Foreign trade is an essential part of the American economy. Countless American businesses depend on foreign consumers to boost their profits. And American consumers (both individual and industrial) depend on foreign suppliers to meet their demand for goods and resources.
|America's Leading Exports(in billions of dollars)||America's Leading Imports(in billions of dollars)|
|1||Civilian Aircraft||74||1||Crude Oil||341.9|
|4||Pharmaceutical Preparations||40||4||Car Accessories||64.9|
|5||Car Accessories||39.9||5||Other Household Goods||61.6|
|6||Other Industrial Machines||38.1||6||Computer Accessories||60.2|
|7||Fuel Oil||34.9||7||Oil Products||52.3|
|8||Organic chemicals||33.4||8||Cotton Apparel||49.5|
|10||Plastic Materials||31.6||10||Video Equipment||41|
Nations generally export goods that they can produce more efficiently than others, and they import goods that other countries can produce more efficiently. In the early nineteenth century, British economist David Ricardo explained all of this, and his ideas about comparative advantage continue to guide our thinking about international trade.
But the web of free trade Ricardo envisioned would not have been possible without the international currency agreements that facilitate commercial exchange. In the last decades of the nineteenth century, many commercial powers, including the United States, adopted an international gold standard—they agreed to back their currencies with gold and fix the rate of exchange. But the gold standard would not last forever; countries began to abandon the gold standard during the Great Depression. For a time, the US dollar replaced gold as the backbone of international commerce, but today currencies float freely—that is, their value relative to one another is shaped by supply and demand.
Governments work to protect the value of their currency so that their goods will trade easily. Many also work to protect their domestically produced goods from excessive foreign competition. Protectionist tools, such as quotas and tariffs, restrict imports and protect domestic industries and the jobs they provide. But many argue that protectionism undermines the benefits of free trade. The unrestricted flow of international goods inspires efficiency and innovation in the workplace, and ensures lower prices in the marketplace.
What would happen if the United States didn't trade with other nations? Well, for starters we would be drinking soft drinks only from bottles, since we import all of the bauxite needed to make aluminum. Oil rigs in Texas, Oklahoma, and Alaska would never reach paydirt since there is no domestic supply of the industrial diamonds needed for the drills. And July Fourth would fizzle since we get all of the strontium for our fireworks from Mexico.
In other walks of life, the impact would be just as dramatic. For example, we currently import more than 80% of the shoes we wear (get it, “walks of life”). It’s all but impossible to find an American-made television. And well over half of the oil we need to drive and lube our cars and machines comes from abroad.
Why don’t we just produce all of these things ourselves, you ask? Read on and David Ricardo will explain.