The Impact of International Trade on U.S. Economy - Essay Example

?Running head: The Impact of International Trade on U.S. Economy The Impact of International Trade on U.S. Economy Insert         Insert Grade Course Insert Tutor’s Name 26 March 2012 The Impact of International Trade on U.S. Economy Introduction The world has witnessed rapid economic regionalization in the last decade, as evidenced by the proliferation of free trade agreements among nations. By July 2007, the number of negotiated and effected agreements had risen to 205. The United States has also had its share in the international trade (Peridy, 2005). She has entered into trade agreements with countries from Africa, South East Asia, and Europe. International trade brings along certain factors, which impact on the U.S economy, either favorably or unfavorably. Some effects of this trade include provision of new markets and access to goods and services at subsidized prices (Sun and Reed, 2009). In the present paper, the impact of international trade on the U.S economy is investigated. It is hypothesized that international trade favorably impacts the U.S economy. The literature reviews that follow will attempt to illustrate and support the hypothesis. Literature Review In a research article by Peridy (2005), three crucial questions were posed to guide the study. First, does the United States face a trade deficit with respect to Middle East and North American (MENA) countries? Secondly, has the deficit resulted from the Euro-Mediterranean (Euromed) agreement? Thirdly, what trade potential does the US hold in this area? (Peridy, 2005). The focus of the investigation is on the trade relations between the US and MENA countries, specifically favorable trade using a short, descriptive analysis. It is hypothesized that, the US will trade unfavorably with the MENA countries comparatively to other OECD countries. The investigation focused on market shares and export levels, and calculated several indexes of export position between the US and MENA countries. The result of this investigation agreed with the hypothesis that there was unfavorable US export performance with respect to MENA countries in comparison with other OECD nations. The result indicated that majority of MENA countries are ranked after other OECD countries in US export preference list. In comparison to other exporters, the US seems to export four-times lesser than the MENA countries (Peridy, 2005). The difference in trade between the US and MENA countries, and the US and Euromed countries may partially be attributed to the long distance between the US and MENA markets, which infers high transport cost to the trading partners (Peridy, 2005). The result of the relative market share also reveals the unfavorable position of trade between MENA countries and the US, with the US having potential in the MENA markets. It is also reported that exports from the MENA countries to the US has continued to dwindle. Contrastingly, the US preserved its favorable position relative to the other OECD countries (Peridy, 2005). These results come together to affirm the hypothesis that international trade favorably impacts on the US economy. One shortcoming of the study is that it relies on predictions that are prone to change (Peridy, 2005). It rests on out-of-sample predictions that calculate what proportion of MENA countries’ exports if they would have behaved akin to countries fully incorporated into the world economy. However, this approach may deter the ambiguous interpretation of residuals. Next, the topic of measures of international relative prices in relation to its impact on the US economy is discussed with China as the primary point of reference. In a research article by Thomas, Marquez, and Fahle (2009), several specific questions are addressed. First, is there a disparity in pricing between exports from China and those from her trading partners? Second, does the World Development Indicator (WDI)’s new price index affect the appraisal of USA’s international relative prices? Third, does the weighting scheme employed in aggregating prices carry some weight? And finally, does the amended price data corroborate a negative correlation between US international relative prices and US net export? It is hypothesized that the negative correlation between relative price and net export is solely dependent on the country's level of development. USA’s relative price index is updated relative to its trading partners. The investigation focuses on China as an emerging market and her influence on the relative price index of industrialized countries such as the US. The results from the investigation led to significant findings. Firstly, the study reveals that China’s relative prices are approximately half those of her trading partners. Secondly, the new WDI price for China necessitated a revision to the rates of the US international relative prices. Third, the choice of the scheme used to weigh the aggregate prices matters. For instance, the degree of USA’s international relative prices using her bilateral export share was markedly lower than the matching measure using her bilateral import share. Fourthly, the revised price data corroborates a negative correlation between US net export and US international relative prices. For China, however, the study reveals a positive correlation between these variables (Thomas, Marquez, and Fahle, 2009). The level of a country’s development is not the sole determinant of the difference in the country’s correlations. This contradicts the hypothesis of the investigation; some developing economies have negative correlations while some developed countries exhibit positive correlations. The third research documented by Sun and Reed (2010) evaluates the impacts of free trade agreements (FTA) on agricultural trade creation and diversion of trade. This study investigates the effect of that FTAs has on trade diversion and formation of Agricultural trade. This study hypothesizes that trade diversions lead to a marked increase in international trade. The investigation employed the use of a gravity model to examine the influence FTAs have on trade movements. The findings from the study reveal the ever-changing nature of agricultural trade creation and diversions among FTA members. The main shortcoming of this investigation lies on the use of the gravity model; the error term used in the gravity model correlates with FTA dummy variables. The study partially supports the hypothesis and partially disapproves it. FTA members can divert some trade to non member countries, and this would lead to an increase in international trade (Sun and Reed, 2009). Miljkovic and Wilson (2011) published a research article on the impact of the emergence of Chinese international corn markets on Chinese and US corn price. Historically, there has been limited trade in corn between China and the USA. These two competitors interact in the supply markets. Moreover, China’s corn deficit is covered with the USA surplus. This study attempts to answer the questions that relate to the impacts that the changes in one market has on the others. The focus of the investigation was to assess the non static interrelationships between corn import and export prices, and the prices of the Chinese corn. The study hypothesized that the prices of Chinese corn varied the market prices. The findings of the investigation reveal that the price of the Chinese corn remains fairly independent of the happenings in the world markets. On the other hand, the USA’s corn market responds to any change in the market by effecting minimal adjustments (Miljkovic and Wilson, 2011). Finally, the topic of the impact of international trade on the US economy is addressed by the American Growth Opportunity Act (AGOA) treaty. In a research article by Nezerwe (2012), the author points out the role of this trade agreement in increasing trade volume between the United State and AGOA-eligible African countries. This agreement opened up the US market to selected duty free exports from African countries, with the eligible goods being textile, chemicals, and agricultural products, which did not compete with the products produced by the American home industries. Two questions addressed in this investigation were pertinent to the main topic of this paper. First, how does AGOA help in supplying the US market with products it does not produce locally? And second, doe the AGOA agreement impact on the economy of the US? This study focused on the analysis of trade created by the AGOA agreement with Kenya as the point of reference. The study hypothesized an increase in trade volume between the US and Kenya (Nezerwe, 2012). The findings of the investigation supported the hypothesis. AGOA agreement led to an increased trade volume between Kenya and the USA, and access to goods at subsidized prices (Sun and Reed, 2009). Conclusion International trade impacts on the economy of the US in various ways. Free trade agreements have made it possible for subsidized goods to enter the US markets. Trade creation has been accelerated by treaties such as AGOA. Deficits in the corn consuming markets have been addressed by the corn producing markets such as that in the US leading to increased trade (Sun and Reed, 2009). Unfavorable export trade subsist between the US and Middle East and North African (MENA) countries mainly because of the long distance between them. Future research should check into ways by which additional international trade can be created particularly from the MENA countries. References Miljkovic, D. & Wilson, W. (2011). The impact of emergence of Chinese international corn markets on Chinese and US corn prices. Applied Economics Letters, Vol.18, 449–454. Nezerwe, Y. (2012). The American Growth Opportunity Act: Impact on U.S. Trade with Kenya. Global Journal of Business Research, 6(1):113-118. Peridy, N. (2005). Towards a New Trade Policy between the USA and Middle-East Countries: Estimating Trade Resistance and Export Potential. Blackwell Publishing Ltd. (Attached document) Sun, L., & Reed, M.R. (2010). Impacts of Free Trade Agreements on Agricultural Trade Creation and Trade Diversion. American Journal of Agricultural Economics, 92(5): 1351–1363. Thomas, C., Marquez, J., & Fahle, S. (2009). Measures of International Relative Prices for China and the USA. Pacific Economic Review, Vol. 14, Issue 3; pp. 376–397. Read More