International_Trade_Report

According to Mankiw’s 1 of the 10 principles of economics (2007), trade makes everyone better off. Swapping goods and services with other countries benefits both countries because it allows for healthy competition and a wider variety of products. The government sets boundaries and restrictions as well as policies when it comes to importing and exporting goods and services. These regulations are put in place to maintain order as well as to benefit both countries and their producers; they allow countries to specialize in producing goods or services that have a comparative advantage. Free trade, which is without boundaries and or restrictions, is an idea that has its advantages and disadvantages. The North American Free Trade Agreement (NAFTA) allows the United States, Canada, and Mexico to trade with each other without restrictions of any type. One example of an advantage and a disadvantage is that NAFTA has helped eliminate poverty in Mexico by increasing income but farmers suffer because of the cheap imports from the United States. (Floudas, 2000). The intent of this paper to discuss the benefits and drawbacks to free trade, determining the goods and services to export, tariffs and quotas that restrict trade, and finally, what causes the U.S. dollar to depreciate in relation to foreign currency and the effects on the U.S. trade deficit. Free Trade Opponents of free trade argue that trade with other countries destroys domestic jobs. Those countries that lower trade barriers and open their markets enjoy a higher standard of living. Consumers have access to a wider range of higher quality products at prices lower than they would otherwise pay. The average person also benefits in terms of wages and job opportunities. When labor and capital flow freely to the most productive areas of the economy, workers are employed in better, higher quality jobs with higher wages. Although there are inevitable short-term transition costs in some sectors of the economy, the long-term benefits of free trade for all, far outweigh such costs (CATO, n.d.). Free trade that can destroy jobs can also create jobs when workers move to other industries that countries have a comparative advantage in. Comparative advantage, according to Mankiw (2007), refers to whatever producer of a good or service has the smaller opportunity cost. The ultimate result, whether or not jobs are lost or gained, is that trade benefits everyone. Determining Export Production In determining which goods and services that countries choose to export in the free trade equilibrium, comparative advantage again comes into play. Countries that have the lowest inputs, can produce a good or service at a lower opportunity cost than another producer. A low domestic price indicates that a country has a comparative advantage in producing a good and that the country will become an exporter. If free trade forces domestic prices to rise on a good or service, and it rises to meet the world price, the domestic producers can sell their goods or services at a higher price. Although the domestic consumers suffer from this, the gains of the domestic producers exceed the loss of the losers and everyone will eventually benefit (Mankiw, 2007, p. 195). Tariffs and Quotas A tariff is a tax that is put on foreign goods. Tariffs are imposed to restrict imports by causing a rise in the price of the goods entering a domestic country. Tariffs may deter or restrict sellers to importing into countries because of the additional tax. Tariffs also work to help protect many domestic industries as well as their workers. For example, if imported produce did not have tariffs, domestic farmers would not earn enough money to continue farming. Tariffs allow domestic producers to produce similar goods for higher prices. Another way the government restricts imports is by setting quotas, or limits on the amount of goods that can be imported. Quotas reduce the amount of foreign goods that enter the country in any given period of time. Setting quotas on goods will create a shortage of foreign goods that will increase the price of that good. The increase in the price allows domestic producers to set higher prices and expand their production. For example, if a foreign made handbag has a quota of 1,000,000 per year and the demand of handbags are 23,000,000 per year, this will leave the majority of the market to American producers. Reducing imports also reduces foreign income, which will also reduce foreign purchasing. Therefore, a reduction in foreign purchasing will cause a reduction in domestic exportation. For any tariff that increases the price and reduces the amount imported, there will be a quota that can achieve the same outcome (Wagner, 2009). As 1 of the 10 principles states, “Trade Can Make Everyone Better Off” (Mankiw, 2007), therefore if Americans do not trade enough, then foreign countries will not be able to trade with us. In other words, if America implements high tariffs and sets excessively high quotas, foreign countries will in turn do the same and this will not be beneficial for anyone. There has to be a medium in which each side can make a profit as well as make sales. U.S. Trade and Exchange Rates The value of the U.S. dollar depends on the demand for it. According to Mankiw (2007), the real exchange rate is the price that balances the supply and demand in the market for foreign currency exchange. This relates to trade in the sense that the exchange rate directly influences our net exports. When the U.S. Dollar appreciates, it costs more for foreign importers to convert their currency to U.S. Dollars. This ultimately makes the price of U.S. goods more expensive than foreign goods, causing less demand for U.S. exports. Because there is less demand for U.S. exports, there is less demand for the U.S. dollar (since importers would pay in U.S. dollars) in the foreign currency market (Mankiw, 2007). According to Shenai (2009), the depreciation of the U.S. dollar does not necessarily mean poor economic health; in fact, it could be a sign of economic recovery and the rebalancing of the global economy. Let’s take our current situation and the value of the U.S. dollar relative to foreign currencies for example. Recently the Federal Reserve has significantly increased their purchases of assets in an effort of increase monetary liquidity. When the supply of the U.S. Dollar increases, the value of it decreases to naturally balance supply and demand. A decreasing value of the U.S. dollar increases the demand for it, which increases the quantity of exports by the U.S. This is a positive sign, according to Shenai (2009), since our country needs to export more and import less in order to decrease the trade deficit that is caused by spending more on foreign goods than is being earned by selling abroad. When our exports increase relative to our imports, our overall Gross Domestic Product percentage increases, which is our way of measuring our economic well-being. International trade is very important to the well being of our economy because it helps create economic opportunity for America. Free trade is a form of trade that allows for healthy competition and the trade of a large quantity of goods for the lowest price. Regulatory policies such as tariffs and quotas are set in place to promote economic growth, as well as to protect United States businesses and workers. With dollar depreciation, the U.S. deficit becomes narrow because it raises the price in U.S. imports and lowers the price in U.S. exports. International trade benefits everyone involved and the government tries to maintain fairness. References CATO. (n.d.). Individual Liberty Free Markets and Peace. Retrieved from http://www.cato.org/trade-immigration/faqs Floudas, D.A. & Rojas, L.F (2000) International Problems. Institute of Politics and Economics retrieved from http://www.diplomacy.bg.ac.yu/mpro_sa00_4.htm Mankiw, N. Gregory. (2007) Ten Principles of Economics. 4th Ed. Principles of Economics. Mason, OH. Cengage Learning Shenai, N. K. (2009). The Depreciating Dollar: Multiple Causes, Mixed Implications. Foreign Policy Digest. Retrieved from http://www.foreignpolicydigest.com/News/Global-Economic-Pulse/the-depreciating-dollar-multiple-causes-mixed-implications.html Wagner, Richard: States and the Crafting of Souls: Mind, Society, and Fiscal Sociology. George Mason University retrieved December 15, 2009 from World Wide Web http://mason.gmu.edu/~rwagner/Erfurt%20Fiscal%20Sociology%201.PDF