0: Hi I'm Adriene Hill and I'm Jacob Clifford and welcome to Crash Course Economics.

4: Today we're going to talk about international trade. So we all know our stuff is from everywhere.

10: Bangladesh, China, Vietnam, China again,

13: but what does it actually tell us about the global economy or the US economy?

17: And who's is benefitting from all this trade. And who's gonna clean all this up?

20: [Theme Music]

29: International trade is the lifeblood of the global economy. Basically when a good

33: or service is produced in, let's say, Brazil and sold to a person or business in the

37: US, that counts as an export for Brazil and as an import from US. As you might

41: expect, the United States is the world's largest importer because Americans love

45: their stuff. In 2014 Americans imported over two trillion dollars worth of stuff,

50: like oil, cars and clothing from countries all over the world. And if you

53: look around your local big box store, it feels like everything is made in China.

57: And we do import a lot of things from China but in terms of both imports, and

61: exports our largest trading partner's not China, it's Canada. The US and Canada trade

66: over six hundred billion dollars worth of goods and services each year.

69: The US imports a lot from Canada but exports almost as much. In fact, the United States is

73: the world's second-largest exporter. It sells high-tech things like

76: pharmaceuticals, jet turbines, generators and aircraft to countries all over the world.

81: It also exports intellectual goods like Kanye West albums and Pixar movies as

84: well as bulk commodities like corn, oil and cotton. The annual difference between

88: a country's exports and imports is called net exports. So if Brazil exports 250

93: billion dollars worth of goods and imports 200 billion that its net exports

98: are fifty billion. That means Brazil has a trade surplus. In 2014, net exports in

103: the US were negative 722 billion dollars. That's what you call a trade deficit.

108: Some people assume that having a trade deficit is inherently bad. Why does the

112: US import nearly all of its clothing? Why can't we clothe ourselves?

116: US producers could easily make more than enough clothing to keep all of us

120: dressed. But they don't because they focus on other things that they're better at

124: producing. The US buys clothes from other countries because we can get them

128: cheaper than if we made them here. This is the value of international trade. It

133: doesn't make sense to make everything on your own if you can trade with other

136: countries that have a comparative advantage. It's worth mentioning here

140: that these savings sometimes come with other costs, especially for the people

145: who are producing these goods overseas. Unsafe and unfair working conditions, and

150: environmental degradation can be ugly side effects of

154: international trade. And we're gonna talk about that. For today though let's get a handle

159: on trade deficits. It can seem like exporting would make a country wealthy

163: while importing would make it poor. After all, if we buy products produced in other

167: countries then we're shipping jobs overseas, right? Well only to an extent.

172: Imagine that I have a choice of buying an American made TV or a TV made in

177: Malaysia. Because of lower labor costs in Malaysia the imported TV cost $200 less

183: than the American made one. So I buy the imported TV. That may cost jobs at a TV

188: factory in the US but I saved $200 by buying the imported TV. And what am I

194: gonna do with those $200? I'm gonna spend them on something I couldn't have

197: afforded if I bought the US TV. Like maybe taking my family out to a baseball game

201: or to a restaurant. That creates jobs in those industries that wouldn't have

205: existed if I'd bought the more expensive TV. Economic theory suggests that

209: international trade reshuffles jobs from one sector of the economy to another, like

214: from the TV factory to the restaurant. But the quality of these jobs can be

218: markedly different. The guy assembling TVs at the US factory was probably

223: making a lot more at his manufacturing job before he got reshuffled to the burrito

228: assembly line at Chipotle. Which is just to say all this is really complicated

233: and what is good in the aggregate is not necessarily good for individuals. For

237: example, look at the North American Free Trade Agreement or NAFTA. It was

241: established in 1994 to drop trade barriers between Canada, the United

245: States and Mexico. Critics point out that NAFTA significantly increased US trade

251: deficits and they say it decreased the number of manufacturing jobs in many

256: states, as companies moved out of the US. Proponents of free trade point out that

260: the US economy boomed in the 1990's, creating millions of jobs including manufacturing jobs, and that free trade

268: has decreased the prices of all sorts of consumer goods, from vegetables to cars. So despite the fact

273: that some workers and industries were clearly hurt, economist would tell us

278: NAFTA's had a net positive impact on all three countries. By the way, you know

283: Thought café, the makers of the Thought Bubble? They're Canadian. These

287: graphics are imported. The debate over the value of specific trade agreements

291: continues. But it's unlikely that the world's largest economies will return to

296: strict protectionism. Protectionist policy, like placing high tariffs on

300: imports and limiting the number of foreign goods, usually hurts an economy

304: more than it helps. There are now several organizations designed to eradicate

309: protectionism, most notably the World Trade Organization or WTO. The WTO has been

315: effective in getting countries to agree to specific rules and help settle

319: disputes, but it's also been accused of favouring rich countries and not doing

323: enough to protect the environment or workers. Trade between countries depends

327: on the demand for a country's goods, political stability and interest rates,

331: but one of the most important factors is exchange rates. Basically this is how

336: much your currency is worth when you trade it for another country's currency.

339: And let's engage in some foreign trade now by going to the Thought Bubble. Suppose the

344: US-Mexico exchange rate is 15 pesos to the dollar. If an American's on vacation in Mexico and wants to

350: buy some sunscreen that cost 60 pesos, they'll have to trade four dollars for pesos. Likewise if someone from

357: Mexico is on vacation in the US and wants to buy a $20 t-shirt she will need to exchange 300 pesos for

363: dollars. Now one let's think about what happens if the exchange rate goes up to twenty

368: pesos per dollar. Now to buy that 50 peso sunscreen in mexico it'll cost the American

372: tourist $3 instead of four. We say that the dollar has appreciated. At the same

378: time the Mexican tourist who wants to buy the $20 t-shirt will need four

382: hundred pesos instead of 300. It works the same way with imports and exports.

386: When the dollar appreciates, it gets cheaper for US consumers to import

391: foreign goods, and US exports to other countries get more expensive. US imports

397: rise and export fall. On the other hand

400: what if the exchange rate fell to 10 pesos per dollar? Now to buy that

404: sunscreen, the american tourist needs $6. Each dollar has gotten less powerful. We

409: say that the dollar has depreciated. At the same time, the Mexican tourist who

413: wants to buy the $20 t-shirt needs only two hundred pesos. So when the dollar

418: depreciates, foreign imports get more expensive which means they fall, and US

423: exports to other countries get cheaper which means they rise.

426: Most currencies, like the peso and the dollar have floating exchange rates that

430: change based on supply and demand. Like when the US imports more products from

433: Mexico, they exchange dollars for pesos. This will increase the demand for pesos,

437: and the peso will appreciate. At the same time, the dollar will depreciate. Now some

442: countries have elected to peg their currency to another currency. This is

445: when a country's central bank wants to keep the exchange rate in a certain

448: range, and they buy or sell currencies to keep it in that range. The Chinese

452: government was well known for buying US dollars to keep the Chinese currency

455: artificially depreciated. When the US is importing goods from China, the yuan

459: would appreciate. Then the Chinese government would turn around and buy

462: dollars which kept the exchange rate about the same. This kept Chinese exports

466: cheap for Americans. Up to this point, we focused on exporting and importing goods

469: and services but there's a whole other side of international trade that involves

473: financial assets. Let's look at something called the balance of payments. It might

476: feel more like accounting than economics, but it helps to show how flows of money and

480: flows of goods and services are opposite sides of the same coin. Every country

483: keeps an accounting statement called the balance of payments that records all

487: international transactions. It's made up of two sub-accounts, the current account

490: and the financial account, sometimes called the capital account. The current

493: account records the sale and purchase of goods and services, investment income

497: earned abroad, and other transfers like donations and foreign aid. So when the US buys

501: fifty billion dollars of computers from China, that's recorded in the US current

505: account. So this is a simplification, but when Americans spend money on Chinese

508: goods, the people in China, in theory, have only two things they can do with that

512: money. They can buy US goods, or they can buy US financial assets, like stocks and

516: bonds. These transactions are recorded in the other side of account, the financial

519: account. There is a reason why the flow of goods and the flow of money are

522: symmetric. If consumers, businesses, and government want to buy more stuff than their

527: country is producing domestically, they have to import it. So there's a trade deficit. That country has to sell

532: assets to pay for those imports, and that's recorded in the financial account. The United

536: States has a very low savings rate which means it's consuming everything it's

539: producing and it sells assets to pay for the additional output it brings in from

543: overseas. Americans are choosing to run a trade deficit. International trade, like

547: everything else in economics, is about trade-offs and choices and winners and

551: losers. In purely economic terms trade deficits and surpluses are the result of

556: people and nations seeking their own self-interests. But while everyone is

560: acting in the self-interested way, international trade doesn't always meet

564: our individual interests. What might be good for the wider global economy, might

569: be really bad for me or my hometown. But in the aggregate, trade does improve the

575: global standard of living. It's just sometimes hard to see up close. Thanks for watching, we'll see you next week.

582: Crash Course Economics was made with the help of all these nice people. You can support

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