Why International Trade and Investment Are Good for the US Economy: A Story in Eight Charts

Trade and investment across borders drive
economic growth. American consumers enjoy greater access to cheaper and more varied
goods as a result. Trade also encourages the most productive American firms and industries
to innovate and raise standards of living—in the US and worldwide. Does trade make every single person better
off? Not necessarily. But on balance, trade and investment are overwhelmingly beneficial
for Americans. This is Cathleen Cimino with eight charts illustrating the benefits. Trade keeps the US economy growing. Since
1960, trade in the US on average has grown at double the rate of growth of the economy
as a whole. Exports of goods and services—produced by businesses employing millions of Americans—are
fourteen times what they were six decades ago. Trade is also a critical engine of world
growth. In 1960, two-way trade in goods and services
accounted for only 9 percent of the US economy. Today it is about 30 percent. Meanwhile, the
amount of US investment has expanded in other countries, from 5 percent of US GDP to 28
percent today. But that is only half the story. Over the same period, foreign companies have
invested increasingly in factories and services in the US. Cross-border investment and trade reduce costs
and improve the quality of consumer goods like cars, electronics, and appliances. Likewise,
trade, investment and new technologies spread innovation and raise standards of living around
the world. Trade pushes countries to produce and export
what they are relatively more efficient at making. This is called comparative advantage.
The US has abundant skilled-labor and has become one of the world’s leading exporters
of high-tech machinery, electrical equipment, vehicles and other capital goods. The same
can be said for US exports of business, professional and technical services.
The chart shows the trend of higher average earnings in manufacturing industries that
export more per worker. More broadly, workers producing US exports are higher paid on average,
by 16 to 18 percent more than other workers. And by all metrics, exporting industries are
generally more productive than non-exporting industries. Not many Americans realize how the nature
of trade has changed. In general, the phrase “Made in America” has become obsolete.
Now 80 percent of global trade takes place across global supply chains and within multinational
corporations that send services, components, and final goods to and from locations at home
and abroad. An iPhone makes huge profits for Apple. But
just as the design, software and certain components of the device are made in California, Arizona,
Indiana, and Kentucky, other parts come from Japan, Taiwan, and Korea. The main assembly
takes place in China. As a result, Apple’s software engineering, programming, and retail
jobs are supported by manufacturing activity abroad. So, US production processes rely on multiple
countries forming parts of the supply chain. Foreign value-added has increased across most
sectors since the mid-1990s and is especially important in industries like chemicals & minerals,
textiles & apparel, and transport equipment. Put simply, imports are essential to US production
and exports! You may hear critics say that “exports are good and imports are bad,”
but that misses this key point. Export competitiveness relies on access to high-quality, low-cost
imports. Growth in trade and growth in investment are
closely related. A lot of people blame investment abroad by multinationals for the loss of US
jobs. But the data shows a complementary relationship: when US multinationals employ more people
in their foreign affiliates (the blue bars) or sell more goods overseas (the red bars),
they also employ more workers at home. They also increase their domestic sales, capital
expenditures, and spending on research and development.
The other side of the story is that foreign firms investing in the US often seek high-skilled
workers and pay better wages than the average US firm. The two-way expansion of trade and investment
does mean that some firms shut down and some jobs are lost. But other firms expand and
new and higher-paying jobs are created. Job losses are concentrated within certain
industries and regions. But job losses from trade are only a small percentage of the millions
of displaced workers who involuntarily lose their jobs each year. Meanwhile the Dept.
of Commerce estimates that, for every $1 billion of US exports, more than 5,500 jobs are created. Some critics also say that trade deficits
produce unemployment. But in fact, there is no positive correlation: in recent decades,
when the US trade deficit (the red line) has increased, unemployment (the blue line) has
generally gone down. When the economy is doing well and trade is expanding, consumers buy
more, including more goods from overseas. Import competition is a factor in the loss
of jobs in low-skilled manufacturing. But a more important cause of economy-wide job
losses are labor saving technologies like ATMs and robots that assemble cars. Yet these
technologies enable huge gains in productivity, measured by output per worker.
Data shows that manufacturing employment growth (the green bar) has declined, but manufacturing
output (the red bar) is growing faster today than in previous decades. The US needs to increase trade and investment
and take advantage of the gains they produce. To do so, US policy must also continue to
enable firms and workers to realize these benefits. This means upgrades in infrastructure,
lower corporate tax rates, and expanded training to improve skill level in the workplace. Another
crucial step is helping those who do lose jobs because of trade and technology by providing
education, training and job opportunities. Another way to take advantage of the benefits
of trade and investment is to conclude pending agreements with Asia, the Western hemisphere
and Europe. But that is the subject of another video coming soon from the Peterson Institute.

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