Question

what if trade ceased to exist, how would Us be affected?

Answer 1

It is important to note that the United States was primarily a manufacturing based economy in the 1960s and the 1970s. However, with time, the United States gradually shifted from a manufacturing based economy to a consumption based economy. While it does not imply that there is no manufacturing activity in the United States, it is important to remember that the country has sustained trade deficits.

With consumption being nearly 70% of GDP, the consumption growth in the economy is largely driven by import of goods from emerging markets like China and India, among others. This makes imports cheaper because of the exchange rate differential and therefore the US consumers benefit from relatively attractively priced good.

At the same time, the United States is an exported in the defense sector and with oil & gas surplus, the United States has also been exporting oil.

If trade ceases to exist, the first big challenge for the United States would be lack of manufacturing of goods to cater to the local demand. With consumption at nearly 70% of GDP, lower availability of good would imply high inflation and decline in consumption spending. This can certainly take the economy into recession.

Further, US has a comparative advantage in defense, innovation and technology. If these goods or services are not imported, excesses will be created within the economy and this will translate into job losses in the sectors where the United States has a comparative advantage.

Overall, if there is no trade, economic activity will decline and consumption expenditure as well as investment spending will be negatively impacted.

Instead of creating trade barriers, the United States should focus on industries that boost the manufacturing sector again. This can be done through lower taxes for manufacturing sector companies and other incentives that promote growth of the manufacturing sector. A finer balance between consumption and production needs to be established for a healthy long-term economy.