A trade deficit arises when a country’s imports exceed its exports. There are different schools of thoughts when it comes to establishing a link between rising deficits and unemployment.
When a country’s exports are consistently less than its imports, this implies that there is a reduced demand for the goods and services it produces, since its nationals, as well as the rest of the world, are buying products manufactured in other countries. If allowed to continue in the long-term, a persistent deficit will lead to job loss locally, because decreased consumption of products and services means that the demand for local industries’ output reduces; consequently, the factories manufacture less, have less need for human capital, and thus there are less jobs available . However, it is important to understand that trade deficits do not always cause increasing unemployment. In certain situations, the existence of a trade deficit indicates that people have steady and stable incomes and there is strong demand for foreign goods. Thus, when countries invest in making international goods and services locally, it may represent a deficit initially, but will eventually translate into a stronger economy.
There are mainly two ways in which trade deficits can be minimized. The most simplistic approach would be to curb imports. On the surface, not spending scare foreign exchange on buying goods and services from abroad seems to be the answer to eliminate deficits. However, in certain situations, a country may be forced to buy certain goods and services because they are essential for a country’s survival. If the majority of any country’s imports constitute finished, luxury goods, and this contributes to the deficit, then imposing heavier import and excise duties will discourage purchase. But if imports include essential products, such as petroleum products that are needed in every economic aspect, or machinery that once installed will increase local output and efficiency, thereby creating jobs in the long-run, then such imports are vital for sustained economic growth .
An unanticipated impediment to growth is the notion of whether free trade should be allowed to flourish or not. Exchange of goods and services without any quotas or restrictive policies, defined as free trade, is often opposed in developing countries. Since the argument is that free trade hurts small-scale local manufacturers who are unable to compete with MNCs, the strongest rationale for allowing free trade should be that it provides greater choices at the most competitive prices for the people; the level playing field will also motivate industries to eliminate wastage and incorporate greater efficiencies .
This is why Transnational Companies who want to establish operations in any country should be encouraged. Aside from the inflow of capital into an economy, Transnational Companies also create local jobs and may trigger infrastructural development which will help give the host country’s economy a boost. For the transnational company’s country of origin, setting up foreign operations increases access to new markets, thereby maximizing the potential for business and profit growth .
Assessing the positive impact of allowing foreign businesses to setup shop locally is complicated and open to debate and interpretation. This is why it is difficult to state with absolute certainty the extent to which poverty alleviation can be achieved through transnational businesses. The difficulty arises, because there is no one clear metric for measuring poverty. Over the years various tools, such as the minimum consolidated household income and GDP per capita have been utilized to classify the relative poverty levels in countries. However, these indicators do not present a comprehensive picture and hence more inclusive measures such as the UN’s Human Development Index, evaluating life expectancy and income equality between various classes, need to be utilized .
Therefore, while free trade in a globalized economy is the way forward, the approach is not without its fair share of flaws. Firstly, if countries and businesses across the world are competing on an equal footing, then this will invariably favor the larger, stronger and more resourceful players. MNCs that have the assets expand production and achieve volume efficiencies or invest more in R & D, will always be at an advantage. Smaller enterprises catering to niche markets will not even stand a chance. This unfair advantage to the big players causes income inequalities and increased dependence of the Least Developing Countries on the developed countries . While international trade organizations and bodies do attempt to reduce this dependence and income inequalities between the developing and developed world, trade assistance programs (the most commonly used tool) have yielded limited sustained benefits. Instead of allowing trade quotas for developing countries, a more effective approach will be helping develop the manufacturing capacities of the industrial sectors of these countries.
The role of the developed or economically strong countries does not end there. A single-minded focus on maximizing economic growth without taking into account the impact industrial activities have on the ecological system is a myopic approach. It is crucial that businesses formulate and implement sustainable business initiatives that have a dual focus on growth, as well as preserving the environment . While initially, being environmentally responsible will cost extra for every organization and every country, yet the there is need for a general consensus that there will be no future markets to cater to or resources to tap into, if businesses do not start changing their SOPs to minimize their carbon footprint.
Works Cited
Bivens, Josh. "Yes, Trade Deficits Do Indeed Matter for Jobs." Working Economics Blog 28 May 2015: 1-4. Online.
Citro, Constance F. Measuring Poverty: A New Approach. Washington, D.C.: The national Academic Press, 1995. Print.
Verdier, Loïc. What is the impact of globalisation on the environment? New York: OECD Publishing, 2013. Print.
