Effects Of Financial Crisis On US International Trade
Jack Boorman (2009) thought that the financial crisis that began in the United States in the sub-prime mortgage market in 2007 and that spread quickly to Europe has become a global crisis, affecting both financial systems across the global and economic activity in virtually all countries. As the most serious financial crisis since 1929’s economic recession, it fully broke out in September 2008, marked by the bankruptcy of Lehman Brothers. Laura D Tyson (2008) believed that this financial crisis was not an ordinary credit crisis and just like the depression in the early 90s of the last century, the continuing economic recession would be longer and more serious caused by the crisis. The United States, as the largest economic entity in the world, the damage the U.S. economy is going through is tremendous, particularly in international trade of the United States. The following will discuss how the financial crisis has an effect on the international trade of the United States from import and export, then analysis of the relationship between international trade and GDP, finally, proposes a theory: the financial crisis is not just a challenge for the United States, but also is the opportunity to change trade deficit.
Effects of financial crisis on the imports in the United States
Robert Mundell (2009) pointed that the financial crisis is actually a collection of three crises: the sub-prime crisis; bankruptcy of Lehman Brothers and its chain reactions; the global economic crunch. The global economic crunch was manifested by the reduction of the scale of international imports. The United States is a country with great imports. Because the manufacturing industry’s proportion in the U.S. economy is far less than the service industry, a lot of things the American people need must import from other countries. As a result, The United States is always imports more than exports in the international trade. The arrival of financial crisis makes U.S. imports decline heavily. The following points show how the financial crisis affects U.S. imports. First, U.S. consumer over-depends on residents’ liabilities to financial institutions (Douglas W. Diamond, Philip H. Dybvig. 2000). In general, Americans do not have much savings, the concept they advocate is to spend more than. After the financial crisis, U.S. financial institutions have been caught in financial crisis. The size of credit is reduced leads that Americans lost support from banks; the decline in consumer demand is inevitable. Second, Consumer demand also relies on the people's real incomes and expecting incomes. Rising in unemployment reduces people’s incomes and disposable incomes are becoming less and less. Americans must tighten current consumption when they are facing these huge pressures (Mandel, Michael, 2009). So it is not strange that imports are shrunk. Low-income consumers are the relatively big proportion in the demands of imports. Moreover, their dependants on banks are greater. The reason of Sub-prime mortgage crisis is because the U.S. financial institutions provide low-income people with excessive. Financial institutions will strengthen risk management and improve the consumer’s credit after the financial crisis, Raghuram Rajan (2009) required financial institutions to maintain sufficient ‘contingent capital’ consumers with low-income would be excluded out of these bank’s lists. Fourth, the financial crisis caused crash to the stock market; the wealth Of the Americans is further reduced, which also bothers the demands of imports (Muller, Aline, Verschoor, Willem F.C, 2009).
Effects of financial crisis on the exports in the United States
Rogoff (2009) pointed that The U.S. economy was going through a long-term and large trade deficits and government budget deficit which ultimately overwhelmed the U.S. financial system in the global economy. There is a point needs to be explained, the impact of financial crisis on exports is less than that of imports and exports always are less than imports in the U.S. international trade. The financial crisis began from America, quickly spread out all over the world. The world market is a whole with each country involving in it, the decline in U.S. imports is the reason that other countries’ exports reduced. In particular, the economic development of many developing countries is supported r by exports, and they import those products and services they are not able to provide by themselves from developed countries, like the United States. Their imports demands from America inevitably suffered from decline; absolutely exports of the United States went through relative reduction. Friedman (2006) believed that deficits would be corrected by free markets as floating currency rates rise or fall with time to encourage or discourage imports in favor of the exports, reversing again in favor of imports as the currency gains strength. From another point of view, the financial crisis is stimulating exports of the U.S. Devaluation of U.S. dollar is well known(Gongloff, mark, 2008), one of the results of devaluation is to make the relative prices of American goods decline in the international market. The decline in prices leads stronger competitiveness of American products. Finally the expansion of exports is achieved.
The relationship between international trade and GDP
International trade for any country is necessary, because there are always something it can provides by itself. Lawrence, H. Summers (2000) believed that the future well-being of the world’s people in large part would depend on how the ongoing process of global integration worked out. International trade exactly is the force to urge global integration. The effects of international trade on different countries are different. The economic growth of some countries mainly depends on international trade, so the scale of international trade has greater impact on GDP. The GDP of other countries is mainly driven by domestic demand, so the scale of international trade has less impact on GDP. In addition to the extent of dependent on the international trade, the structure of the international trade should be paid attention on analysis of the relationship between international trade and GDP. The total volume of international trade consists of exports and imports, so the greater the total volume of international trade is does not mean the greater its contribution to GDP is (Santiso, Javier, 2008). The meaning of import is buy goods from other countries while export refers to sell products to other countries. It is called trade deficit when imports are bigger than exports. On the contrary, people name it trade surplus if exports are bigger than imports. It is obvious that the number of trade deficit is the loss in the international trade while the number of trade surplus means the benefits from the international trade (Florio, Anna, 2010). Generally speaking, trade surplus is the phenomenon a country would like to see. In fact, the balance of imports and exports is the ideal result for a country. Kristin J. Forbes (2002) thought that a country would be vulnerable if trade surplus is excessive. Because its economy is easily affected by the fluctuation of the international market and changes of other countries economy, the extent of economic independence is poor. Once the global economic crisis happens, this blow will be hard to imagine (Udomkerdmongkol, Manop, Morrissey, Oliver, Görg, Holger, 2009).
Challenge and opportunity for the United States
Balcerowicz (2008), Polish Celebrated Economist, thought that it should be noted that the U.S. economy has extraordinary flexibility, including the labor market account. Therefore, the U.S. economy has greater anti-seismic capability than most developed countries in Western Europe. In past years, the United States has been kept trade deficit with a few major trading partners, like China (Prasad, Eswar S, 2009). In fact, America often undergoes the huge imbalance of trade even the scale of international trade is great. After this financial crisis, GDP growth is negative; the rate of unemployment is increasing; the national income is cut down (Altman, Roger C, 2009). The U.S. economy and people’s living standards have been greatly damaged; the U.S. government is carrying out large-scale economic stimulus plan in order to improve economy. The proportion of imports and exports is changing with the contraction of international trade (Schmidt-Hebbel, Klaus, 2009). Warren Buffett (2006) said: ‘The U.S trade deficit is a bigger threat to the domestic economy than either the federal budget deficit or consumer debt and could lead to political turmoil... Right now, the rest of the world owns $3 trillion more of us than we own of them’.Because the impact of this financial crisis on import is greater than export; trade deficit is tending to be reduced. Maybe this is a good opportunity to change the structure. At present, America could take advantage of the pain this financial crisis brought to adjust the economic structure (Barry Eichengreen, Michael D. Bordo, 2002). First, Americans should shift their understanding about consume after the pain of financial crisis, statistics indicate that more Americans are will to save money other than deficit spending (Tsai, Pei-Jung, 2009 Second, the economic strength of the United States itself can make it out of the shadow of the financial crisis, the government can help these big banks and big companies out of the difficulties through economic stimulus plan. Third, the downward in the value of the dollar makes the goods of United States more competitive in international markets; exports can be a certain degree of stimulus compared with the decline in imports. Fourth, the U.S. government will strengthen supervision of financial institutions, in this process; a number of severely deficit-ridden, insolvent and hopeless-in-making-up-deficit enterprises will be eliminated(WEBER, Rolf H., GROSZ, Mirina, 2009). A. Michael Spence and Gordon Brown (2009) suggested that establish an early-warning system to help detect systemic risk. No one denies that this financial crisis is a catastrophe, especially Americans. They have been through a very long hard time since the outbreak of this financial crisis. Even through Friedman (2005) and other economists have pointed out that a large trade deficit (importation of goods) signaled that the country’s currency are strong and desirable, a long-term trade deficit should not be neglected. Every coin has two sides, on the other side of pain; maybe it is a chance to urge the reforms and improvement of U.S. economy (Dick, K.Nanto, 2009).
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