This paper is highlighting the economic international imbalances that are prevailing in the economy and are thus causing distress. The international economy is the prospering day today but it is creating such imbalanced problems which are depressing the economy. These problems are unemployment, inflation, and fiscal deficit which are leaving the economy in a stagnant position and leading to economic international imbalance trade.
US free trade policy is meant to ease the trade between the countries, and so is set up for the beneficiary of developed countries. This policy eliminates all kinds of taxes, tariffs that could be used by the developed countries to protect their economy. Various organizations and councils have stood forward and criticized the trade policy, among the known are USBIC (the United States Business and Industry Council). It predicted that the Free Trade Policy would not give a positive impact even for the developed nations.
International Political Economy
Globalization, technological advancements, and industrialization have led the economy to boom. Various countries have prospered and have grown faster, leading to higher returns and profits. But globalization is just not the same for increased global economic integration, it had lead to unemployment, a high rate of inflation, rising costs of food, and fiscal deficit.
The economy is prospering day by day but leaving a large amount of the population unemployed. Despite the investment opportunities being set up for businesses during the last decade, still, there has been news about factory closures leading to high structural unemployment and a rigid labor market. This scenario is being faced both in the developed and undeveloped or developing countries. Labor in the developed countries complains that production is shifting to Eastern Europe, Asia, and other developing nations. Even if new industries are being set in these least developed areas there still hasn’t been optimum employment.
China is known to produce goods at the lowest prices because its labor costs are the cheapest all around the world. But even there have been de-recruitment in China as the Economic Policy Institute (EPI) estimates that 410,000 manufacturing jobs were lost to China between 2002 and 2004.
The inflation rates have doubled since the last decade and the economy is suffering from strata-inflation. The main reason behind the rise in prices is the ever-increasing high prices of OIL. Oil is a natural resource that is depleting and the shortage is being created in the market. All the major industries are dependent on this resource. The more the oil is demanded the lesser it is supplied in the market. Oil prices have increased from 36 gallons to 105 gallons during the last six months. It was basically the oil reserves that had lead to political instability all around the world leading to political turmoil in Iraq.
Rising costs in the prices of food have created trade imbalances and an inflationary impact on major countries. There has been a rise in the price of food because of a rise in the prices of fertilizers and other agricultural inputs, change in climate, demand for dairy and meat products are increasing, increase in population, and trade rules and tariffs.
The world is being faced with a fiscal deficit, a negative balance of payment, and a decreasing GDP and public debt. This applies to both the developing and the developed nations. The public debt has to lead the economy to high interest rates, low private investments, less funding, debt trap, economic collapse, and widespread poverty.
The main reason behind imbalanced trade is the equal opportunity allotted to the whole economy. The under developing countries that are already facing poverty problems, high population, and above all few resources to cater to the ever-increasing demand rate cannot survive in the competitive market if the opportunity is not given to them. Opportunity includes the foreign capital funds or the investment. Investment is the key to a progressed nation.
As investment walks in the country, employment opportunities are created which eliminates poverty and other social factors. This leads to the production of goods and services and an increase in the GDP, net income, and real income, leading to a rise in economic growth.
According to the Survey, the following developing nations are experiencing public debt at the following rates: South East Asia is experiencing a high public debt and a low GDP. In Sri Lanka, in 2006, public debt stood at 93 percent of gross domestic product. In India, Public debt is estimated at 82 percent for the fiscal year 2006. In Pakistan, 57 percent by 2006, in Bangladesh, the level of public debt has stabilized “below 50 percent of GDP” and is estimated at 47 percent in 2006. In Nepal, public debt stood at 56 percent of GDP in 2005. (UNESCAP, 2008)
There are few countries that are having a dominant position in the economy and market. And these few countries are responsible for imbalance trade. One of them is China and it is accused of dumping. China is producing commodities at the lowest prices and then exporting to all other countries. This has been easier since the US has given the Free trade Policy, removing all the barriers and tariffs and making it tougher for domestic industries to compete.
Apart from China, Iraq, Iran, and other Middle-east countries that have oil reserves, their economy is booming and creating a recession among the other countries.
Germany, Indonesia, and Japan also have a good market share in machinery and are dominating and enjoying the monopoly powers.
Effect of Imbalances on the Economy
Economic international imbalances have emerged in the economy for decades; they were initially recognized in the postwar period. It started when there was a reconstruction in Europe and Japan and other developing nations started industrializing. They started to emerge in the business market keeping pace ahead. The competition was at the boom in this period; those countries that failed to compete were left way behind. Later high petroleum prices, the Reagan boom in 1980, and the low interest rates charged by the US and Japan worsened the international imbalance.
Economic imbalances have also been due to the inelastic supply of gold reserves, foreign capital lending or debt, private capital funding, dollar exchange rate, and reduction of tariffs. This imbalance leads to inflation, the low growth rate among the developing nation, poverty, income inequality, negative balance of payment, high debt rate, fall in real net income and therefore widening of the economic international imbalances. (Kragel, pg 3-16, Feb2008)
In the economy, even if it is an individual or an economy as a whole, a fall in the purchasing power changes the whole situation. Because the real net income falls which has a bad impact on GDP. Due to this, the investors give a second thought to investing and they prefer saving. And when private or public capital funds are not entered into the economy, there are low chances of growth and prosperity becomes limited. All these factors lead to depression in the economy.
USBIC and the U.S Free Trade Policy
The US free trade policy represents trade between the countries without any interference from the government and any kind of protectionism and interventions like trade barriers, taxes, or tariffs. The US free trade policy was implemented to make trade easier among the nations. Free trade includes the trade of goods and services without taxes, tariffs, or other trade barriers. It links the world in a common hub connecting all countries and easy accessibility of the knowledge, technology, markets, market information, labor, and even capital.
Free trade has a lot of benefits; there is more scope for growth and both parties benefit if they have a different opportunity cost of production. According to the officials, it is the free trade that had saved the economy and helped it to gain back from Great Depression in 1930. There are varieties of people who are in favor of Free trade. In 2006 American Economic Association conducted a poll which revealed that 87.5 % of its members with PhD agreed that “the U.S. should eliminate remaining tariffs and other barriers to trade.” (Wikipedia, free trade)
Investment as mentioned above is an important instrument for economic prosperity. And so US free trade policy includes several investment packages for investors to encourage them to invest in foreign direct investment (FDI). In NAFTA Secretariat 2003, article 1106, chapter 11 mentions and highlights a number of performance requirements. Some of them are as follows;
- exporting a given percentage of goods;
- achieving a given level of domestic content;
- transferring technology,
- other limits on the use of the foreign exchange.
Mexico and China both encouraged their economy in FDI and it resulted in significant results. As before NAFTA (1983-92), the stock of FDI in Mexico increased by $23 billion U.S. dollars. In the decade after NAFTA, between 1993 and 2002, the stock of FDI increased $124 billion, an increase of 435%. And In Canada (1983-92), before NAFTA, the stock of FDI in Canada increased by $44 billion U.S. dollars. In the decade after NAFTA, between 1993 and 2002, the stock of FDI increased $202 billion, an increase of 354 %. ( Scott, 2003)
USBIC (United States Business and Industrial Council) is a council that takes a stand for all American Companies and fights against unemployment in America. (USBIC, n.p.,n.d)
USBIC was true in those predictions as soon after NAFTA was signed problems started to be faced by the citizens and the companies, in return affecting the economy.
But the free trade which was signed for a better cause has led the economy on other grounds. Since 1933, when NAFTA (North Free Trade Agreement) was signed its after-effects were seen very soon. According to EPI (Economic Political Institute), “In 2003, 879820 net jobs have been lost in the US due to NAFTA” (Ericson, pg 3, 2008).
Free trade has grown the inequality and long term stagnation. Not only have workers lost their jobs but also the remaining labor force is faced with a sharp decline in wages. According to EPI (Economic Political Institute), “In 2003, 879820 net jobs have been lost in the US due to NAFTA” (Ericson, pg 3, 2008). Now the workers are in political turmoil and a state of anxiety because at one time the prices of commodities are rising to a great level extent and secondly the wage/ hour rate is decreasing. Not only blue-collar workers are facing this turmoil but also white-collared workers.
The situation has turned so tensed that now workers are ready to work at low wages with poor working conditions because some firms threaten workers with the closure of industries and move abroad, leaving them totally helpless. A Wall Street Journal survey in 1992 reported that one-fourth of almost 500 American corporate executives polled admitted that they were “very likely” or “somewhat likely” to use NAFTA as a bargaining chip to hold down wages.
US Trade Policy was criticized by Alan Tonelson, Research Fellow at the United States Business and Industry Council (USBIC), an association representing small- and medium-sized manufacturing companies stated: “the trading partners should not be rewarded for gaining competitive advantage by repressing their workers and by permitting their air and water to become dirtier as they modernize and become more industrialized.”(Scott 2003),
Free trade policy also lacked to recognize the negative impact on imports. Even if the exports increased but imports decreased to a level extent causing the closure of various organizations. The reason being was that they could not operate in that fierce competition because when trade is being done under free trade then no industry can be protected, the newly established businesses have very little chance to grow and survive.
Free Trade policy is also criticized for the US Trade Deficit. It is because of the policy that net exports faced changes and thereby leading to the effect of a deficit in trade. “In a statement issued by the USBIC after the New Trade Policy was announced, the USBIC said that trade expansion with countries that are too poor to become consumers of U.S.-made products but are able to become producers of goods destined for the U.S. market is causing the U.S. trade deficit to reach dangerous levels.”(Scott, 2003)
It can be concluded that USBIC’s predictions about the trade policy are genuinely true. It cannot be stated that the free trade policy brought nothing but distress because this would not be true. It is because of this policy that countries, companies/ organizations are equal opportunities to perform better and get higher returns and profits. The trade showed a positive direction as the capable ones flourished, the example is China and Mexico.
But its consequences are too strong and hence cannot be ignored. It is because of trade policy that unemployment, inflation, and trade deficit have come to grounds and caused of an economic imbalance in the economy. But different organizations are coming up with different policies to rectify these problems and soon they will be solved.
Fredrick Ericson, Globalization, earnings and consumer prices: taking stock of the benefits from global economic integration; pg:1-5, 2008. Web.
UNESCAP, Financial Deficit and Public Debt sustainability in South Asia, 2008. Web.
Scott, 2003, The high price of ‘free’ trade NAFTA’s failure has cost the United States jobs across the nation. Web.
Free trade. 2008. Web.
Scott, 2001, Nafta at Seven-EPI Briefing Paper. Web.