In the current competitive global economy with increased globalization, international trade continues to play an imperative role in the US, as well as other global economies. The US has the most diverse and productive economy globally due to its engagement in the international trade. Although the majority of the US citizenry does not recognize the importance of international trade due lack of direct impact on their daily lives, it plays an essential role in the economy. For example, it is estimated that a combination of foreign direct investments and international trade comprise a third of US economy. International trade plays an imperative role in job creation, economic growth and increasing income. For example, it is estimated that the import industry employs more than 10 million while the export industry employs more than 12 million directly.
Therefore, international trade is essential in the global economies in ensuring economic growth and development. In addition, it facilitates the creation of employment opportunities to a large number of people all around the globe. International trade has been an essential factor behind increased globalization and integration of global economies. This paper seeks to explore the impact of international trade focusing on the US economy. In addition, it seeks to explore how US engagement in the international trade has impacted its integration with other global economies leading to the creation of trade agreements and treaties.
International trade in the US has experienced exponential growth in recent years forming a significant portion of the economy. This has created a positive impact in the US GDP, employment creation and improving the balance of trade in the country. After the global financial crisis, US have adopted various economic measures in mitigating the crisis, which are focused on improving the economy. The measures that have been adopted are meant to facilitate increased productivity and increased output in domestic and international trade. However, there has been a special focus on international trade due to influence the US has on the global economy. This has led to increased exports, which has led to shrinking of the trade deficits improving the country’s GDP.
Impact of International Trade on Employment in the US
Employment has remained a contentious economic issue especially after the global economic crisis. Over the last decade, there has been an exponential growth of international trade in terms of exports and imports due to increased trade liberalization. Prior to liberalization of the economy, which led to the creation of multilateral and bilateral trade agreements the total employment related to trade approximated 14 million, in the early 1990’s. However, this changed tremendously after the liberalization, and it was approximated that, in 2004, trade related employment had more than doubled. Although there are perceptions that trade has a negative impact on employment and wages in the US, the majority of Americans acknowledge the importance of international trade in employment creation. The perception has been due to the perceived effects of imports due to reduced local employment and lower wage jobs.
There have been various empirical studies exploring the relationship between international trade and employment in the US. However, most have been flawed and vastly underestimated the positive impact of trade on employment in the US. This has been due to bias and flaws associated with the process of estimation, which results in bias of the results. The majority of the people recognizes that exports have a positive impact on the provision of employment opportunities. Equivalently, they also recognize that imports have a negative impact on employment opportunities. The export of offshore trade has been attributed to increased wages as manufacturing companies hire more people to increase productivity.
However, there have been various researches showing a decline in some wages as the country continues importation of manufactured products from low cost countries. The increased importation from low cost countries has led to declining wages, as well as increased wage inequality. However, this varies between different types of workers as the skilled and educated workers experienced a sharp increase in wages while their uneducated counterparts experienced a decline in wages. This can be attributed to increased demand of skilled workforce with the development of information and technology. The majority of the organizations globally are seeking to increase their productivity through innovations and development of new products. This can only be achieved through incorporations of skilled and competent workforce, who bring creativity to the organizations.
Economists have analyzed the positive and negative effects of international trade and trade liberalization in the US economy. In this analysis, they established that, in the short run, there may be cases of job loss especially in labor intensive industries. This effect is felt more profoundly since it affects the labor market in the short run and economists term this as structural unemployment. This is due to the fact although there will lose of jobs in the short run, people who retrain will be able to achieve employment in other sectors of the economy. However, the net effect is positive because as trade improves the export industry also employs a significant portion of the country’s labor force. Analysts have stated that engagement of the US in the international trade and more so, trade liberalization has had a balanced effect on the country’s labor market.
Effects of International Trade on US GDP
The importance of global trade in a country is measured through evaluation of the contribution of the trade in a country’s GDP. The calculation of GDP is used by economists enables them to calculate the amount of goods and services produced in an economy. It involves the addition of categories of economic expenditures such as consumer, investment, and government expenditures. The component of international trade is captured in the last component of the GDP equation where exports are netted out with imports. Exports are attributed to the generation of income in the country while imports generate income for the foreign countries. Therefore, exports are perceived as good for the economy while imports are perceived as ‘bad’ for the domestic economy.
For many years, the US has had deficits in the balance of payment in that the imports always exceed the exports. Therefore, the net gain on the GDP has been a deficit although there are other benefits accrued to international trade. However, in the recent past the deficit has been shrinking, which has been attributed to the growth of the GDP. This has led to a reduction of the negative effect of the international trade on GDP leading to an improvement in economic growth. For example, in 2007, the exports were 12% while the imports were 17% of the GDP compared to 13% and 16% respectively record in the third quarter. The shrinkage of the deficits in the foreign trade has been attributed to 2.93% increase of the GDP growth in the second quarter (Gorman 192). However, this has been attributed to the devaluation of the dollar, which has made the US dollar relatively cheaper as compared to other currencies.
The international trade plays an imperative role in influencing the exchange rate of the US dollar relative to other global currencies. This is due to the fact, the rise or fall of exchange rate relative to other currencies influences demand and supply of goods and services to the international market. For example, prior to the global financial crisis, the US had devalued it currencies leading to decrease of the deficit in the current account of balance of payment. However, the measures adopted to mitigate the financial crisis led to an appreciation of the dollar relative to other global currencies. This would result to increase in imports and reduction of exports hence the creation of a deficit in the current account.
The balance of trade accounts provides an overall outlook of accounting of a nation’s involvement in the international trade. It is also referred to as the balance of payment and provides a summary of all transactions that a country engaged in with other countries globally. It provides a summation of all transactions that individual businessmen, organizations and governmental agencies engaged in with the rest of the globe. These transactions are recorded as either debit or credit in the balance of trade equation. The transactions that lead to outflow of money in the country such as imports are recorded on the debit side while imports that cause inflows of money into the country are recorded on the credit side.
The balance of payment subdivides the international transactions into three accounts, which includes the current account, capital account and financial account. The current account comprises trade in goods and services, which include the income receipts, such as interests on loan and dividends on external investments transfer of assets unilaterally such as foreign aid. On the other hand, the capital account comprises migrant’s transfers such as goods and financial assets accompanying immigrants into and out of the country. In addition, it also includes international debt reliefs and transfers of funds through gifts. The financial account in the balance of payment is used in recording trades, in fixed assets such as real estate and financial assets such as stocks and bonds.
Prior to incorporation of the balance of payment equation, each of the three accounts is summed up separately and the sum of the current account is equated to capital account plus the financial account. Therefore, the current account should balance out to zero with a summation of the capital and current account. However, it is rarely zero due to exchange rate movements, accounting conventions and guidelines and statistical discrepancies. America total imports exceed the total exports, which results in a current account deficit. The country is forced to finance the deficit in the current account through borrowing internationally or by sale of capital assets bought in the international market.
Globalization has brought about specialization, where country focus on what they can produce optimal at low cost. Therefore, although the perceived impact of imports is negative specialization plays an imperative role in ensuring production at low cost. Although the import business was initially meant to support a country in the provision of what is not produced domestically, some of the products produced are also produced in the country. Globalization has led to improvements in the standards of living for people all around the globe. Therefore, people import goods that facilitate achievement of higher standards of living even though alternative products are available in their country. In addition, industries in the US have shifted their focus on lower labor cost countries, where labor intensive products are imported from countries with lower labor costs. The majority of organizations in the US has engaged in specialization, which allows them to achieve economies of scale.
Impact of International Trade on Formation of Trade Agreements in the US
The US is a major player in the international market and trade engaging with numerous countries in import and export business. Trade agreements involve a contract where countries formulate the terms of trade between them. Trade agreements facilitate the determination of tariffs, duties and taxes that countries impose import and exports. A trade agreement can be multilateral or bilateral depending on the number of countries in the agreement. A bilateral agreement involves two countries where they formulate the terms of trade between goods and services traded between the two countries. On the other hand, a multilateral trade agreement involves an agreement between more than one country. This is more complex to formulate as compared to bilateral as it may involve numerous players and hence more factors to consider.
Trade agreements are essential since they facilitate achievement of a competitive advantage for the countries participating in the trade. The most profound multilateral trade agreement with the US is the North American Free Trade Agreement (NAFTA). There are other numerous trade agreements that the country has had with various other countries globally. Trade agreements have been attributed to numerous opportunities, which facilitate economic growth. There are various other global trade regulatory authorities regulating global trade such as the World Trade Organization (WTO).
The growth of international trade has also led to the development of Trade and Investment Framework Agreement (TIFAs). These have facilitated the provision of a framework for the government discussion and resolution of trade and investment issues. They also facilitate identification of capacity building and work related agreements between the trading countries. Trade agreements are also imperative in opening up foreign markets for US exporters through the reduction of barriers of trade. Trade agreements enable traders explore new markets for their products in the new markets increasing the competitiveness of the country in the global economy.
In the current global economies, countries and organizations are seeking to achieve competitive advantage in their areas of operations. Competitive advantage is achieved through the introduction of new products and establishment of new markets to expand business operations. Therefore, trade agreements are imperative for US achievement of a competitive advantage in the global economy. Trade agreements enable the country negotiation of an agreement that protects the interests and ensure free flow of goods. Participation of the country in the global trade and especially in the trade agreements facilitates the creation of a more stable and transparent trading and investment environment. This enables the country’s exporters to export goods to the trading partners more easily as compared to countries where there are no agreements.
There have been perceptions that the participation of the country in various trade agreements with other countries in the international trade cause negative effects to the economy. This regards perceptions of employment opportunities loss as the country obtain goods from trading partners. On the other hand, developing economies have been perceived as the losers in the international trade due to lack of value addition in their products. This has been due to the perception that developed countries have higher economies of scale that enable them to take advantage of low developed countries.
Impact of International Trade on Income and Living Standards in the US
International trade has been hailed for improving standards of living for various people around the globe. This has been due to the fact people are able to obtain diversified goods and services from all around the globe, hence improving their standards of living. There are different measures of national income and standards of living, in the economy such as GDP per capita and the total GDP. However, various other economic measures are used in comparison of income such as trade dependency and debt burden. International trade provides a framework where the goods produced in the US are traded in an expanded platform. For example, in the recent years America has expanded in the global market after devaluation of its currency prior to the global economic crisis. This led to the reduction of the deficit in the current account hence a growth of the GDP, which is a measure of national income.
International trade has been an important factor behind information and technological development, which has been essential in improving standards of living. In the current global economies information and technology plays an imperative role in achieving competitive advantage. This has been due to increased innovations and creativity in the production of goods and services, which vastly improve the standards of living for the people. In addition, it facilitates the achievement of efficiency in the global economy's allocation of resources. International trade has also been an important factor behind globalization, which is a current trend in the global trade. It has led to improvement in trade between countries as global economies become more integrated.
The integration of the global market has also been greatly influenced by the development of information and technology. For example, the adoption of internet marketing and online shops has been a great factor in enhancing global trade. People in the US can be able to shop for different goods all around the globe at the comfort of their homes or offices. Therefore, these improvements in the global trade continue to improve the standards of living for people living in the country in terms of quality of products and ability to obtain such products in the market.
In conclusion, international trade continually complimented the growth of the US economy in diverse ways. As a major player in the international market, the US has been able to engage with numerous countries all around the globe. Participation of the US in the international market has had numerous economic benefits such as increased employment provision, growth of the GDP and economic diversification. It has also led to increased integration of countries economically, through the formation of trade agreements with numerous countries. Additionally, international trade has also led to improvement in the standards of living of the US citizenry as they are able to obtain different goods from different parts of the globe. International trade has also vastly contributed to the development of information and technology in the global market and especially in the US.
Works Cited
Cline, William R. "Trade and Income Distribution:The Debate and New Evidence." 2013. 8
August 2013 <http://www.econ.yale.edu/alumni/reunion99/cline.htm>.
Gorman, Tom. The Complete Idiot's Guide to Economics. New York City: Alpha, 2003.
Krugman, Paul R. Strategic Trade Policy and the New International Economics. New York: MIT
Press, 2006.
McDonald, Brad. "International Trade: Commerce among Nations." 28 March 2012.
International Monetary Fund. 9 August 2013 <http://www.imf.org/external/pubs/ft/fandd/basics/trade.htm>.
United States International Trade Commission. The Effects of greater economic integration
within the European Community on the United States: fifth follow up report. California: the University of California, 2008.
