Discuss about the Extensive and Intensive Margins of Trade.
Trade protectionism refers to the situation whereby policies are enacted to limit competition that is unfair from overseas countries. Nonetheless, it is a defensive measure which is politically motivated (Baldwin, and Richard 97). Within the short period, it is considered to be effective but as obvious, it is very destructive in the long-run. It is viewed to make the industries of a country less competitive management.
The United States is considered the second most significant export economy in the entire world. According to Economic Complexity Index (ECI), it is regarded as the eighth most complex economy, with an ECI of 1.39. According to 2016 statistics, the country exported $1.42T and had an import of $2.21T. The United States deals with many exports, with the primary commodities unspecified, refined petroleum, motor vehicles, vehicle spare parts, and integrated circuits (Cooper, and William 425). The main imports of the country are cars, crude oil, computer accessories, packaged medicaments, and unspecified (Kerner, Andrew, and Jane Lawrence 110). The leading destination for its exports is Canada, Mexico, China, Japan, and the United Kingdom. Its imports mainly come from China, Mexico, Canada, Japan, and Germany.
The president of the United States of North America, Donald Trump, has had impacted dramatically on protectionism and free trade since he took power. He has made decisions and threats by canceling bilateral and multilateral trade agreements to favor a protectionist business;
First, he vowed that he would tag China as a “currency manipulator” (using monetary policy to make exports of a country to be more desirable to overseas buyers) and would thus impose obligations on goods that are made in China, and would bring World Trade Organization cases against China as a result of unjust subsidies.
Second, Trump has been committed to withdrawing from the North American Free Trade Agreement (NAFTA), which has helped govern trade and security for twenty-three years (Gries, Thomas, and Margarete Redlin 206). His threat is based on the fact that he wants the other nations to be willing to negotiate on the terms that he wants. This is considered as a bargaining ploy by many trade negotiators.
Third, the president hinted on withdrawing from the U.S.-South Korean Free Trade Agreement (KORUS). He argued that the deal was an unequal whereby Washington has a trade deficit of up to $28B with Seoul (Dutt, Pushan, Ilian Mihov, and Timothy Van Zandt 212). The aim is to change the agreement to lower the trade deficit of Washington with the fourth-largest economy in Asia.
Fourth, Trump is focused on filing cases against China and any other country that he deems not playing relatively, in the World Trade Organization (WTO) courts. This will result in a rise in the number cases in the court. However, the president is also focused on appointing a national “trade prosecutor,” giving a blind eye to the team already in place.
In his inaugural speech, Trump gave a clear indication that his administration would be purely protectionist (Petri, Peter Michael Plummer, and Fan Zhai 98). The leader has already withdrawn from Trans-Pacific Partnership agreement which involves eleven other countries. A threat has come from him to the American firms that are situated outside the United States, investing in punitive taxes and tariffs management. A wall is in place to build along the Mexican border and vowed to impose heavy taxes on the exports from Mexico to pay for the construction of the wall. His slogan as a protectionist on trade is “American First” and “Buy American, Hire America.”
The current situation is the ability of the United States to trigger trade war in the world. At present, the United States is experiencing a trade deficit which is much higher than that of 2013. However, it is experiencing growth in its imports, which is a good sign according to trade analysts as it has helped promote the growth of businesses and job opportunities (Constantinescu, Cristina, Aaditya Mattoo, and Michele Ruta 16). The consumer products, not forgetting the automobiles are the core drivers who have led to the high trade deficit. The petroleum imports, for example, crude oil, natural gas, and all the other petroleum-based products are falling (Petri, Peter, and Michael Plummer 96). The main reason behind the fall is due to the growth of the shale oil fields whose development has led to an oversupply of the products. The trade deficit does hurt the economy of the United States because the economy is being financed with debts.
According to economists, there is less sense resulting from the bilateral trade deficit that is being advocated in by Mr. Trump. This is because in a global economy that is integrated, what is of importance is the size and maintenance of the current account balances globally, and this relies mostly on the domestic expenditure rather than policies on currency or even trade.
The purchase of goods by the United States from overseas for a prolonged period has caused the nation to lose its competitiveness (Villarreal, Angeles 130). Due to this, the nation lacks the expertise and the industries required to manufacture this product. As a result, the United States has outsourced more jobs, and the standard of living has gone down.
Regardless of the United States reaching almost full employment, the current leadership focuses on taking job opportunities back to the American people, mostly jobs relating to manufacturing (Handley, Kyle, and Nuno Limão 78). The proposed development in infrastructure and cutting down on taxes will, however, lead to an increment in the demand for labor and goods. Here, the focus is mainly on trade deficit which the United States is in a position to sustain the debt with the shale oil and gas.
Protectionism of the United States on trade is due to the view of business not being a win-win situation. Preferably, the enormous deficit is seen as other trade partners to the US are taking advantage of the United States (Williams and Brock 96). If enacted fully, the considerable barriers to trade will have a substantial effect on the firms that operate as international producers such as the automobile companies which need to import and export their products management.
With the protection ideas from the leadership, the trade team has an intention of driving a hard bargain with nations which run huge trade surpluses with the US (Antràs, Pol, and Robert Staiger 3173). A few things advocated by the US as a bargain include; China would be forced to lower its tariffs on MFN, asked to leave its developing country status in the World Trade Organization, promote its consumption domestically by expediting its reforms, and enhance its efforts that would see that they conserve intellectual property; Germany would be asked to strengthen the spending by the government which is inclusive of defense spending, and additionally raise the wages; Japan should as well increase its spending on defense, avail more of the government procurements to the firms based in the US, and lower its protection on agriculture.
With this trends in the current situation, the interest rates of the United States are expected to rise sharply and at a speedy rate, which would result in deviation of the capital flow towards the US (Baldwin, Richard, and Dany Jaimovich 13). With the enactment of Border Adjustment Tax, countries which have debts mainly being dominated by the US dollar will be affected a lot. In such a situation, many states will turn on bilateral trade and trade at the regional level due to trade frictions.
Protectionism policies are adopted by countries to protect the domestic industries from international competitors by imposing regulations on trading of products. Within the short-term, the polices act as a protective measure to the United States in the following ways;
If the country has an intention of developing in a new industry, protectionist policies in such a situation help protect the new upcoming sector from similar industries that are established by competitors (Hufbauer, Gary Clyde, and Jared Woollacott 64). This, as a result, would give the new industry to study and develop a competitive advantage over the competitors.
Additionally, the protectionism measures would help lower the ratio of joblessness in the country. This is because local companies are restricted by tariffs, quotas, and other regulations that constrain them to hire local employees.
Protectionism is also meant to prevent dumping. This is a situation where a product is exported below the costs of production so as to access an unfair market share. It aims at dropping the prices of the goods below the prices that the same product would sell in the in the home country. The main objective of dumping is for the good to be in a position to increase its market share in the specific industry, so as to effectively create job opportunities for its citizens. Additionally, it focuses on putting the producers of a certain country out of business and take the position of being the leading industry in the same product.
In the long-term, trade protection policies lead to industries weakening. Since there is no competition, firms that operate in the sector become less innovative, as there is no need. At last, the domestic product of the country decline in quality. As a result, the quality of the product diminishes and the product sold at higher prices than what overseas competitors would otherwise have produced. This constraint the consumer to spend much money on less quantity of goods and services that are not of good quality.
The high rate of United States trade protectionism measures will slow down economic growth in the future. Closure of all the borders of the country would leave a large number of citizens jobless especially those who owe their jobs to exports. This is because the closure of the borders would lead to other countries do the same and lock out the United States such that exports to those countries from the U.S. would not be sufficient. Thus, layoffs of employees would be immense within the United States of North America.
Due to the fact that the United States does little investing in education in high-tech, science, and engineering courses, it has adapted job outsourcing from other nations such as China. However, with the trade policies currently in place, the country is to face a significant setback as there would be inefficient skilled labor in the mentioned disciplines.
In the long run, the policies would lead to trade wars. As the United States imposes controls on imports, this will lead to another retaliatory action by another country that leads in imports such as China to decrease its volume of the world trade (Blonigen, Bruce, and Lindsay Oldenski 9). This movement causes the prices of importing new technology from other developed nations to go up.
The protectionism policies would cause an adverse multiplier effect in other countries. This is because when the United States imposes trade restrictions, let say on Korea; the outcome is reduced trade which will have an adverse multiplier effect which will influence many other countries since exports represent injections of demand in the global circular flow of income.
The policies as well have a regressive outcome on the distribution of income. The high tariffs that result from the systems mostly hit the low-income earners the hardest. This is because the duties majorly fall on products such as foodstuffs and clothing, which the low-income families spend the most considerable share of their earnings. As a result, there is an imbalance in the distribution of income among the first class, the middle class, and low-income earners.
Protectionism leads to distortion of the market and causes a decline in allocative efficiency. Thus, it can be considered as an expensive and an ineffective way to sustain jobs. An increase in the tariffs causes the prices of the consumers and leads to inefficient sectors being shielded from genuine competition. The high taxes discourage foreign producers, encouraging allocation of resources domestically and globally to be wasteful. The export subsidies depress access of market by the producers and the world prices. This, however, destroys investments, gains, and jobs opportunities among many developing and low-income earners, which to a large extent depend on the exportation of primary and manufactured goods for their development.
Multilateral trade agreement involves three or more nations whose intentions are to regulate trade between the countries without prejudice. The negotiations are meant to enhance integration among the participating countries between the states being involved. The United States of Northern America has some multilateral agreements which include; North American Free Trade Agreement (NAFTA) is among the most significant free trade areas covering the United States, Mexico, and Canada. The agreement has led to reduced prices on groceries and oil in U.S. The cost of groceries and fuel is lower since the cost of importing the produce from Mexico and Canada have been cut down by NAFTA (David, David Dorn, and Gordon Hanson 2157). The political stability in the region and exclusion of tariffs makes the importation even cheaper, compared to importing from the Middle East. Despite the agreement enhancing import and export among the three countries, it is criticized for impacting negatively on half a million jobs in the United States. It also led to declining in the wages of US as well as boosting the trade deficit of the United States.
Trans-Pacific Partnership (TPP) is a trade agreement between eleven countries bordering the pacific-ocean and the United States. The deal, like any other free trade agreement, removes tariffs on products and reciprocates trade quotas. Also, the agreement has helped remove non-tariff blocks which affect trade, and this is not common with the other trade agreements (Brandt, and Loren 160). TPP involves a large number of products and services, which include financial services, foodstuffs security standards, and telecommunication (Serrano, Raú and Vicente Pinilla 4207). It has helped boost imports and the growth of the economy, creating more job opportunities for the nations. Nonetheless, the agreement has contributed to income inequality in the countries with high wages and promotes goods that are at low prices from the low-wage nations.
Transatlantic Trade and Investment Partnership (TTIP) is a trade agreement between the United States and the European Union. Both create nearly a third of the continent’s Gross Domestic Product (Schwartz and Paul 45). The trade agreement has created job opportunities and enhanced economic growth in the two regions (Evenett, Simon, and Johannes Fritz 1321). The disadvantage of this trade agreement is that a large number of industries would suffer as a result of the increase in competition from Europe. This, as a result, would lead to fewer jobs for the American employees.
The Central American-Dominican Republic Free Trade Agreement (CAFTA) is an agreement between the United States and a number of few developing nations. The trade agreement has promoted stronger trade and the ties in investment, welfare, and stability along the Southern border of America and the region.
The United States-Bahrain free trade agreement has generated opportunities for the United States to export its products, thus creating job opportunities for its citizens, mostly the farmers, and other workers. Farmers have primarily improved their agricultural exports to the US, whereby the tariffs are standardized (Villareal, and Ian Fergusson 652). The United States acts as the core oversight of the agreement. The agreement additionally promotes influences positively the policy of improving economic growth in the Middle East.
The United States-Chile Free Trade Agreement has eliminated efficiently tariffs and opened up markets. The agreement has also reduced of trade between the two nations, provided copyright protection for intellectual property. It has as well efficiently eliminated discrimination in trade of digital products, enables the two countries to stipulate laws that retain competition and prohibiting unlawful business conduct (Kee, Hiau Looi, Cristina Neagu, and Alessandro Nicita 343). With the agreement, manufacturers and workers from the US have increased opportunities as their exports can access the Chilean market duty-free. The exports mainly include machinery, cars, aircraft, and mineral fuel. It has expanded the market for ranchers and farmers from the US. The farm produces benefits from the high demand created by the two nations. Finally, the Chilean service market is growing very fast, and the United States has the advantage of accessing these markets. This includes access to banks, insurance companies, security organizations, not forgetting the professionalism sector.
United States-Colombia Trade Agreement is an agreement which eliminates trade tariffs and barriers that restrict US services. It is aimed to expand the imports of the United States thus creating job opportunities. It involves disciplines that include the procurement of the government, property rights, and protection of the environment. The agricultural products are duty-free in Colombia. Furthermore, the agreement ensures that the United States organizations in Colombia are free from unlawful treatment and provides that there is a common ground to solve investment disputes whenever they arise. A section of the agreement ensures that the two nations adhere to labor rights.
The United States-Israel Free Trade Agreement serves to expand trade between the US and Israel. It helps lower the barriers and enhances transparency in regulations. The focus of the agreement is on agricultural products and telecommunications accessing the market in both countries.
Conclusion
From the discussion, it is clear to see that trade protectionism to some extent (in the short-run) may have a positive impact (Staiger, and Robert 259). Nonetheless, in the long-run, it has adverse effects on the United States and the whole world. Protectionism will in the future cause an increase on trade frictions mainly among the United States and the big four countries that the US turns to have huge trade deficits (Aggarwal, Vinod, and Shujiro Urata 127). To ensure that free trade between nations remains useful, it will depend on how fast and the ability of the vast partners of the United States in the deal will be able to retaliate. However, the president of the United States has a large number of protection instruments which are legal at his disposal. All this will depend on the partners of the United States making sure that their voices are heard early enough, and if they stand tall that they will at no dispensation retaliate within the boundaries of law, in case their interests on trade are not considered.
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