International Trade, Essay Example

A recently published article in The New York Times online edition reports that the U.S. trade deficit reached the widest imbalance in the last three years in January, 2012. The increase in trade deficit has been caused by both higher prices such as of commodities like oil as well as higher demand for foreign-made products such as cars, computers, and food products. In addition to negative impact of imports on the trade deficit, U.S. trade balance was also hurt by lower exports to Europe which has been dealing with debt crisis and weaker economies. Exports to Europe, which accounts for 20 percent of America’s export market, fell by 7.5 percent. The deficit is expected to slow the growth rate of the first quarter of the current year by an annual one percent. Economic growth may improve later this year due to higher consumer spending as a result of low unemployment rate (The New York Times, 2012).

The article is not surprising because U.S. is the world’s second biggest energy consumer, only behind China (Oster & Swartz, 2010) but unlike China which has a strong manufacturing sector, the U.S. economy has become more service-intensive. While goods and intangible products can be exported, it is more difficult to export services which often require real-time delivery and face-to-face interaction with the consumers. And the reason for manufacturing decline in America is globalization which has made factors of production more mobile. As a result, manufacturing has moved to places where production costs are lower due to lower labor costs. This explains why U.S. imports of food, computers, and cars have been rising because in addition to foreign companies such as Sony, Toyota, and Honda etc. which enjoy good reputation, even American companies including GM, HP, and Intel etc. have outsourced their production activities to countries with lower labor costs.

This indicates the importance of U.S. achieving energy-independence because the demand for oil will only go up as emerging countries such as India and China continue to enjoy record growth rates. Thus, the U.S. should invest in alternative energy sources such as solar energy and wind energy which may be infinite in supply and costs will come down as the technology is perfected over time. This is also importance to minimize the impact of outside factors on the U.S. economy. Oil prices are determined by factors outside U.S. control but as the trade deficit has shown, the consequences for the U.S. can be catastrophic. So only by reducing reliance on oil, U.S. can gain more control over its trade balance.

The trade deficit might also have increased due to the strengthening of the dollar against other countries. When dollar appreciates it value, it makes imports cheaper for American customers while making American exports more expensive for foreign customers. The result is higher level of imports and lower level of exports. This also means U.S. should increase its efforts to persuade China to let its currency flow freely because undervalued Chinese currency gives unfair advantage to Chinese exporters at the expense of American exporters.

This trade deficit also emphasizes the fact that U.S. should further diversify its export markets because a major reliance on any one region results in greater risk as Europe has proven. Asia and Africa offer greater growth potential and U.S. exporters should investigate these fast growing regions for more opportunities. The factors behind the U.S. trade deficit also emphasize the fact that globalization has increased interdependency among world economies and events in any single country or region can have significant impact on other countries.

But American companies also have opportunities due to globalization which will also help reduce the trade deficit. One is to increase investments in education and innovation/research because unlike products, ideas cannot be outsourced. The ability of American companies to stay competitive is not through manufacturing but innovative products and continue to lead the world in new technologies and products. Another way to increase foreign investment is to give incentives to investors that will not only create jobs but also increase exports.

If countries like China do not take steps to bring in their currencies’ value to fair levels, U.S. should take steps to depreciate dollar though it may also carry inflation risk. One way to do so is to increase the supply of U.S. dollars that will result in dollar depreciation and make American exports cheaper for international customers. The other countries may have cheaper labor but America still produces one of the best technologies in various industries. Thus, America should focus on more specialized products such as agricultural technologies, military products, and construction technologies. These specialized products may not enjoy volume but their per capita revenues may run into millions.

The article demonstrates that countries are losing some control over their trade balance due to globalization that has linked economies of the world like never before. In addition, there is freer flow of factors of production than ever before. This means that the countries with lower labor and production costs enjoy natural advantage and the only way to tackle this challenge is through innovation. In addition, U.S. also needs to monitor its own currency as well as those of its trading partners because exchange rates have significant impact on international trade.

References

Oster, S., & Swartz, S. (2010, July 18). China Tops U.S. in Energy Use. Retrieved March 10, 2012, from http://online.wsj.com/article/SB10001424052748703720504575376712353150310.html

The New York Times. (2012, March 9). U.S. Trade Deficit Surged to 3-Year High in January. Retrieved March 10, 2012, from http://www.nytimes.com/2012/03/10/business/economy/us-trade-deficit-widens.html?ref=internationaltradeandworldmarket