America's response to the Flat World - Case Study Example

America's Response to the Flat World "The playing field has been leveled" as said by Nandan Nilekani to Thomas Friedman, which made him, write the book The World is Flat: A Brief History of the Twenty-First Century. The current situation of the world's economy has shifted from the traditional notion that the global economy is monopolized only by the elite few. Now, there are emerging economic powerhouses such as China and India. Globalization has played a great part in dismantling such monopoly by opening markets and giving opportunities to other would-be players to join the club. But at the same time, globalization has also helped the regular powerhouses such as the United States and some European countries maintain its status. Being a powerhouse, the US economy plays a big part in globalization. There are a lot of countries that wants to develop ties and establish partnership in order for them to benefit largely may it be economically or politically (Pink, 2005). Apart from World Trade Organization (WTO) and General Agreement on Tariffs Trade (GATT), the United States has entered into small trade deals as part of their plan to pursue trade liberalization on multilateral, regional and bilateral fronts. Securing ties with strategic partners enables the United States to expand its already booming economy. It can conquer overwhelmingly small and developing economies through these trade agreements (McMahon, 2006). As of 2005, America has entered into ten Free Trade Agreements. The first trade agreement is with Israel in 1985. This was followed by Canada and Mexico which comprises the North American Free Trade Agreement (NAFTA) which took effect in 2004. A free-trade agreement with Jordan went into effect on December 17, 2001. Negotiations for free-trade areas with Singapore and Chile, begun in December 2000, have been completed. On January 21, 2003, the United States and Morocco announced their intention to negotiate a free-trade agreement, and on May 21, 2003, the United States and Bahrain announced such an intention (www.citizen.org/trade/nafta, 2006) . It was then followed by the partnership with the countries such as Australia, El Salvador, Nicaragua and Honduras. An agreement with Guatemala, the Dominican Republic and Costa Rica have passed congress and has yet to be enforced. There are three more agreements that are being considered by congress, with Oman, Peru and Colombia. Talks are being done with 11 more would be trade partners, either bilaterally, as part of regional deals or as members of customs union (McMahon, 2006). Free trade agreements (FTAs) are arrangements or pacts between countries to secure preferential deals with strategically important countries. It can help the companies to enter and compete more easily in the global marketplace. In these kinds of agreements, this will help level the international playing field and encourage foreign governments to adopt open and transparent rule making procedures, as well as non-discriminatory laws and regulations (McMahon, 2006). FTAs also help strengthen business climates by eliminating or reducing tariff rates, improving intellectual property regulations, opening government procurement opportunities, easing investment rules, and much more. These deals may be lowering or in some cases elimination of tariffs and other hindrances on goods. NAFTA for instance, has set limits for safety and inspection of meats sold in the grocery stores, new patents for medicines that raised its prices constraints on local government's ability to zone against sprawl or toxic industries; and elimination of preferences for spending the tax dollars on U.S.-made products or locally-grown food (Gruben,1997). Related to this, international trade is an integral part of the U.S. economy, accounting for more than one-quarter of U.S. gross domestic product and supporting more than 12 million U.S. jobs, including 1 in 5 manufacturing positions. FTAs can be a catalyst for accelerating economic growth by allowing greater competition, encouraging the formation of international partnerships, and by greatly liberalizing many industries. Most FTAs include specific obligations in the areas of intellectual property, services, investment, and telecommunications. Many FTAs also provide for groundbreaking cooperation in promoting labor rights and the environment (Hofgard,1993). For over a century, free trade has been one of the most important determinants of America's wealth and strength. There are at least five important reasons for continuing to support free trade (Smith, 1991). Higher Standard of Living Free trade improves people's living standards because it allows them to buy and purchase a higher quality goods at less expensive prices. In the 19th century, British economist David Ricardo showed that any nation that focuses on producing goods in which it has a comparative advantage will be able to get cheaper and better goods from other countries in return. As a result of the exchange, both trading parties gain from producing more efficiently and consuming higher quality goods and services at lower prices (Eiras, 2004). Trade between nations is the same as trade between people. It simply makes sense for each person to work at what he or she does best and to buy the rest. The United States exports in order to purchase imports that other nations produce more skillfully and cheaply. Therefore, the more lux the nation with the other trading nations, the more access people will have to the best, and this will be less expensive goods and services (Smith, 1991). But then, it is not only the traders benefit from this arrangement but also the traders as well. In the absence of trade barriers, producers face greater competition from foreign producers, and this increased competition gives them an incentive to improve the quality of their production while keeping prices low in order to compete. At the same time, free trade allows domestic producers to shop around the world for the least expensive inputs they can use for their production, which in turn allows them to keep their cost of production down without sacrificing quality (World Bank, 2003). In the end, the results benefit both producers--who remain competitive and profitable--and consumers--who pay less for a good or a service than they would if trade barriers existed. Competition and Innovation It has been written that innovation is the basis of progress, and competition is the best incentive to innovate. The continuing efforts of the other companies in innovating their products has paved the way for other companies to find new technologies and better ways to produce their new products. The need to remain competitive forces businesses to strive constantly to innovate. As a result, new technologies are born (Smith, 1991). America is perhaps the world's best example of how competition fosters innovation. Although at times the United States has become somewhat protectionist, its economy has been built primarily on the principles of a free market, private enterprise, and competition (Eiras, 2004). In a very competitive environment such as in the US, and new technologies have been thriving, may it be from computers, medicines or machinery, it helped the economy to become increasingly more productive per unit of labor and machinery employed in the production process. Since 1948, according to the Bureau of Labor Statistics, multifactor productivity--a ratio of output to combined inputs--in the U.S. private business sector has more than doubled (Smith, 1991). Economic Growth Economic freedom is where the tariff and non-tariff is measured. It also involves other barriers to commerce such as inflationary pressures, regulations that make it more difficult to do business, restrictive banking systems, whether or not property rights are protected, and the fiscal burden of government (McMahon,2006) . As what the World Bank has stated from their reports, the economies of countries that open their markets grow at a faster pace than the economies of countries that open their markets less or not at all. A growing economy increases the demand for goods and services, and as demand increases, more businesses start and expand their operations. Such expansion leads to the creation of more, better-paid jobs. The same is true when the market expands beyond borders. Gaining free access to other markets opens up new business opportunities, encouraging investment and fostering job creation ( Gruben,1997). Stronger Institutions and Infrastructure Free trade also fosters the strengthening and development of institutions that safeguard economic freedom and development. Facing new opportunities to sell and purchase goods and to open all sorts of trade-related businesses, individuals have a strong incentive to create mechanisms and institutions to seize those opportunities. Adam Smith (1991) observed this phenomenon in the 1770s, especially in Italy and Switzerland: Commerce and manufacturers gradually introduced order and good government, and with them, the liberty and security of individuals, among the inhabitants of the country, who had before lived almost in a continual state of war with their superiors. This, though it has been least observed, is by far the most important of all their effects. Peace Free trade fosters an enormous chain of economic activity, the benefits of which culminate in a social desire to be at peace with neighboring and even faraway nations with which trade is conducted or might be conducted in the future. When individuals see how beneficial it is to live in an economically free society; when they see how freedom allows them to improve their lives and those of their families; when they can create new businesses, engage in commerce, or work for a decent salary or wage, adding dignity to their lives, they want peace to preserve all these good things. In addition to the advantages of what each and every individual can get out of the free trade agreements, are also because of the several reasons. Trade agreements are necessary to expand the markets for US goods. Free Trade Agreements provide a way for the United States to help various countries for foreign policy reasons while having little effect on the United States. It is expected to help the small US partners since they have gained access to the enormous US market. The Free Trade Agreement of the Americas (FTAA), a thirty-four-nation trade agreement based on the model NAFTA, is also being planned. It is intended to be the most far-reaching trade agreement in history. The present Administration has also expressed interest in trade agreements with all the ten members of the Association of South East Asian Nations or ASEAN, including Vietnam, with which recently it signed a pact that would ease its entry to WT0 (McMahon, 2006). On the political side, a trade agreement is important for developing and emerging market to introduce market-oriented reforms in domestic policy (McMahon, 2006). A policy that ensures the protection of the domestic firm at the same time provides market for foreign firms. Specifically the US has certain control measures when the foreign firm is slowly gaining on the domestic market. It has created a law that regulates the prices of foreign products when it is considerably cheaper than its American counterpart, additional duties when a certain product is gaining a market share, limitations on what products are allowed to be sold in the US. US ties with Middle East countries such as Morocco, Jordan, and Bahrain along with a pending deal with Oman shows the economic and political position US has in the strategic oil-rich region. Ties with countries in oil producing areas are beneficial to US which largely depend on oil for its economy to run. The US interests in striking an agreement with the members of the ASEAN could also strengthen its presence in South East Asia which is rich in natural resources. Approval of the agreement could pave way for another additional source of raw materials needed by several of the industries (McMahon, 2006). Critics still worry that the overwhelming pursuit of free-trade agreements could divert the world from multilateral negotiations and lead to the development of rival trading blocs centered on the traditional big players such as the United States, the European Union (EU), and Japan. Foreign-policy and tactical considerations must be weighed alongside the economic arguments in determining whether the pursuit of trade agreements is an advisable path to the goal of multilateral free trade. Problem arises when foreign products cannot compete with domestic products. This creates a one way inclination of the trade agreement which is not the way it is supposed to be. Countries are then forced to issue policies that compromises the production cost by providing additional expenses to develop products that can compete with local ones. This is good because innovation and product development come into play but some does not have enough resources to sustain such changes thus they are sometimes forced to face a negative profit and end up in the losing end. Third world countries are susceptible to this problem. Established economies like the US that have excess resources to continually develop new and competitive products do not encounter this kind of problem. This is what critics' calls unfair trade because they see that bigger and stronger economies take advantage of this situation by broadening their market in other countries without the risk of losing your market at home. The reverse is also possible; imports which are cheaper can also steal your market at home and at the same time your products are not selling in the other country thus you end up on the losing end. Production costs for developed countries are higher because of high labor cost results to high product prices compared to third world countries which has cheaper labor and can sell its products at lower cost giving them the competitive edge in the market. This is the situation faced by the US against a new powerhouse China. Cheap Chinese products abound worldwide and are consistently top-seller and pose a direct threat to some US products ( Gruben,1997). Though the majority of the agreements are with small states, the gains are smaller compared to the mighty US economy. India and China have yet to finalize agreement with the US. But still it may look like that the US is bullying smaller states to pry open up its market for imports than open its market to exports. Trade agreement with Australia shows an increase of 32% trade surplus amounting to $2 billion and $4 billion rise in Chile and Singapore (McMahon,2006). It shows a significant increase of exports from the US to small countries that have a small chance to at least level up with the amount the US has gained. Although totaling the amount of exports and imports by the US to and from its partner countries shows the figures are balanced. The individual export and import data shows that the US exports are more than the imports received by the US (Smith, 1991). In a flat world, money, jobs and opportunity will go to the countries with best infrastructure, the best education system that produces the most educated work force, the most investor friendly laws and the best environment. Money goes to where the quality of environment attracts knowledgeable people, investment laws that encourage entrepreneurship, education and infrastructure. These are what Americans must focus on in order stay competitive and maintain its status as one of the major big players in trade. The academic community has not caught up with this (Chanda,2005). America is not producing enough young people going to science and technology and engineering which are some of the fields that are necessary and essential for entrepreneurship and innovation for the 21st century. This is a crisis that the country will be facing in years to come. Students from developing and some third world countries are eager to fill the vacuum brought about by this crisis thus pose a huge threat for big market players such as the US. Being fully equipped with the right knowledge and expertise along with the right fundamentals on international business management will increase the chances of being tapped to replace the aging executives of companies that play a major role in trade agreements. This would diminish the role the American company will play in international trade. This realization must start at the onset of education in which the American youth will carry. They must not undermine the importance of their present education so that they will not lag behind their counterparts in developing countries(Jefferson, 2001). The clich' that was "Finish your dinner. People in China and India are starving" is now being replaced by "Finish your homework. The People in China and India are starving for your job". (Friedman,2005) The focus should not only be on science and technology but also in international business. This is vital in the sense that a time will come that economy will be highly dependent on international trade. Businesses prosper using the supply-chain format by which parts of a certain product are produced from various parts of the world. A particular laptop is composed of parts made from the third world countries that are being tapped because of their cheap labor (Chanda, 2005). Because of this, being trained in a technical sense is not enough for deals have to be made overseas to ensure a regular flow of parts needed to make a particular computer. Contract manufacturing can elevate a country into prominence. That is why America's educational institutions must engage their students in learning dialogues that produce effective managers for the global economy. Their capability to produce persons for this new marketplace is mainly dependent on the curriculum by which they are trained in. During the start of globalization several educators recognized the need to internationalize the business curriculum. It proposes an increase in international business content for business schools in the US. International business content includes cooperative business and foreign language and the analysis of other countries and culture. Since business leaders and other bosses prefers their employees to know the fundamentals to be internationally competitive. It is apparent that changes have to be made in the curriculum (Jefferson, 2001). Basically changes in the curriculum include, first, a specific international business course should be offered or required by the business school. Second, specific international courses may be recommended or required outside the school of business. Third, the curriculum would require the coverage of the global dimension in all of the business core courses. This is based on the commitment of the business school, faculty background and training, resources available, and nature and extent of support by administrators. Other educators suggest that international travel-study tours, organized and directed with appropriate parameters, can assist in the internationalization of business curricula (Chanda, 2005). Although there are a lot of suggestions as to what specific subjects that needs to be included in the curriculum, it all boils down to knowing the fundamentals on being internationally competitive. But it does not stop here, policymakers and trendsetters in internationalizing the business curriculum will continue to evaluate the efficiencies of these structural changes and encourage more comprehensive strategies and programs that produce competent graduates prepared for the challenge of global business (Jefferson, 2001). Being part of flat world shows that even the middle class have impact on the global trade mechanisms. When it ventured into the age of globalization, the world, from being small became tiny. It implies that minute changes or adjustment on a countries policy can affect its neighbors. Middle Class refers to people who have a degree of economic independence but not a great deal of social influence or power. The term often encompasses merchants, professionals, bureaucrats, and some farmers and skilled workers. Expanding economies means giving additional opportunities for blue collar workers to improve their way of life. Job openings created by additional investors create a stable source of income for parents to send their children in formal schools. This creates a new middle class that will play an important role in globalization. They can be considered as additional consumers of products that have the buying power to continue the cycle of supply and demand thus sustaining the businesses (Gruben, 1997). Trade agreements are supposed to help member countries improve the quality of its products by exposing it to a greater market. Agreements have been reached in order to mutually help each other attain market share in each others country. Complication arises when a country tries to take advantage of the provision of an agreement. But certain clauses in agreements even though disadvantageous to a party are made in order to protect national interests. Critics sometimes overlook the reasons why these restrictions are needed (Gruben, 1997). The trade agreements effect on the other countries involved is more beneficial compared to what the US has gained largely because of the huge difference in economies. Apart from the monetary benefits they get, assistance in terms of policy-making and product development helps partner countries to align their markets on what is greatly beneficial for their economies (Chanda, 2005). Conclusion Free trade is an essential pillar of U.S. economic power and prosperity. It encourages labor force specialization and the exchange of goods and services that other countries do better and at lower cost. Specialization leads to competition and innovation, providing new technologies that allow Americans to produce more goods and services, cure more diseases, pollute less, get better education, and choose from a wider range of investment options. As the economy grows, people enjoy higher standards of living and gain a greater appreciation of the benefits of living in a peaceful society. The Bush Administration should keep America free of protectionism and special favors. To that end, it should advance more free trade agreements and lead negotiations at the World Trade Organization to eliminate agricultural subsidies, anti-dumping measures, and other policies that benefit selected groups at the expense of millions of Americans and undermine the nation's ability to grow. Instead of threatening to impose barriers to inexpensive imports, the Administration should lower the tax and regulatory burden on U.S. companies so that they can be more competitive. The more America moves toward economic freedom, the more it will foster its own prosperity, the prosperity of other nations, and ultimately the cause of liberty around the world. REFERENCES Adam Smith, The Wealth of Nations (New York: Prometheus Books, 1991), pp. 24-25. Alden, Edward, January 30, 2007. Bush is right to push for renewal of his fast track trade policy. www.ft.com/cms/s/29319b4e-b0a-8a62-0000779e2340.html February 28, 2007. Chanda, Nayan. April 18, 2005 Wake up and face the Flat Earth-Thomas Friedman. YaleGlobal. Yale Center for the Study of Globalization. Http://www.yaleglobal/yale.edu/display.article'id=5581 February 28, 2007. Eiras, Ana Isabel May 24, 2004 Why America Needs to Support Free Trade Backgrounder #1761 Free Trade Agreements www.export.gov.fta February 28, 2007. Global Trade Watch (GTW) http://www.citizen.org/trade/nafta/ February 28, 2007 http://www.citizen.org/trade/oman/ February 28, 2007 http://www.citizen.org/trade/cafta/ February 28, 2007 http://www.citizen.org/trade/africa/ February 28, 2007 http://www.citizen.org/trade/afta/ February 28, 2007 http://www.citizen.org/trade/fta February 28, 2007 Gruben, William C. April 1, 1997 Will fair trade diminish free trade' Business Economics, Vol. 4, pp. 32-33. Hofgard, Jurt C. April 1 1993, Is this land really our land' Impacts of free trade agreements on US Environmental Protection. (Trade and the Environment) Environmental Law, Vol. 4, pp. 67-73. Janssen, Michel and Mincey, Wayne. 116 Million Reasons Why the World is Flat www.faotoday.com/magazine.asp'artid=1458 February 28, 2007. Jefferson, Robert W. Jan 1, 2001 Preparing for Globalization-Do we need Structural Change for Our Academic Programs. Journal of Education for Business, Vol. 1, pp. 7-10. McMahon, Robert June 13 2006, The rise in bilateral Free Trade Agreements. www.cfr.org/publication/10890/#2 February 28, 2007. Office of the United States Trade Representative -______http://www.ustr.gov/Document_Library/Fact_Sheets/2003/Quick_Facts_US- Singapore_Free_Trade_Agreement.htmlFebruary 28, 2007. http://www.ustr.gov/assets/Document_Library/Fact_Sheets/2006/ assetuploadfile582_8880.pdf February 28, 2007 http://www.ustr.gov/Trade_Agreements/Section_Index.html February 28, 2007 http://www.ustr.gov/Document_Library/Fact_Sheets/2004/The_US- Chile_Free_Trade_Agreement_An_Early_Record_of_Success.htmlFebruary 28, 2007 Pink, Daniel. Why the World is Flat. Http://www.wired.com/wired/archive/13.05/friedman_pr.html February 28, 2007. UN Trade conference launches 'Virtual Institute on Trade Development': Thematic Sessions address issues related to partnership, communications technology, transport facilities. (part 2 of 2) M2 Presswire June 18, 2004. World Bank, World Development Indicators, 2003, on CD-ROM. Read More