Trade has always been a major force behind the relations among nations. International trade allows countries access to goods and services that they cannot produce or that can be produced more cheaply offshore. For example, tea can be grown with some difficulty in a northern climate, but most tea for the world market is still supplied by India. India has a climate and soil well suited to the production of tea, and everything is in place to grow enough tea leaves to meet the demands of the world market.
With the establishment of standard trade routes and fairly stable governments in the Western countries, international trade became regulated and controlled by the 1700s. Taxes were levied against some import items to allow local producers to compete economically against foreign producers. (Import taxes are called tariffs.) Trade limits were set on other items to keep the local market from being flooded with foreign goods.
Europe traded with the United States from the time of the first settlements in the 1600s. As the American economy and industry expanded with the Industrial Revolution in the early 1800s, the variety of items the United States was able to trade with other countries increased greatly.
The dominant foreign trade policy of the United States following the Civil War was protectionism, meaning that the government enforced high tariffs and rigorous import restrictions to protect home market producers from overseas competition. When the Democrats took power in the second decade of the 20th century, tariffs were lowered briefly, but protectionism returned with President Harding and reached a new peak with the Smoot-Hawley tariff of 1930. This tariff, a response to the crash of 1929, resulted in retaliatory tariffs by other nations and worsened an already depressed economy. Exports fell from $5.2 billion in 1929 to $1.7 billion in 1933. The New Deal managed to roll back much of the tariff. Together with the new Import-Export Bank, which offered foreign traders an alternative to getting loans from private bankers, these measures helped increase exports between 1934 and 1938 by more than half a billion dollars.
After the Second World War, American international business quickly expanded its manufacturing and distribution facilities overseas. In some instances, these companies were established under licensing arrangements or as joint ventures with a foreign company.
In the 1960s, the United States experienced an erosion of its dominant position in world trade, and in most of the years since 1970, it has reported a negative trade balance (more imports than exports). In 1999, the U.S. trade deficit reached an all-time high of $263 billion as economic crises in other countries caused our exports of everything from soybeans to automobiles to fall. Since that time, the U.S. trade deficit continued to rise significantly, reaching $752 billion in 2006. However, the deficit dropped in 2007 to $699 billion, a trend economists blamed on the recession causing a drop in consumers' buying power and declining demand for imported goods. As the recession continued, the trade deficit remained low compared to previous years. In 2009 the deficit bottomed out at $384 billion. As the economy improved and recession ended, the trade deficit increased to $499 billion for 2010 and $557 billion for 2011. The trade deficit dropped to $474.9 billion in 2013, but was up again in 2015, at $484.1 billion, due to the weak economies of countries overseas and a sharp decline in export sales.
Among economic policymakers today, the most popular solution to the trade deficit is expansion of free trade, which means open markets and economic interdependence. In a move toward more free trade, President Clinton signed two agreements that took effect in 1994. The North American Free Trade Agreement (NAFTA) is a pact among the United States, Canada, and Mexico. Its provisions included the elimination of all tariffs over the next 15 years on goods produced and sold in North America, the barring of governments from imposing special requirements on foreign investors, and the lifting of certain restrictions on services, such as banking, telecommunications, and transportation. In 2013, five years after NAFTA was implemented, the U.S. had a total of $1.1 trillion in export/import goods with Canada and Mexico. The second pact, which consisted of amendments to the General Agreement on Tariffs and Trade (GATT), was approved by the U.S. Congress and the governments of 116 other nations. It reduces international trade barriers, including tariffs, import quotas, and export subsidies. In 1995, the World Trade Organization (WTO) took over, using the same system of rules as GATT. With the acceptance of Yemen as an organization member, more than 97 percent of the global economy falls under the WTO trading system. Opponents of agreements and organizations of this sort argue that they put American jobs at risk and increase the U.S. trade deficit.