Donald Trump recently challenged the US Europe alliance’s long-term value. He said that the European Union was his biggest foe. It is what they do in trade. This is consistent with his recent anti-trade with Europe views, but it ignores the enormous benefits that Americans have reaped from the strong economic and militarily allied U.S. with Europe benefits which include nothing less that unprecedented peace and prosperity.
Trump’s trade war against Europe and his hostility towards broader Western alliances like NATO point to a future where there will be lower standards of living. This is directly due to less trade and more conflict, which indirectly results from reduced economic integration. Robert Kagan, columnist, said that things won’t be okay.
My research has focused on the effects of increasing international trade on U.S. living standards. I have shown that these causally connected during the latter 20th century. The U.S. Europe relationship dominated most of the trade during this period.
Trump calls Europe a foe and makes it clear that he doesn’t get why rich countries trade with each other. This is something that economists have struggled with for years.
Why Rich Europe Countries Trade
Although it may seem obvious that the U.S. trades with Europe some people might prefer Parmigiana from Italy while others prefer Wisconsin cheddar economists struggled to explain why so much trade took place among wealthy countries. They thought that the U.S. could produce high quality cheese at a price comparable to Italian producers, so why would they need to travel to satisfy their palates?
Paul Krugman, an economist, provided a clear answer in 1979 that would ultimately win him the Nobel Prize for Economics. His first answer was simple, but it is important. It boils down to the idea that consumers can benefit from having many product options available to them even though they may be small variations of the same item.
Exports Were Machinery Europe
In 2016, the top U.S. exports were machinery ($29.4billion), aircraft ($38.5billion) and pharmaceutical products ($26.4billion). Machines ($64.9 billion), drugs ($55.2 billion), and vehicles ($54.6 trillion are the top three imports from EU. While the product categories are similar, there are significant differences in the types and prices of the machinery and pharmaceuticals that are sold on each market. All these options are available to consumers, which is a benefit for them.
Krugman answered the second part of Krugman’s question by saying that by producing for both markets companies in Europe or the U.S. would be able to reap greater economies of production and lower prices. This is what happens when countries trade. Recent research also shows that domestic prices can be lower due to increased foreign competition.
These benefits can be quantified. The gains the U.S. received from lower prices and new product varieties over the period 1992-2005 was about one percent of the U.S. GDP, or approximately $100 billion. Krugman’s response emphasized how international trade among equals can increase the size of the economic pie. The combined economies of Europe and the U.S. has accounted for half of the global GDP.
Largest Trading Partner
Since the 1970s, the United States largest trading partner is the European Union in terms of bilateral trade. The U.S. imported $592billion in goods and services from Europe in 2016, and exported $501billion. This represents 19% of U.S. total trade, and 19% of American GDP.
One of the key features of this trade is that nearly a third of it occurs within individual companies. It is essentially multinational companies selling products to their local markets or as inputs to local production. This trade is vital as it supports hundreds of thousands of jobs and serves as the backbone for a vast network on both sides. It’s also a network that drives the global economy: almost every country in the world has a primary trading partner in the EU or the U.S.