. Current issues include bilateral and multilateral trade liberalization initiatives, steel dumping, export controls, and the rapidly growing trade deficit. This report provides a brief overview of the economic arguments for free trade, common arguments for trade barriers, and the cause and economic significance of persistent large trade deficits. A central theme is that the economic benefit of specialization and trade is a fundamental aspect of economic life whether for the individual, region, or nation. This benefit is mutual, enriching each trader; moreover, the gain from trade can accrue to a trading partner even if that partner is less efficient in the production of all tradable goods. Trade can also lead to economic gains by allowing a fuller use of economies of scale and by inducing productive innovation. Trade is, however, a disruptive force as well, advancing the economic position of relatively efficient activities, but diminishing that of relatively less efficient activities. This process will often place significant economic and social costs on workers and industries in adversely affected activities.

Arguments for trade barriers come in many forms but none is generally accepted by economists. Trade barriers are often seen as a redress to the social and economic costs of trade or as a way of enhancing economic advantage. In most cases, however, economists argue protection from trade imposes costs on the economy that exceed the benefits obtained. These costs can arise from inefficient resource allocation, intractable implementation, and foreign retaliation.

The trade deficit is not a necessary aspect of trade, nor is it caused by foreign trade barriers. A trade deficit is rooted in macroeconomic behavior at home and abroad. The deficit is a means for the nation to spend beyond current production, with a like sized inflow of borrowed foreign capital that funds the added spending. Spending beyond current production, particularly on investment, can confer significant benefits. But, borrowing will entail some level of cost as debts are repaid.

This report will be updated infrequently with changes in economic knowledge and with current trade data.