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Free Trade and American Jobs
The market models in which the goods and services are transferred without hindrance of the governments are called Free Trade. Here the hindrances generally include tariffs and taxes and other non-tariff barriers, such as quotas and legislations. These trade barriers can be removed through trade liberalization. The principles of microeconomics will be helpful to analyze the issue of free trade and the export of American jobs. There is a no such close correlation which cost the jobs due to trade deficits. There are some misconceptions on trade deficits among the people which are simple, appealing and wrong. The trade deficits are not totally determined by the microeconomics of trade policy. The trade deficits will signal global investors’ confidence in the country and on the purchasing power of the domestic consumers. At the end of the day what matters is not the difference between exports and import but the benefits incurred in the form of efficiencies, consumer choice and opportunities created in an economy which is open to world trade.
In recent years under Washington’s agricultural subsidy program, subsidies received by U.S. corn farmers have resulted in overproduction of crops causing large dips in the price of the crop. In 2000, U.S. corn producers alone received $10.1 billion from the U.S. government—ten times the Mexican government’s annual agricultural budget. Subsidies are determined by a farm’s land area and historical output; due to which, most of the aid goes to large agribusinesses.
U.S. has established a pattern, which assists in opening its borders by means of free trade deals, bringing supply and demand capitalism to a developing world, to create mutually beneficial trade arrangements. At the same time, it protects its own farmers against the self-correcting mechanisms of the capitalist model by rewarding overproduction at home by economically penalizing small farmers in other parts of the world. According to the one of the survey made by America’s major trading partners which reveled that there is no such relationship between bilateral trade balances and openness to the US exports which will damage American market. There is no such serious connection between industrial decline and trade deficit.
North American Free Trade Agreement (NAFTA) signed in 1993, is a free trade and investment agreement that provided investors with a unique set of guarantees designed for stimulating FDI and the movement of factories, jobs within the hemisphere, especially from the United States to Canada and Mexico. It does not contain any protections to maintain labor or environmental standards, favoring the investors. NAFTA increased the unemployment within the agricultural sector of Mexico such that there were 6.8 million unemployed agricultural workers in Mexico (corn producers being worst affected) at the end of 2004, according to the Economic Policy Institute reports. Even though NAFTA has sharpened Mexico’s agricultural problems, but it can’t be blamed wholly for the country’s struggling economic sectors. Latin American Regional Report says that the existed subsidies to support Mexican farmers are usually given to large-scale operations. Rich farmers and Agribusiness men receive more aid and neither pay income tax nor irrigation costs; contrastingly, leaving only insignificant amounts of support to the poorest and smallest Mexican farming operations, which is limited to subsidized fertilizer and awards from the Procampo program which was instituted by the Mexican government in order to curb the migration which resulted from NAFTA.
It also increased the immigration of Mexicans to the U.S., which also brought various economic benefits, as the laborers are not competing with U.S. born educated persons. Free trade and immigration are therefore interlinked and the supporters and opponents of free trade are also divided in their opinion. Conservatives support Free trade measures generally but not the immigration policies whereas Liberals support open immigration but are against the Free trade measures. U.S. is tackling the situation very well by implementing policies that can stimulate both the Mexican as well as the U.S. economies.
The trade deficit would remain largely unaffected without a change in the aggregate levels of savings and investment. The exported subsidies by the Government would not be effective in reducing the trade deficit. President Clinton proposed in response to the Asian financial crisis, federal budget in 1999 increasing the subsidies to U.S. exporters through the Export-Import Bank., which would stimulate foreign demand, by allowing certain exporters to lower their prices on sales abroad. Bidding up of the dollar's value in foreign exchange markets will take place due to greater demand for dollars needed to buy U.S. goods. Similarly the effective price of U.S. exports would be raised generally, if the dollar is stronger offsetting any price advantage gained by the subsidies. Therefore the Total exports and the Trade deficit would remain unchanged. Only diversion of exports from less favored to more favored sectors will take place due to subsidies.
Theoretically, by influencing a nation's level of savings and investment, a trade policy can indirectly affect the trade deficit such as a increasing tariff would presumably increase government revenue through additional customs duties, which results in smaller trade deficit. But it can also stimulate investment in the protected industry, increasing demand for foreign capital which leads to a larger trade deficit. But trade policy is believed to have marginal impact on the trade balance.
There is lot of impact of supply and demand, diminishing marginal returns and some other economic concepts on the free trade, jobs, government policies etc. Where as the diminishing returns also called as diminishing marginal returns. As per the relationship is concerned it is a production system with fixed and variable inputs. Every additional unit of variable input defers less and less additional output. While producing one more unit of output costs more and more in variable outputs. This perception is also known as the Law of increasing relative cost, or law of increasing opportunity cost. Though apparently a concept of economics is purely diminishing marginal returns and it also implies a technological relationship. Ultimately a firm’s short run marginal cost curve will increase as per the Diminishing marginal return. Conversely in economics; supply and demand illustrates relationship between prospective sellers and buyers of a good in the market. As the model is basic in microeconomic analysis of buyer and sellers have interactions in a market. The supply and demand model resolve price and quantity sold in the market. It is also used as a point of departure for other economic model and theories in the competitive market; the model predicts that price will function to equalize the quantity demanded by consumers and the quantity supplied by producers ensuing in an economic stability of price and quantity. It also incorporates with other factors varying such equilibrium as reflect in a shift of demand or supply.
Where as competitive advantages are concerned each additional unit of variable input gives less and less additional output. The Diminishing marginal returns also imply a technological relationship. The law of supply and demand is one of the most common words to market and labor as well. When there is any variation of increasing supply and decreasing the price takes place a commodity goes down. The producers make less production, supply reduces and the prices accomplish a balance. It is a fine system, which is called Capitalism and Free Trade. When government interferes in the free market it can also be called socialism or communism.
The governments enacted several acts to help the market of its own in the era of free trade. The Smoot-Hawley Tariff Act of June 1930 was enacted to enhance the protection afforded domestic farmers against foreign agricultural imports. But where as the worsening of the worldwide depression is concerned, ‘The Smooth-Hawley Tariff’ was further a significance of the commencement of the Great Depression than an initial cause. While the tariff is also did not cause depression, it also not help in its betterment. It provoked a storm of foreign retaliatory measures and came to place as a mark of the ‘beggar-thy-neighbor’ policies (policies designed to improve one’s own lot at the expense of that of other) of the 1930. Such policies contributed to a radical decline in International trade. This was evident from the decline of imports in the U.S from 1929, $ 1,334 million to $390 million in 1932, with the Europe. Conversely, U.S. exports to Europe fell down from $2,341 million in 1929 to $784 million in 1932. The world trade had declined by 66% between 1929 and 1934. In general, Smoot-Hawley did nothing to encourage confidence and cooperation among nations in either the political or else economic sphere during a risky era in international relations.
The Great Depression of the 1930 was the most important and turning economic event in the history of America. It caused massive hardship for numerous people and the failure of large fraction of the nation’s businesses, financial transactions and farms. It transformed national politics by vastly expanding government, which was increasingly expected to stabilize the economy and to prevent suffering. There was a remarkable improvement in the output per man-hour, but our gains were marginalized by the rise in the unemployment. The depression is best understood as the final chapter of the breakdown of the world wide economic. The depression can be under stood only in the context of the times. There are four huge differences as stated below:
1. The Gold Standard: Generally money is in the form of paper, but government was obligated, if requested, to exchange that paper for gold. Many countries went off the gold standard during World War 1, and restoring it was a major postwar aim. Britain, for instance, returned to gold in 1925. Other countries backed their paper money not with gold, but with other currencies mainly U.S. dollars and British pounds were convertible into gold. The higher interest rates depressed conversion of interest-bearing deposits into gold and strengthen confidence that inflation would not break the commitment to gold.
2. Economic Policy: Apart from the gold standard, economic policy scarcely existed. It was little belief that governments could prevent business sprawl. The lower wages and interest rates caused by slouches would spur recovery. Andrew Mellon, Treasury secretary under President Herbert Hoover, said after the depression started, “Enterprising people will pick up the wrecks from less competent people.
3. Production patterns: Agricultural productive materials were much more important parts of the economy than they are today. This meant that lower product prices could cripple domestic prosperity and world trade, because price declines smashed the purchasing power of farmers and other primary producers (including entire nations). In 1929 farming accounted for 23% of US employment (versus 2.5% today). Two-fifth of world trade was in farm products, another fifth in other raw materials. Poor countries (including in Latin America, Asia and central Europe) exported food and raw materials and imported manufactured goods from industrial nations).
4. The impact of World War1. Wartime inflation, when the gold standard has been suspended, raised prices and stimulated fears that gold stocks were inadequate to provide assisting for enlarged money supplies at the new, higher Price level. It was one cause that convertible currencies, such as the dollar and pound, were used as gold substitutes. The war weakened Britain, left Germany with massive reparation payments, and split the Austro-Hungarian Empire into many countries.
Therefore by reading the above it can be understood that these are the reasons, which caused worsening of the worldwide depression.
Jobs in US with present development
Trade deficits do not cost jobs which are obvious as rising trade deficits are correlated with falling unemployment rates. Trade deficit is not caused by unfair trade practices but reflect the flow of capital across International borders. Trade deficits and industrial decline are not connected which is evident from the fact that U.S. trade deficit almost tripled from 1992-1997, whereas it’s Industrial production and manufacturing output has increased by 24% and 27% respectively. The U.S. economy has actually grown faster when trade deficit was on a rise than in years in which the deficit was shrunk. Trade deficits signal global investor confidence in the United States and rising purchasing power among the domestic consumers.
The fundamental macroeconomic factors such as labor-supply growth and monetary policy determine the total number of jobs in the United States. The trade among the nations will not show the negative impact on the number of jobs instead it will increase the pace at which produciton shifts from one sector to the other sector. Just like New technology where it lower the demand and in one sector and increses it other area, trade also has the same correlation.
New technology lowers demand for some jobs while increasing for others such as trade enhanced its production of more Boeing jetliners, pharmaceuticals, software, and financial services for export; it also means to decrease the production of Happy Meal toys, T-shirts, shoes, and computer memory chips, etc in US. As a result, the total output as well as the total employment keeps increasing. According to the Bureau of Labor Statistics 2003, the U.S. economy has created 21 million jobs between 1992 and March 2001. This can be due to the factors like investment, government spending and the growth in domestic consumption; simultaneously it has also eliminated three million jobs in the same period due to growth of the U.S. Trade deficit (Scott 2001)
The US trade deficit has grown from $132 to $ 198 billion since 1993. In that period the people employed in manufacturing sector has grown to 18,678,000 from 18,075,000 that is more than 600,000. Media is also creating lot of confusion in with out going deep into the subject matter. Even it is interpreting in its own ways. Some statements are made due to the lack of fundamental misunderstanding of the concepts of trade and unemployment. Columnist Patrick Buchanan says "Our merchandise trade deficit was $175 billion (in 1995). For every $1 billion, you get 20,000 jobs. That's 3.5 million American workers who would have had good manufacturing jobs if we simply had a trade balance." free trade markets some times doesn’t handle the economic externalities such as national culture and public health well, so as a society the people should also act to compensate for what the market cannot do.
The countries such as Canada is also affected the brain drain where most of the educated people went to USA. Actually it is beneficial to USA; it depends upon how the peer groups take this. Some time society gets carried away with the wrong interpretations also.
The unemployment has fallen steadily when there is increased in the trade deficit in 1990. The rate of unemployment has fallen down but the trade deficit has grown much more than it had been the earlier years. With the expanding economy there is creation of jobs and demand for imports also increased. Actual reality is the trade deficit acted positively in falling unemployment. The job export has not really hurt US, instead more jobs have been created than lost although some sectors have seen significant losses or demise while new innovation has created new jobs.
Free trade, Wikipedia inc, 20 December 2007.< http://en.wikipedia.org/wiki/Free_trade>, December 22, 2007.
2Jacob Hill, COHA Research Associate, July 18th, 2007
3. Seymour E. Harris, ed., Postwar Economic Problems. New York: McGraw-Hill Company, Inc., 1943, p. 3.
4. Table 103. The 1998 merchandise trade figure was released February 19, 1998, by the Bureau of Economic Analysis,
5. Quoted in Wayne Leighton, "Playing with the Numbers: Why Protectionists Are Wrong about Trade," Issue Analysis, Citizens for a Sound Economy Foundation, Washington, September 18, 1997, p. 1. Buchanan made his remark on CNN on March 3, 1996.
6. Jeff Colgan, 2005, Broadveiw press, Canada commercial policy. Pp 136.
7. Council of Economic Advisers, Economic Report of the President 1998, Table B-103, for the annual trade deficit figures and Table B-42 for the annual unemployment rates.