basics of trade

● definitions

● Imports - domestic purchase of foreign made goods and services

● Exports - sale of domestic maid goods and services abroad

● Free trade - absence of political barriers to international exchange

● The US is known for importing more than exporting. When focusing on the topic of trade, we're mainly referring to tangible stuff or consumer goods (e.g., parts and components for an automobile, legal and financial services, etc.) you can hold that are traded at increased frequencies around the world today. It is important to note who America's top 15 trade partners are as of 2018: China, Canada, Mexico, Japan, Germany, South Korea, United Kingdom, France, India, Italy, Taiwan, Netherlands, Brazil and Ireland.

● why trade?

● You might be thinking, like me, the best possible outcome would be to be self-sufficient as a country and grow our own food and have access to our own fuel. Perhaps we don't want to trade services and goods that are sensitive to our national security. The first trouble with this is that there aren't that many countries that are able to be self-sufficient entirely. The second trouble is that it's just not a good idea thanks to the law of comparative advantage. Comparative advantage in a nutshell says, "Specialize your domestic production in the goods and services you're good at making"; don't bother wasting time with the things that you don't make well and trade for those things. So when you master the domestic economy and you make it available to free trade while all the other countries in the world does that, we got extra stuff made that's available to spenders at inexpensive prices which creates an economic welfare increase! Comparative advantage is nearly a 200-year-old principle that assists with explaining why States have slowly liberalized the economies over the decades.

● comparative advantage

● More specifically, comparative advantage is assessed in a specific way that makes you ask yourself how much does it cost me, a given economy in a worldwide marketplace, to create a specific product related to creating some other product; what's the proportion of the cost for my marketplace to produce product A, relative to producing product B and how does the ratio compare to a trade mate? Predominantly, if my marketplace can produce something more inexpensive then my trade mate can, then I have competitive advantage and I should be making product A instead of product B; maybe the trade partner should make product B instead and if we master trading with one another, we will be better off. Basically, this is not about how rich or grand your economy is, it's not about how much products you can produce, it's about the costs related to the trade mate; any two countries can benefit from trading with each other.

● What's important to note right now is that comparative advantage comes with a couple of crucial policy predictions. Comparative advantage gives us the reason to why it is in the States best interest to beautify the domestic marketplace and involve themselves in free trade. It says a countries are just better off when you're only focusing on producing what you make skillfully while dismantling political obstacles that may muffle your economy from worldwide competition. In summary, comparative advantage believe tariffs are not good, recent trade wars are not good, and running a trade deficit is not technically a bad idea. Comparative advantage simply predicts that trading makes everybody welfare-enhancing.

● Is this true though? Will comparative advantage give us higher wages, better jobs, extra money in our bank accounts, a good quality life because the foreign goods in the store are cheaper because they were imported and maybe we'll have more options as a result of free trade. Despite all this, some people believe there is a downside to comparative advantage and in order to analyze whether or not comparative advantage is the route to take we need to look at the assumptions of the comparative advantage.

● Assumptions:

● Products are homogenous; it does not take into consideration the possible differences in the traits of the good and the quality of the good that might be important to us or comparative advantage assumes that the beer and the wine made in England is just as good as France's beer, all that matters is the price. That, however, might not be true. We might believe that specific countries are more efficient at making certain goods. For instance, we might prefer Italian leather shoes because we think there is a premium that is to be placed on a luxury good like that. Italy doesn't particularly have a comparative advantage when producing shoes, but it produces high quality shoes. Despite of all this, competitive advantage does not consider that kind of example into account.

● Transportation costs are zero but in actuality they are not especially decades or even centuries ago where transportation was immensely costly. This factor is going to influence trade when it comes to specific partners around the world (e.g., sending a good to a certain part of the country might cost a lot of money, the good will spoil before arriving there, etc.). Again, transportation costs are not zero.

● Demand is constant.

● The costs of economic adjustment are zero:

● trade's costs

● Adjustment costs are the price that a marketplace earn for adjusting or adapting to changes in the worldwide market forces. For example, let's say I need for a particular good goes away. Does that mean my job to make that good is safe? Unfortunately, comparative advantage doesn't say anything about this process which is a huge disregard. This is where understanding the politics of free trade starts. As you liberalize the marketplace, some businesses die off. Maybe that's an efficiency benefit from a traditional economic point of view. On the other hand, we must remember that comparative advantage is saying that the United States probably should stop making so much steel or maybe you shouldn't have apparel or textile businesses because these products can be made better somewhere else (e.g., China, Mexico, etc). Aside from all this, it is just not that simple. The policy issue is now how can we establish trade policies that eases the blow of globalization on those parts of the local marketplace that suffer from marketplace openness.

● protection

● There is one well known policy established from observing the trade wars around the world that protects workers from market competition it's to hold back their free trade commitments; maybe too much liberation in the marketplace is bad. What we probably want to do is build a wall around domestic economy, at least around certain industries, from the production over the increasing protectionist barrier commonly known as tariffs. Tariffs are simply taxes on goods. So, if you want to narrow the gap between the more expensive local goods and the inexpensive foreign goods and increase the demand for products made locally, you add tariffs which have been a common behavior from the US in recent years. This is also occurring across the Atlantic, not just the Pacific. There are dozens of other different forms of trade barriers like the technical method of limiting imports from an economy by having a lot of mysterious regulatory protections that the producers may not have the capability of navigating but the most important protection we will focus on to protect the losers from globalization is tariff barriers.

● We charge tariffs because taxes on imports create expensive foreign goods which increases demand for products made locally. For instance, the Trump administration increased tariffs on steel imports. Basically, Alabama, Ohio and Pennsylvania steel mills we're hurting terribly from cheap steel made from Mexico, China, sometimes South Korea, etc. Therefore the Trump administration made the foreign steal more expensive with tariffs on them, increasing the number of US consumers buying from Ohio, Alabama and Pennsylvania. As you probably already know, tariffs is one of the United States' source of income. Tariffs, though, are the bread crumbs of America's bank account, although that was not always the case historically. As a matter of fact, the first piece of legislation ever created through the US Congress was a tariff because in the late 1700s, the newly formed USA needed money.

● Tariffs are supposed to protect domestic industries. However, administrations in the US undergo intense criticism from political opponents especially from economists who claimed that tariffs are a bad idea.

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