The Global Economy and International Trade
This paper is a research on international trade and its impact on the global economy. It will be divided into three main parts addressing different questions in relation to the main theme of study.
1. Importance of International Trade to the U.S. Economy
International trade and global economy have different effects on individuals, groups and nations because it encompasses a closely knit relationship between traders of various goods and services, multinational corporations and world financial markets. U.S. has a well developed system to encourage international trade. The major emphasis is on production for exports even though they also produce to meet domestic consumption demands. The main export goods from the U.S. are mainly chemicals, agricultural products, consumer durables, semi-conductors and aircrafts. On the other hand, the main import products are petroleum, automobiles, metals, household appliances and computers (Text book, 342).
The importance of international trade to the U.S. cannot be overemphasized since the export of goods and services contribute 10% of the total U.S. output. Additionally, U.S. total exports forms 9% of the world export. Therefore, the US is a key stakeholder in multilateral trade and global economy as it leads the world in combined exports and imports as measured in dollars. Whereas it is the world second largest exporter, it ranks lower compared to other trading countries in terms of exports as a percentage to GDP. The countries which rank higher than the U.S in this case are Belgium, the Netherlands, Germany, South Korea, Canada, Italy, France, Newzealand, Spain and Japan (Text book, 345).
International trade has enabled the United States to develop linkages with other countries to facilitate trading of their goods and services. A few of the main partners are Canada, China and OPEC countries among others. In 2007, the United States exports to Canada accounted for 22% of its total exports while receiving imports from Canada worth 16% of U.S. total imports. The demand for goods by the consumers of the United States could be made by the low cost goods from China during the hard economic times of the United States history. The country has a great deficit in their energy supply. The main partner for the United States in this case is the OPEC countries. In 2007, the United States imported goods worth $174 billion from OPEC countries mainly foreign oil. The imports were more than the exports which stood at $49 billion to those OPEC countries in the same year.
International trade has enabled the United States to concentrate on production and supply of goods and services in which they are more advantageous than the rest of the world. As a result, the specialization has resulted into allowing more refined production. The specialization within the United States economy has been based on comparative advantage. Such a mode of production has allowed the U.S. to improve on allocation of their resources and get register positive outcomes out of it as they put more effort on producing goods in which they are globally competitive and import the shy from the products in which other countries have a better comparative advantage over them.
It goes without saying that trade is only viable when it brings income to the nation. The United States income has really improved through international trade as they aim to produce goods and services that meet international standards. With the establishment of foreign markets exchange, the United States has been able to trade at the international market enabling them to buy more imported goods from in Japan and Europe when the two suffered recession and low income.
2. Factors that have Facilitated Rapid Growth of International Trade since World War II
The factors which have been pertinent in providing an enabling environment for international trade include: open economies, specialization, and formation of foreign exchange market, legislations to protect trade as well as the formation of regional and world trade organisations. These factors spring from the fact that nations came to the reality of the globalization and the interdependence that can lead to better output and living standards (Jae 173).
Most of the nations including the United States have adopted the open economy market system. The production is geared towards more of exports than imports of particular goods and services. As a result, more trade is switched from domestic to the international scene leading to the growth of international trade. On the other hand, such open economies have been characterized with specialization based on products in which a given country has a comparative advantage. The specialization has meant that a country concentrates on a few products in bulk for trade in surplus of the domestic market for global trade (Luis and Maria 217).
It is worth noting that specialization has been able to increase productivity of the nation’s resources due to better allocation and avoiding waste of resources. As a result, nation’s pursuing specialization has experienced greater overall output and better income. The outcome of the same is a more efficient production of nations as well as more relevance in participation with other partners in the international scene (Robert 273).
The formation of the Foreign Exchange Market (FEM) has been a landmark to international trade. FEM is a market where foreign currencies are exchanged, relative prices and exchange rates are established. The exchange rates can fluctuate depending upon demand and supply changes in the FEM. The formation of FEM has enabled nations to exchange their products within different currencies from a standard point of view based on the fluctuations in demand and supply of their trade products at the international market (William and Allan 331).
The challenges faced at the international markets in terms of goods from foreign countries being cheaper that the domestic products could potentially lead to the collapse of other nations. This is because rich nations and industries enjoying economies of scale as well as ability to carry out strategic specialization could easily outdo the emerging nations in the global scene. As a result, the individual nations began to put forth legislations to protect their domestic producers and consumers. Among such protection legislations tariffs, trade adjustment assistance, export restrictions, subsidies and non tariff barriers are included.
The imposition of various restrictions onto trade at individual nation’s level led to varied impacts on their trading partners that reacted by imposing restrictions as well. Later, the nations embraced the importance of open borders for their neighbors’ since specialization and resource endowment did not allow self reliance; others were needed to fill the gap. This led to the rising of Free Trade Zones or trade blocks to liberalize trade in the regions though obstruct trade with non trade block members. For example, the formation of the 27 members of EU, North American Free Trade Agreement made up of Mexico, Canada and the U.S.
The global trade relations led to the formation of the World Trade Organization (WTO) to oversee trade agreement among members and hold further discussions on trade liberalization. For example, the WTO initiated trade negotiations in Doha, Qatar in 2001 which became known as the Doha negotiations/agreements. These agreements have been able to promote and facilitate better trade options and patterns for their members in the global scene as well as arbitrate where some members fail to adhere to the agreements (William and Allan 321).
3. Effects of Global Competition on U.S. Firms, Workers and Consumers
The United States have been a key player in the global market competing with other partners in the exchange of goods and services. The competitions have led to varied effects which have, as well, initiated reactions and responses from the stakeholders within the United States and global scene at large. Among the effects are trade deficits, surpluses, specialization in production of goods and services, initiation of trade protection and subsidies, creation of employment opportunities, formation of trade adjustment assistance and off-shoring among others.
Due to competition in multilateral trade, in 2007 the United States had a trade deficit in which its imports exceeded the exports by $816 billion. Further, the United States had surplus in the provision of air transportation and financial services and the total U.S. exports exceeded the import services by $107 billion. Even though U.S. leads the world in the total volume of exports and imports, there is a great competition with world top exporters being the Netherlands, the UK, Italy, Canada, Belgium, South Korea, Russia, Mexico, Taiwan and Spain (Luis and Maria 228).
Competition at the international market also led U.S. to specialize in products in which it has comparative advantage. American firms and workers then embarked on these products manufacturing with more specialized courses. At the same time, the government promoted firms and industries working on their core preferences. The consumers have to choose between the available alternatives within the specialized products or rely on imports for the products not produced locally or having better prices from the international market (William and Allan 328).
On the other hand, competition with nations with weaker currencies enabled U.S. to buy more goods and services from them. At the same time, trade with nations with stronger currencies became more expensive for the United States. However, it important to note that the U.S. nations currency has been on the rise leading to more demand. The trade protection and subsidies which began in the United States was due to the effects of competition.
The U.S. government imposed tariffs, import quotas and subsidies to farmers to address foreign goods that competed with the local goods and to protect the domestic market. However it has been documented that tariffs aid in transferring costs to local users of a product while providing gains to domestic producers and revenue to the government. The gains to the U.S. industries and workers come at an expense of the entire economy leading to economic inefficiency, reduced consumption and lower standards of living (Jae 125).
It is important to note that competition prompted the United States government to initiate trade adjustment assistance in 2002 to provide cash assistance, education and training benefits as well as healthcare subsidies to workers displaced by imports or plant relocations. On the other hand, competition led to off-shoring as work which was previously done by Americans but could be done by others was given so that the U.S. concentrates on more specialized jobs. As a result, some workers and firms lost jobs while others gained other specialized jobs (Robert 210).
Imported Products in the U.S.
Due to the massive growth in international trade and specialization by the United States, walking around the United States, one will find quite a number of imports ranging from cutlery manufactured by Switzerland, rain-proof accessories manufactured in South Korea, Japanese cameras, English pots, and Chinese sleeping bags. There are also Japanese made Toyotas, German made BMWs, coffee from Brazil and bananas from Honduras among others. On the same breath, the imports include but not limited to petroleum, automobiles, metals, household appliances and computers.