At first glance, a pencil seems simple, something anyone could make. But behind that familiar object lies a remarkable story of cooperation, creativity, and global trade. The wood comes from forests in California, the graphite from mines overseas, the rubber from Southeast Asia, and the metal ferrule from yet another country. These materials are shaped, refined, and assembled by countless individuals, none of whom may ever meet.

This is the essence of “I, Pencil”, a short video that reveals how free markets and trade connect people across the world to create the universe of goods and services available to us. It’s a powerful reminder that trade isn’t just policy, it’s the hidden engine behind nearly everything we use and value.

HISTORICAL CONTEXT

Trade has been a cornerstone of human civilization, from ancient caravans on the Silk Road to modern cargo ships, fiber‑optic cables, and digital marketplaces connecting billions of people and businesses. As transportation, communications, and technology evolved, so did our ability to access raw materials, optimize production, develop specialized services and enter larger markets.

The idea that trade fuels prosperity was famously articulated by Adam Smith in The Wealth of Nations (1776). Smith argued that free exchange and specialization drive productivity and generate wealth for nations. He introduced the concept of the “invisible hand” and posited that countries grow richer by focusing on their comparative advantages, producing goods they can make most efficiently and trading for others.

After World War II, global leaders embraced Smith’s principles to rebuild shattered economies and prevent future conflict through economic interdependence. Central to this effort was the creation of the General Agreement on Tariffs and Trade (GATT) in 1947, which laid the groundwork for a rules-based international trade system. GATT:

• Substantially reduced tariffs: The average tariff levels dropped from about 22% in 1947 to roughly 5% by the early 1990s.
• Eliminated quotas and other quantitative restrictions.
• Provided preferential access to U.S. markets for war-torn allies, helping them rebuild their industrial bases while creating stable markets for American exports.

By offering low tariffs and favorable export conditions, GATT boosted the industrial recovery of Germany, Japan, the UK, and France, while placing the U.S. at the center of a rejuvenated global economy. These early arrangements reflected the strategic belief that open trade promotes peace, innovation, and shared prosperity.

The legacy of GATT lives on in today’s World Trade Organization (WTO), founded in 1995, continuing to guide trade flows, protect supply chains, and support economic opportunity in a deeply interconnected world.

FREE TRADE FROM THE 90s TO TODAY

AFL-CIO studies on the Trans-Pacific Partnership warned that weak labor provisions allowed wage suppression abroad, fueling factory relocation efforts closer to home.

DID YOU KNOW?

SUPPLY CHAINS

A supply chain refers to the entire system of producing and delivering a good, from raw materials to manufacturing to delivery to consumers. Many products, like smartphones, solar panels, medical devices, or electric vehicles, are made through global supply chains, where components are sourced from multiple countries.

Watch this explanation of global supply chains from CFR Education (4 minutes):

U.S. trade policy, through tariffs, export bans, and trade agreements, has a major impact on how businesses manage these supply chains. When policies shift, companies may relocate manufacturing, adjust sourcing, or lobby for exemptions.

PLAYERS OF THE GLOBAL TRADE ECOSYSTEM

International trade is powered by an intricate ecosystem of players, each making decisions influenced by policy, pricing, and opportunity. This is the engine of the global economy.

Watch this video from the Council on Foreign Relations that broadly covers international trade (7 minutes):

Think of it like a relay race: raw materials, production, transportation, and sales, all handed off across borders, cultures, and currencies.

Here’s how it all fits together:

• Raw material suppliers are the foundation of global production, extracting or growing essential inputs like metals, oil, timber, and agricultural goods. Their operations are shaped by commodity markets, environmental conditions, and geopolitical stability.
• Manufacturers transform raw inputs into finished products. They choose locations based on access to skilled labor, affordable energy, and proximity to suppliers or customers. A car may have its body stamped in Mexico, engine assembled in the U.S., and tech components shipped in from South Korea.
• Service and Logistics providers are the invisible hands that move the world. Shipping companies, freight forwarders, and warehousing firms ensure products get where they need to go, navigating customs, tariffs, and international regulations in the process.
• Distributors and wholesalers act as the bridge between manufacturers and retailers. They buy in bulk, manage inventory, and make sure products are available across regions and seasons.
• Retailers range from small boutiques to global giants like Walmart or Amazon. Since they sell directly to consumers, pricing and stocking decisions reflect global supply dynamics and trade costs.
• Technology providers, like software and data analytics firms, work behind the scenes to keep supply chains humming, offering everything from real-time tracking to AI-powered demand forecasting.

And then there’s the environment in which they all operate:

• Exchange rates can make or break a deal overnight. A weaker dollar can benefit U.S. exporters, while a stronger one makes imports cheaper for consumers, but tougher for domestic manufacturers.
• Trade regulations and standards, set by national governments and institutions like the World Trade Organization (WTO), act like the rulebook for cross-border business. Compliance is not optional, it’s critical to avoiding fines, delays, or reputational damage.

Global supply chains don’t just happen. They’re built through trust, travel, negotiation, and strategic alignment.

This video from Kite & Key Media explains the causes behind  breakdowns in the supply chains, creating shortages of products we want (7 minutes):

TRADE DEFICIT AND TRADE IMBALANCE

Trade imbalance is a general term used to describe any situation where exports and imports are not equal. There are two main types:

1. Trade Deficit:

• Occurs when imports of goods and services exceed exports.
• The country is buying more from the world than it sells.
• Example: In 2024, the U.S. posted a roughly $918 billion trade deficit, equivalent to about 3.1 % of GDP, down from a peak of $944 billion (3.7 % of the GDP) in 2022. Since 2000, the country has averaged a $594 billion yearly deficit, far higher than in earlier decades.

2. Trade Surplus:

• Occurs when exports exceed imports.
• The country is selling more to the world than it buys.
• Example: Germany and China often run trade surpluses.

This analysis from the Council on Foreign Relations (CFR) helps unpack the causes and consequences of trade imbalances. Trade deficits are not inherently harmful; they can reflect a nation’s role in the global economy, its attractiveness to foreign investors, and the choices consumers and companies make every day.

Take a look at this short video on  Surprising Truths about America’s Economy (2 minutes):

FEDERAL GOVERNMENT

Article 1, Section 8 of the Constitution gives Congress the power “to regulate commerce with foreign Nations, and among the several States, and with the Indian Tribes[.]” While it has the sole power to set tariffs and collect revenue, Congress has delegated some of this responsibility to the president.

Two key pieces of legislation shared this power with the executive branch:

1. The Trade Expansion Act of 1962 granted the president power to impose tariffs in the name of national security without congressional oversight.

2. The International Emergency Economics Power Act (IEEPA) grants the president broad authority over various economic levers in the case of a national emergency.

The primary offices and agencies that implement or set trade policies are:

• Office of the United States Trade Representative (USTR): Leads the development and coordination of trade policy, negotiates trade agreements, and chairs key interagency committees such as the Trade Policy Staff Committee (TPSC) and Trade Policy Review Group (TPRG). The USTR is the president’s chief advisor and negotiator on trade matters and is central to all major trade policy decisions.
• Department of Commerce: Promotes U.S. exports, enforces trade remedy laws, and supports American businesses in global markets. It provides critical support for industry, manages export controls, and implements trade enforcement actions.
• Department of State: Promotes U.S. business interests abroad, supports trade negotiations, and advances economic diplomacy. It coordinates with USTR and other agencies to open foreign markets and strengthen international economic relationships.
• United States International Trade Commission (USITC): Investigates unfair trade practices, provides analysis and information to Congress and the president, and maintains the Harmonized Tariff Schedule. USITC offers impartial, fact-based analysis essential for informed trade policy decisions.
• DHS Customs and Border Protection: Enforces trade laws at the border, collects tariffs, and monitors imports and exports. The CBP is the frontline agency for implementing and enforcing trade regulations.

To learn more about these and how the executive branch makes policy through agencies, see The Policy Circle’s Executive Branch Brief.

The Judicial Branch influences trade policy primarily through judicial review. The Supreme Court has the authority to determine whether laws or executive actions, including those related to trade and tariffs, are constitutional. It also plays a role in interpreting when and how the executive branch can exercise powers granted by legislation. Although the courts tend to act slowly, their decisions have a lasting and significant impact on both current and future trade policies.

See The Policy Circle’s Judicial Branch Brief to learn more about this vital institution.

GLOBAL TRADE INSTITUTIONS, AGREEMENTS, AND STRATEGIC LEVERS

While international institutions like the WTO and IMF provide the framework for global trade, countries also enter into regional and bilateral agreements to promote their economic interests, secure supply chains, and align with partners.

This section explores the key organizations and agreements shaping international trade, with a spotlight on U.S. involvement across the globe.

INTERNATIONAL AND MULTILATERAL INSTITUTIONS

• The World Trade Organization (WTO) promotes global trade rules, reduces tariffs, and offers a dispute resolution mechanism for its 164 member countries. Though central to global trade governance, the WTO has faced challenges in adapting to modern digital trade and addressing the needs of emerging economies, as well as other criticisms.
• The International Monetary Fund (IMF) provides financial assistance and policy guidance to help countries stabilize their economies. Its influence in shaping domestic reforms is significant, though often controversial due to required austerity measures.
• The Group of Seven (G7) brings together major democratic economies to coordinate trade, development, and security policies, with a growing focus on countering authoritarian economic practices.

To learn more about the WTO and how organizations like it shape international trade, watch their video showcasing their work (6 minutes):

BILATERAL AND REGIONAL TRADE AGREEMENTS

The U.S. isn’t just exporting products. It’s managing a network of 20+ comprehensive trade agreements across every continent, which go far deeper than surface-level tariff rules.

Explore the full list of active U.S. free-trade agreements, including dates, countries, and key chapters, on the U.S. Trade Representative (USTR) website.

STATE AND LOCAL GOVERNMENTS

While trade agreements and tariffs are negotiated at the federal level, state and local governments play a critical and often overlooked role in shaping trade outcomes. From attracting foreign direct investment (FDI) to setting local laws that influence how and where companies operate, these levels of government help determine whether a business chooses to invest, expand, or relocate in their region.

Louisiana, Michigan, Kentucky, and Texas have the highest dependencies on foreign trade. Here’s a short video for the top 10 states dependent on trade (2 minutes):

States compete aggressively to attract direct foreign investments by:

• Participating in international trade missions, where governors and local officials meet with foreign investors and government counterparts to promote their state as an ideal destination.
• Creating investment promotion agencies or economic development offices, often with dedicated staff focused on key countries or sectors.

For example, SelectUSA, a federal program, works with state and local partners to match international firms with U.S. communities ready to host new facilities. In turn, governors use trade missions to showcase their workforce, infrastructure, and legal environment to foreign firms looking to enter or expand in North America.

LEGISLATIVE LEADERSHIP AT THE STATE LEVEL

State legislatures can pass laws that:

• Reduce barriers to entry for new businesses;
• Offer tax incentives and business-friendly regulatory frameworks;
• Encourage export activity through grants and trade education;
• Improve infrastructure and supply chain reliability;
• Align regulations and credentialing systems with industry needs.

Through legislation, states can also signal long-term stability, a key factor for both domestic firms and international investors looking to commit to a location for 10, 20, or 50 years.

LOCAL LEVERS: WHAT STATES AND CITIES CONTROL

The decision for a company to build a factory, office, or warehouse in a specific location often hinges on factors that are controlled locally:

• Zoning laws determine whether a parcel of land can be used for industrial, commercial, or residential development.
• Environmental regulations affect which industries are permitted and under what conditions.
• Incorporation laws influence where and how businesses choose to legally form.
• Insurance requirements impact the cost and complexity of doing business.
• Workforce development programs shape the availability of skilled talent through partnerships with community colleges, trade schools, and apprenticeship programs.

Cities and states that align these factors to support a business’s needs are often more competitive in attracting both domestic and foreign investment.

Local governments foster a pro-growth environment by:

• Investing in infrastructure, including broadband, transportation, and utilities.
• Supporting public-private partnerships to upskill the workforce.
• Offering fast-track permitting and streamlined business services.
• Establishing innovation districts or enterprise zones to encourage startups and advanced manufacturing.

Cities also compete by developing quality-of-life factors, like schools, parks, and affordable housing, that help attract and retain talent.

For citizens, understanding this dynamic reveals how trade starts at home. Every industrial site approval, skills training program, or zoning reform has ripple effects that shape trade capacity. By participating in local planning, workforce boards, and economic development discussions, citizens help shape the conditions that drive trade-related investment and influence whether their community thrives in the global economy.

To connect with your state’s trade office or to learn more about these efforts, resources like the National Association of State Departments of Agriculture (NASDA) and the State International Development Organizations (SIDO) offer tools to facilitate engagement.

Civil society in the United States, including businesses, philanthropies, and engaged citizens, plays a vital role in shaping how trade policy is made and implemented. From supply chain decisions in boardrooms to grassroots campaigns against forced labor, these stakeholders influence how trade impacts industries, communities, and global norms.

HOW BUSINESSES SHAPE TRADE POLICY

Businesses and entrepreneurs are deeply engaged in shaping trade policy in ways that:

• Protect their supply chains.
• Reduce tariffs or trade friction.
• Promote competitiveness through export markets.

LOBBYING AND COALITIONS

U.S. companies spend heavily to influence trade legislation. For example:

• During the U.S.-China trade war, firms like Apple, Intel, and Walmart lobbied against tariffs on Chinese goods.
• Trade associations such as The Footwear Distributors and Retailers of America led a cross-industry coalition that successfully delayed certain tariffs on imported shoes.
• The US Chamber of Commerce also informs and shapes trade policy through a business perspective.

SUPPLY CHAIN DECISION-MAKING

Trade policy directly affects where businesses locate factories and source materials.

Here is a Wall Street Journal video that presents the strategies that companies adopt to optimize their supply chains (5 minutes):

Some firms are now diversifying operations to reduce dependency on geopolitical rivals:

• Intel and TSMC are building new semiconductor fabrication facilities in Arizona and Ohio.
• Tesla has negotiated battery supply agreements in North America, responding to new rules in the U.S.-Mexico-Canada Agreement (USMCA) and the Inflation Reduction Act.

PHILANTHROPY’S ROLE: SHAPING TRADE WITH PURPOSE

Philanthropic organizations influence trade by:

• Funding research and policy innovation (e.g. Hudson Institute, Cato Institute, Peterson Institute for International Economics, Aspen Institute).
• Supporting supply chain transparency tools that identify labor abuses or environmental damage.
• Promoting entrepreneurship and access to trade in developing countries. The Skoll Foundation has backed fair trade certifications and local production hubs to help small producers enter global markets under ethical conditions.

CITIZENS AND ADVOCACY GROUPS: TRADE AS A MORAL AND POLITICAL ISSUE

Civil society actors influence trade by holding companies and governments accountable. This includes:

• Human Rights Advocacy:
  • Groups like Human Rights Watch and the Uyghur Human Rights Project successfully pushed for the Uyghur Forced Labor Prevention Act, which bans imports tied to forced labor in China’s Xinjiang region. In parallel, nonprofit tools like Kleo help consumers identify products and brands potentially linked to Uyghur forced labor, empowering individuals to make informed choices and apply market pressure alongside legislative action.
  • Their reports and campaigns influenced Congress and the Department of Homeland Security to act.
• Environmental and Labor Campaigns:
  • The Sierra Club and AFL-CIO pushed for enforceable labor and climate provisions in the USMCA. Their advocacy led to landmark updates from NAFTA.
  • These groups now track the implementation of those agreements and file complaints when commitments are violated.
• Consumer Movements:
  • The Fair Trade movement encourages ethical sourcing and empowers small farmers and artisans.
  • Citizen campaigns have pressured brands to disclose sourcing, pay living wages, and avoid supply chains tied to deforestation or child labor.

From boardrooms to community groups, civil society plays a critical role in shaping U.S. trade.

As the U.S. confronts growing competition and supply chain risks, trade policy is no longer niche. It’s a national strategy in which citizens should engage.

STRATEGIC DEPENDENCE ON FOREIGN SUPPLY CHAINS

The COVID-19 pandemic and recent geopolitical tensions have revealed dependencies on foreign countries for essential products, including:

• Semiconductors (chips): Critical to electronics, defense, and AI. Over 70% of advanced chip production occurs in Taiwan. The U.S. is investing heavily to restore domestic manufacturing via the CHIPS and Science Act.
• Electric batteries: Vital for electric vehicles and energy storage. China controls 70 to 90% of global battery supply chains, from rare earth mining to final assembly.
• Medical supplies and pharmaceuticals: In 2020, over 80% of active pharmaceutical ingredients (APIs) used in U.S. drugs came from overseas, primarily Europe, India, and China. Shortages in PPE and ventilators revealed the national security risks of outsourced health infrastructure. To find out what medicines are currently in short supply, check out the FDA’s shortage list.

These dependencies have triggered bipartisan calls for reshoring or “friend-shoring“, moving production to allies, and for trade agreements that support supply chain security. Here’s a recent hearing on breaking China’s chokehold on the critical mineral supply chain.

DISCOURAGING OFFSHORE PROFITS AND ENCOURAGING ONSHORING

In recent years, federal policymakers have begun to reverse trade and tax incentives that historically encouraged U.S. companies to earn profits abroad, a key driver of offshoring. In a February 2025 press release, U.S. Representative Lloyd Doggett (D-Texas) announced the reintroduction of legislation targeting Trump-era tax breaks that encourage offshoring. The goal is to make it less lucrative to shift production overseas and more attractive to bring high-value manufacturing back to American soil.

TRADE AS A TOOL FOR FOREIGN POLICY AND NATIONAL SECURITY

In early 2025, the U.S. invoked national-security powers, specifically under the International Emergency Economic Powers Act (IEEPA), to impose tariffs aimed at pressuring Canada and Mexico to curb fentanyl trafficking. Starting February 4th, 2025:

• A 25% tariff was applied to virtually all imports from Canada and Mexico, with lower rates for energy products, under a declared national emergency tied to drug smuggling. Although these tariffs were later paused for USMCA-compliant goods, the move marked a significant effort to utilize trade policy as a foreign and security instrument.
• The White House framed the action as part of a broader enforcement strategy, asserting it aimed to “hold [our neighbors] accountable for stopping poisonous fentanyl and other drugs” entering the U.S. market.

These actions illustrate how trade measures, such as broad-based tariffs tied to perceived security threats, are increasingly being leveraged to influence the behavior of neighboring countries, beyond their traditional economic roles.

PROTECTIONISM BEYOND TARIFFS

Protectionism refers to government actions and policies that restrict international trade to protect domestic industries from foreign competition. While tariffs are a highly visible form, protectionism can take many shapes, some more subtle but equally impactful on global trade dynamics.

In its report Beyond Tariffs: What the U.S. Can Learn from China’s Industrial Playbook, RAND highlights how China has built a robust, multifaceted strategy to strengthen domestic industries and compete globally. According to the report, Beijing blends:

• Direct subsidies to targeted sectors (e.g., electric vehicles, semiconductors).
• Tax incentives for companies investing in R&D or “strategic” sectors.
• Below-market land prices for industrial development.
• Government procurement preferences for domestic firms (e.g., the state government chooses a domestic firm for a project, even if a foreign firm is cheaper).
• Localization requirements forcing foreign firms to partner with or transfer technology to Chinese companies.
• State-backed financing offering favorable loans to companies with global ambitions.

Together, these tools create a powerful system of state-led industrial policy, often criticized by other nations as distorting markets and providing Chinese firms with advantages, particularly in export markets. To learn more about China and how it operates, check out The Policy Circle’s China in Your Backyard Brief.

While China’s approach may seem extreme, protectionism also exists in the United States, particularly in agriculture. A notable example is the U.S. sugar industry, which benefits from a complex mix of:

• Import quotas that limit the amount of foreign sugar entering the country.
• Tariffs on sugar imported above those quotas.
• Price supports that maintain domestic sugar prices above global market levels.

This system has kept U.S. sugar prices consistently higher than world prices, benefiting a relatively small number of sugar producers while raising costs for American consumers and food manufacturers. According to the Cato Institute, these policies cost U.S. consumers an estimated $2.4 to $4 billion annually in higher prices.

Rockford, Illinois, was once a thriving manufacturing center, nicknamed the “Fastener Capital of the World”, with employers like Ingersoll Machine Tools and Rockford Products fueling the local economy. In the early 2000s, as free trade expanded and global competition intensified, many of these companies offshored production to countries with lower labor and regulatory costs. Ingersoll eventually closed its U.S. operations and moved production to China, contributing to the loss of nearly 10,000 manufacturing jobs in the region.

PROMISES VS. REALITY

Free-trade advocates predicted that outsourcing low-skill jobs would free up capital and opportunities for higher-skilled, better-paying jobs in technology and services. While these jobs did materialize, they largely clustered in major urban centers like Chicago, Boston, and San Francisco, not in mid-sized industrial towns like Rockford. As a result, small-town economies were often left without the resources or infrastructure to participate in the new economy.

BIG-BOX RETAILERS: EARLY WINNERS OF GLOBAL TRADE

One of the first domestic beneficiaries of low-cost overseas production was big-box retailers such as Walmart, Target, and later Costco. These companies quickly leveraged lower global manufacturing costs to offer inexpensive consumer goods, which in turn fueled their rapid expansion across small-town America.

While these outlets brought convenience and affordability to communities facing economic decline, they also contributed to the erosion of local businesses. Studies show that towns with Walmart stores saw a decline in local retail establishments by as much as 34% over a decade.

POLICY SHIFTS: CAN RESHORING WORK?

Federal policymakers are now reconsidering trade incentives to bring jobs back to the U.S. The goal is to restore local manufacturing capacity and revitalize economically distressed regions.

But a core challenge remains: Is the workforce ready?

For decades, “college for all” was the national mantra, and many local education systems deprioritized skilled trades. States and cities must now ask whether workforce development programs can bridge the skills gap and rebuild a talent pipeline for the very industries trade once displaced.

Small U.S. businesses are deeply integrated into global supply chains. Even small manufacturers often rely on overseas suppliers for parts, materials, and finished products. For example, one FedEx survey found that 88% of small and medium-sized U.S. businesses say trade is essential for growth, with 85% linking it to job creation. At the same time, 97% of U.S. exporters are small firms, and they account for nearly one-third of the nation’s merchandise exports, demonstrating how vital foreign market access is for business expansion. As a result, policymakers face a difficult question: would onshoring policies truly help, or could they inadvertently disconnect these businesses from critical supply chains and export opportunities?

Whether you’re evaluating a new business development in your area or working in an industry shaped by global markets, you can use this Policy Circle Brief to drive education, spark dialogue, and influence outcomes that reflect your community’s values.

BE AN INFORMED ADVOCATE

Trade policy impacts everything from the price of food to the availability of jobs in your region. Use this Policy Circle Brief to:

• Host a roundtable with neighbors, business groups, or civic clubs.
• Review your state’s economic development strategy or industry-specific trade reports. Start by finding your state’s economic development office or prompt AI to help you with your search.
  • Try asking AI: “Can you help me find [your area’s] economic development strategy, if there is one?” If your state doesn’t have one, follow up by asking about surrounding areas.

STEP INTO INFLUENCE

Many critical trade and investment decisions are made locally through city councils, county boards, and regional commissions. You can:

• Invite a colleague or friend to join The Policy Circle’s Civic Leadership Engagement Roadmap program and grow your network while deepening your understanding of how policy is shaped in your community and state. Apply for local advisory boards, especially those tied to planning, economic development, or zoning.
• Look up your municipality’s meeting calendar and check agendas for upcoming land use or development hearings. Attend public hearings for new data centers, manufacturing plants, or retail developments.
  • Ask questions such as:
    • What are the terms of this investment?
    • What incentives are being offered?
    • Will the company partner with local schools or workforce programs?

LEVERAGE THE POWER OF BUSINESS

If you work in or with a business affected by trade, you’re already part of the system. Use your role to:

• Encourage your company to join local chambers of commerce and advocate for open, fair markets.
• Push for community partnerships, like job training, career pathways, or internships.
• Research your industry’s trade association to stay current on issues and policies. Start with:
  • The U.S. Chamber of Commerce:  International Affairs to learn more about business opportunities that await around the globe.
  • The National Association of Manufacturers plan for what U.S. trade policy could look like.
  • The German American Chamber of Commerce of the Midwest partners with local businesses and schools to create structured, employer-led training pipelines.

Whether you’re evaluating a new warehouse project in your county, helping students understand how a product is made, or testifying at a city zoning hearing, your voice and leadership matter. Trade policy is not just global, it is deeply local, and informed citizens can shape it for long-term economic resilience and opportunity.