International Trade and Labor in America: Key Economic Impacts

Introduction: The U.S. Economy and International Trade

The United States is currently the largest economy in the world, with a gross domestic product of $15.08 trillion. Despite its major achievements, the American economy faces tremendous challenges, including the lingering effects of the economic recession, an aging population, high growth in pension and healthcare costs, and a highly unbalanced national budget. The United States also carries one of the largest public debts in the world, representing 67 percent of its GDP (Central Intelligence Agency, 2013).

An important component of the American economy is its international trade relationships, which include both imports and exports. Key facts about U.S. trade include the following:

Exports account for $1.497 trillion, making the U.S. the fourth largest exporter in the world. Imports total $2.236 trillion, making the United States the largest importer globally. The current account balance stands at a negative $465.9 billion. The U.S. mainly trades in consumer goods, capital goods, industrial supplies, and agricultural products. The primary sources of U.S. imports are China, Canada, Mexico, Japan, and Germany, while the primary destinations for American products and services are Canada, Mexico, China, and Japan (Central Intelligence Agency, 2013).

To better understand the state of international trade in the United States, the phenomenon can be examined through multiple lenses. Two notable areas of analysis are the impact of international trade on key economic indicators — such as employment, unemployment, incomes, and equality — and the concerns surrounding relationships with specific trade partners. This paper addresses both of these issues.

Impact of International Trade on Employment and Unemployment

Employment

Employment levels within the United States are influenced, among other factors, by the levels of demand and supply for products and services. When domestic demand for U.S.-manufactured goods and U.S.-delivered services increases, employment rates rise accordingly. Similarly, when demand for these goods increases in foreign markets, U.S. employment levels also benefit. However, negative impacts on employment occur when demand for American products and services declines. More specifically, when U.S. exports are uncompetitive in the global marketplace — generally due to higher prices — demand for the domestic workforce decreases. Likewise, when domestic demand for locally produced goods falls, often as a result of high levels of cheaper imports from more cost-effective regions, U.S. employment is negatively affected (Feenstra, 2000). In the first scenario, employment suffers from decreased competitiveness of American exports; in the second, it is hurt by rising volumes of foreign imports.

Unemployment

The relationship between unemployment and international trade in the United States is essentially the inverse of the relationship between trade and employment. Specifically:

When U.S. international trade is characterized by high levels of foreign imports, unemployment within the country rises. This occurs because domestic products and services face reduced demand in local markets, decreasing the need for labor. Conversely, when trade operations feature high levels of exports and strong internal consumption, American products and services are competitive and in demand both nationally and internationally. Under such conditions of elevated demand, unemployment rates tend to fall, since demand for labor also increases.

Effects on Wages and Income Equality

Incomes

Employee wages in the United States follow a pattern similar to that of employment in relation to international trade. When trade operations are dominated by large volumes of imports, the wages of domestic workers are negatively affected. When trade is characterized by high demand and strong competitiveness of domestically produced goods and services, employee wages in the United States tend to increase.

While the relationship between international trade and employee wages is well established, it is worth noting that this relationship is weaker than the one between trade and employment levels. In other words, domestic and international demand do raise wages, and low demand does suppress them, but the effect is significantly smaller than the corresponding effect on employment (Feenstra, 2000). At a broad economic level, international trade operations affect the U.S. economy first through employment and only secondarily through wages.

Equality

Income equality is another important economic indicator influenced by international trade. Research has generally concluded that open trade operations stimulate wage increases and, in doing so, tend to have a negative effect on inequality — meaning they may reinforce it rather than reduce it at face value.

However, closer analysis reveals that the impact of international trade on income inequality depends significantly on a country's overall level of economic development. Open and free trade in developed countries tends to reduce income inequality, whereas open trade in developing nations tends to increase it (Aradhyula, Rahman, and Seenivasan, 2007). In the case of the United States, therefore, the impact of open international trade on income inequality is broadly positive, with a tendency for inequality to decrease as a result of expanded imports and exports.