USA Economic Benefits of Trade Through Other Countries

• • Country Background

The United States gained freedom from the British Crown through a revolution. It has federal system in practice where powers are divided between the federation and provinces. 52% of its population is immigrants from Latin America. Due to its ethnic and racial diversity, it is called the “melting pot”, the cause to celebrate the basic American ideology (BBC News, 16 Nov. 2009).

Although the racial discrimination has been banned with the promulgation of the 1964 Civil Rights Act but it still remains a burning issue.​​ 

The government functions through three different branches: legislative, executive, and judiciary. Legislative is run by the Congress through the two elective houses, the Senate and the House of Representatives (xaviermissionaries.org, 2010).

Through various trade agreements and the World Trade Organization (WTO), the USA is marching in global reach by competing in global markets. It shares free trade agreements with Canada and Mexico through North American Free Trade​​ Agreement (NAFTA) and others like Organization of American States, and Security and Prosperity Partnership of North America.

The United States has taken a shift from the 1940s to 1960s multilateral approaches by strengthening the free trade through 1970s and 1980s and onwards followed an aggressive bilateral trade strategy focusing greatly on domestic economic interests and regional political objectives (Baldwin, 1989).

• Overview

The United States has been playing a major role in global perspective; as such its foreign policy actions attract criticism as well as praise. It has combined the mission of spreading democracy with implicit national self interest as the ideal of its foreign policy. It has prospered a great after freedom but the difference between the rich and the poor has been widening, as more than 30 million Americans are living below the official poverty line, most of them are African-Americans and Hispanics (BBC News, 16 Nov. 2009).

From the start when early settlers came to America from Britain, the aboriginals – the Native Americans, majorly black Africans remained backward in economic progress as they had to work as slaves on the​​ American plantations. With continuous immigration from European countries, natives became minorities in America. In today’s America, Asians and Hispanics from the Southern Americas are struggling to find their share of the freedom and prosperity, as promised by the “American Dream” (BBC News, 16 Nov. 2009).

New economic challenges have surfaced the world and America in particular has been affected by global financial crisis of 2008, creating new economic circumstances to tackle with (BBC News, 16 Nov. 2009). Another major affect has been 9/11 aftermath of terrorist attack of September 11 2001 on the World Trade Center, compelling the nation to rethink on its role as the global super power. In October 2001, America waged a combined war against Afghanistan’s Taliban regime. In March 2003, military action against Iraq toppled the rule of Saddam Hussein. By playing such leading role in the world body politics, the U.S. collectively takes into consideration its business and trade interests (BBC News, 16 Nov. 2009).

• Review of Literature

The U.S. has been serving its economic and political interests through its trade policy strategy. It is no more following the benevolent multilateral approach of 1960s, seeking global cooperation in promoting democracy and​​ freedom. In 1970s and 1980s, it brought about a shift in its earlier stand, focused at domestic economic interests and regional political aims. This policy shift in the U.S. has resulted in more bilateral discussions resulting in agreements over the U.S. compelling its trade partners to access their domestic markets for the U.S. products to minimize the affects of the imports from that country. Entering into free trade pacts with the Caribbean basin, Israel, and Canada is different from the above. ​​ Policy shift lays stress on “fair” trade through antidumping and reactive duty laws to regulate imports and denouncing the rank ​​ of most favored nation although not harming the domestic industry due to the other nations’ unfair foreign trade policies. The United States has not completely denounced multilateral practices as is visible from its participation in Uruguay Round discussions. The difference in approach is evident with its unwillingness to reach a compromise for a consensus on issues as it used to in the past. The U.S. interests have gained primary importance compelling a change in its trade policy strategy (Baldwin, 1980).​​ 

A lot of bickering has been going on the US Trans-Pacific Partnership, as negotiation on regional, Asia-Pacific trade agreement, known as Trans-Pacific Strategic Economic Partnership Agreement (TPP) is going to happen in Melbourne, Australia on March 15-19. From the last one year,​​ Obama government was neglecting its participation by going to the limits of worst type of protectionism, as there were concessions for the stakeholders (James, 15 March 2010).​​ 

The TPP deal has potential although drawbacks remain to be analyzed. The actual TPP took place in 2006 with just four members—Brunei, Chile, New Zealand, and Singapore. The purpose behind the agreement was to remove tariffs between the members by 2015. Other participants joined in 2008 were Australia, Vietnam, and Peru, just after the U.S. showing its interest in joining the TPP. Future expansion of this group is seen in the Asia-Pacific region with Malaysia also showing interest in joining it in February 2010 (James, 15 March 2010).

Asia-Pacific region has seen growth, as it is visible from Table 1 that member states are registering comparatively fast growth rate over the last decade. The U.S. national interest has increased with its goods export lead by 8 percent in 2008 and service exports by 7.7 percent. This TTP is an attempt by the U.S. government to compensate its diminishing participation in Asia-Pacific markets, as other countries are entering into bilateral and regional pacts to which the U.S. is not a party. It will provide the U.S. the opportunity to become competitive and get its share of job related economic aspects (James, March 15 2010).

Earlier, during his tenure of 1 year, Obama government was following protectionist policy, showing disregard to trade liberalization and catering to special interest groups wanting protection from foreign competition. This TPP is a good attempt on the par of the US government of opening up towards globalization (James, March 15 2010).

The government should make further advances in the interests of the consumers and businesses by showing allegiance to bilateral pacts already made. Free trade in the true global spirit should be encouraged​​ to promote economic liberty and global interaction. TPP discussions should not be used as a ploy to divert attention of the supporters of such pacts from multilateral or unilateral trade liberalization tactics (James, March 15 2010).

• Path to Globalization

The U.S. is on the path to globalization through various trade agreements. Such agreements enhance exports of the U.S. companies, their profits, employment, and wages in such industries that cater to the increasing world markets. The World Trade Organization also puts pressure on the American government to follow the open market policy of global economy. Globalization has helped the American people to access goods and services in competitive rates, resulting in money value increase in real terms. Local producers compete with foreign producers on price, quality and production to the benefit of American public. By importing raw material, capital goods and other essential inputs like steel and semiconductors at competitive rates, the U.S. companies are successfully reducing their cost of production, which helps them to remain competitive in international markets (Cato Institute, 2009).

The U.S. government trade agreements include United States Court of International Trade, Canada-United States Free Trade Agreement, United States International Trade Commission, United States free trade agreements, North American Free Trade Agreement, Organization of American States, and Security and Prosperity Partnership of North America. Trade agreements serve the purpose of agreement on trade issues with partner or other country although the public opinion in the US is divided on the need to enter into such agreements. ​​ 

The table 2 below provides a view of the US percentage of imports to its exports from 1960 to 2004.The year 2004 indicates the imports to the highest level of 60 percent to exports 4 percent. Similarly, export was highest in 1964 simultaneously resulting in lowest import that year.​​ 

Table 2

The table 3 below captures export of goods and services from 1960 to 2004. The table 3 shows clear difference in the quantum of services that rose during the time period to goods exported. Both were at the highest peak in the year 2004.

Table 3

Table 4 below indicates that import was greater than export as shown in table 3; import of goods and services combined is just below 1800 billion dollars while export is below 1200 billion dollars.

Table 4

These tables signify the role played by American trade in global perspective. It has been a leading importer and at the same time has been one of the top three international exporters. ​​ It is the pivotal point of global business, benefitting from its position unlike most other nations. Reason being that it is the world leader in consumption, thus, becoming the top customer of companies’ world wide. There is competition to grab a portion of the U.S. market among businesses. This economic advantage is some times exploited by the U.S. to impose economic sanctions in some parts of the world. ​​ About 60 trading nations have U.S. on the top of their export market list.​​ 

Being the major importer of the world, there are a number of U.S. dollars floating in the world market. It is recognition to the sound economy and quite sound monetary policy of the U.S. building faith in its currency, which is a globally accepted and secure mode of payment.​​ 

Further, to repay its debt, The U.S. government sells its treasury bonds to both its people and outsiders. Off late, selling these treasury bonds outside the country has become more significant. ​​ A good part of the money invested in the U.S. treasury bonds has been the earning through imports in the U.S. (http://en.wikipedia.org/wiki/Foreign_trade_of_the_United_States).​​ 

• Exports

The United States was traditionally into the export of wheat. It still is into wheat export due to availability of high tech farming, skilled farmers, and huge prairies in the Midwest and the Great Plains making production of wheat at large scale to be exported. With the changing times, the U.S. has also changed to exporting new goods and services after facing challenges in cost and quality from other countries in finished goods in the early 1970s. Computer technology off late has become a major item of export, changing​​ America’s manufacturing based economy to the new Information Age- based economy that survives and depends on latest technology introduced through advanced and top-rated software and computer companies (Institute for International Economics).

6.1 Comparative Advantage

Comparative advantage in some commodities accrues when they are global products. It is one of the major traits of the U.S. trade to divide the production process in different functions; some of the processes are distributed world wide to those countries that have some sort of competitive advantage in a specific stage of the production process. Final assembly of items takes place for sale. In the U.S. it is happening in the trade of computer and its related items. Capital goods like semi-conductors, computers, parts, and accessories are growing rapidly in export as well as import. Capital goods make 30 percent of the U.S. total exports. Increase in capital goods export is due to the fast growth of this sector (Mann, 2002).

The two-way trade in some commodities as stated above is the result of decomposition of the production process. The U.S., for example, has expertise in some production processes like processor chips, complex software and fully finished product. It has delivered some processes to​​ other countries where comparative advantage exists like in memory chips, “canned” software, and other peripherals. Comparative advantage exists in selling the final product only if some production processes are relinquished to such countries where cost of production is less. The U.S. has to put together its initially produced parts with the overall production processes at critical steps to get the comparative advantage accruing for both countries in the production processes (Mann, 2002, pp. 39-41).

The U.S. export is divided into three categories, goods, services, and financial assets. Goods include foods, feeds, and beverages, which formed 14.4 percent of the total share of goods being 80.8 percent according to 1975 census but in 1997, its export got reduced to 5.5 percent. ​​ Only capital and consumer goods except autos showed increase in export from 27.4 percent to 31.4 percent from 1975 to 1997. Export of goods like industrial supplies and material and other has been on the decline in the time period ranging from 1975 to 1997 (Mann, 2002, pp. 34-35).

In services export, the U.S. trade has seen mixed trend, although overall the services sector export increased from 19.2 in 1975 to 27.5 in 1997 with major increase in travel and passenger fare services export (Mann, 2002, pp. 34-35).

In capital outflows, export increase has been in private assets like foreign securities, bonds, and foreign stocks besides other claims including banks. The comparative advantage is visible not only through service sector services with their increased share in total exports but positively increasing net export balance in services (Mann, 2002, pp. 34-35).

The major export destinations of the U.S. as per the Fact Sheet are Canada, Mexico, China, and Australia (http://www.dfat.gov.au/geo/fs/usa.pdf). The latest highlight of the U.S. international trade in goods and services has been of decrease in deficit in January 2010 to $37.3 billion from $39.9 billion in December, previous year. This accrued because of comparative more decline in imports to exports (U.S. Census, 11March, 2010).

• Imports

The U.S. is mainly into import of foods, feeds, and beverages, industrial supplies and materials, capital goods, and consumer goods. In food category among others non-agriculture foods have been the least imported in January 2010 to 58 billion dollars while fish and Shellfish have been the highest to 1,093 billion dollars. In industrial supplies and materials, cotton and natural fibers were the minimum to 5 billion dollars in January 2010, followed by hides and skins import to 18 billion dollars while the maximum​​ import has been in crude oil of 19,244 billion dollars. In capital goods, highest import has been in computer accessories of 5,263 billion dollars while the minimum import has been in commercial vessels in January 2010 of 3 billion dollars. In consumer goods category, the highest import was made in pharmaceutical preparations to 6,489 billion dollars while the lowest item imported on the list was musical instruments to 117 billion dollars in January 2010 (US Census Bureau, March, 2010)

From December 2009 to January 2010, decrease in import of goods shows a decrease in automotive vehicles, parts and engines ($1.5 billion), and consumer goods ($0.9 billion). An increase happened in the import of Foods, feeds, and beverages category ($0.1 billion). Other goods and industrial supplies and materials remained unaffected (US Census Bureau, March, 2010).