Impact of NAFTA agreement on the US Economy - Research Paper Example

 In the wake of globalization and liberalization, international trade has increased manifold. In fact, it is in the benefit of international consumers as they get the quality goods at the lowest possible prices; however, many economists oppose it as it affects domestic manufacturers. It is worth pondering on the root causes behind the ever increasing global trade. The paper aims at exploring how the trade agreement called NAFTA that the US has entered into with Mexico and Canada has impacted on the domestic industries and the US economy at large. The paper would also explore how the devaluation of the US Dollar against the Chinese Yuan can bring respite to the US manufacturing industries. Suranovic (2010) describes about some important key-reasons that decide about any trade between the nations and they are worth pondering to understand the burgeoning global trade. Resource Advantage Each country is endowed with certain natural resources such as minerals, water, land, fossil fuels, and essential raw materials and accordingly their strength lies in manufacturing those finished goods where such resources are necessary. Obviously, such resource pool will put certain countries in advantage over others. Technological Superiority Technological superiority of one country over other in a particular product will facilitate production of better quality goods at lower cost and that superiority puts one country ahead of others in a particular good. If the US produces Boeing aircraft and fighters or other sophisticated warheads then it is because of the technological superiority that the US exerts over others in this field. Government Regulations Trades between the nations are also impacted by the subsidies provided to domestic producers or tariffs imposed on the imported goods. Subsidies will artificially reduce the cost of domestic producers and tariffs will increase the cost of imports thus jeopardizing the international trade. For a free international trade, it is essential that such tax barriers do not exist between the nations. Absolute Advantage vs. Comparative Advantage Douma & Schreuder (2008) argue that the country that shows highest productivity levels over others in a particular good will be considered to have absolute advantage in producing that good. It is a fact that the US has absolute advantage in producing grains as it needs fewer real resources relative to the most of the countries in the world. The availability of huge agricultural land and the use of machines are the major reasons in having absolute advantage in agriculture. The country uses minimal labor per unit area of agricultural land increasing the productivity levels manifold; however, it is essential to note that absolute cost advantage does not determine the production and allocation of labor for producing a good but it is the comparative advantage that gives rise to the production of a particular good in that country. The comparative advantage takes into account the opportunity cost while producing a particular good in that country (Suranovic, 2011). This fundamental reality drives the trade globally and the NAFTA agreement is to be seen in this light. US Trade Balance with NAFTA Partners and the World in the year 1989 and 2009 (In billions of current USD) Source: O’Leary et al, 2012, p13. It is important to note here that there is no appreciable change in balance of trade in agriculture commodity with Mexico and Canada; there is no significant impact on the US labor force involved in agriculture. In all merchandise trade with Mexico and Canada in 2009, imports have increased by almost 45 billion and 11 billion USD respectively but so is the case with world trade which shows negative balance of 500 billion USD. This clearly shows that NAFTA trade has followed the world trend only and nothing specific can be attributed to NAFTA agreement that the US has entered into (O’Leary et al, 2012). Below mentioned table indicates about the employment changes between 1989 and 2008 in the key industries in the US. This change is attributed to all international trade that the US is engaged with various countries in the world. Employment Change in Traded Goods Industries, United States, 1989-2008 Industry Employment (thousands) 1989 2008 % change (1993-2008) Agricultural Products 1137 951 -10.4 Textiles & Fabrics 496 157.6 -67.3 Apparel Manufacturing 936.2 221.4 -75.0 Leather & Allied 131.4 36.1 -70.1 All traded goods Industries 20506 17001 -18.5 Source: O’Leary et al, 2012, p14. . Due to various trade agreements between 1989 and 2009, the major impact has been felt by textiles, apparel, and leather industries in the US where the displacement of workers has been highest. The noteworthy point is that the US imports in these three sectors are not from Canada or Mexico but they are mainly from China, Taiwan, Korea and India. This also indicates that NAFTA has not been instrumental in displacing workers from these three industries in the US. Understanding Impact of NAFTA on the US Labor Force Ever since the day NAFTA was signed until 2001, real US exports to Mexico increased by 93 percent, by 35 percent with Canada and by 20 percent with non-NAFTA countries. The US import from Mexico increased by 190 percent, from Canada by 69 percent and by 59 percent from non-NAFTA countries. The trade increased employment in trading countries. The US International Trade Commission tried to find the effect of NAFTA on various manufacturing sectors and concluded that 109 industrial sectors had absolutely no effect from NAFTA. Only seven sectors were really affected from NAFTA. The Department of Agriculture also tried to find the effect of NAFTA on rural employment. They finally concluded that rural employment was increased by 0.07 percent in 1996 than would have been possible without NAFTA. In the study done by Krueger, it was found that NAFTA had a positive impact on exports but statistically it was not significant. These results indicate that NAFTA had a small and statistically insignificant impact on employment status of the US (O’Leary et al, 2012). Devaluation of the Dollar against the Yuan, and the US Manufacturing The US was in forefront advocating the trade liberalization among nations removing import restrictions and tax-barriers across nations since quite a long time. Currently, China is a largest trading partner of the US in international trade. Following table speaks about imports and Exports numbers between these two countries. (In Billions of USD) Year 2012 (Up to September end) 2011 2010 2009 2008 Imports Exports Imports Exports Imports Exports Imports Exports Imports Exports Figures 310.97 78.79 399.36 103.94 364.94 91.88 296.37 69.49 337.77 69.73 Difference -232.18 -295.42 -273.063 -226.87 -268 Source: http://www.census.gov/foreign-trade/balance/c5700.html It is evident from the above table that the huge trade gap exists between these two countries. The US imports are rising every year compared to its exports to China. The experts look at the balance of payments issue of the US from the exchange rate perspective between the US dollar and the Chinese Yuan. The Chinese government has pegged Yuan at fixed exchange rate against dollar. The exchange rates between these two currencies are not free floating in the market thus, keeping the currency depreciated artificially. This makes Chinese exports cheaper and imports costlier in the world. It is worth noting that China has strongly opposed the criticism made on its currency policy. In June 2010, the china's central bank allowed some flexibility on its exchange rate policy and the currency appreciated by 2.9 percent through the end of 2010. Critics and policy makers in the US are of the opinion that the balance of payment issue has its roots in undervalued Chinese currency. Many also state that the huge unemployment issue that the US has been facing since long has its reason lies in huge its trade deficit with China (Morrison & Labonte, 2010). In one of the study done by the Economic Policy Institute in the US, it was found that almost 2.4 million jobs in the US were displaced between 2001 and 2008 (Morrison & Labonte, 2010 p 6). The high unemployment rate that is hovering around 9 percent in the US since 2008 last quarter until date has a lot to do with trade differences between these two countries. Not only this but other East Asian countries are also forced to keep their currencies depreciated so that they can compete with Chinese onslaught in the international trade. Bergsten from the Peterson Institute for International Economics has estimated that if the Chinese currency is appreciated by 40 percent against the US dollar then it would create additional jobs between 600,000 and 1.2 million in the US (Morrison & Labonte, 2010 p 6). Economist Paul Krugman also opines that undervalued Yuan has become a major impediment in the global economic recovery (Morrison & Labonte, 2010 p.6). Reflection Despite a wide ranging controversy on international trade, it is a fact that currently, global world trade has reached to the level of almost $12,500 billion. It cannot be denied that international trade has brought efficiency in production processes and in deliverance of the goods. The world is producing higher economic output using lesser resources and consumers have benefitted from this immensely. The US has always been the biggest advocate of free trade since last several decades and it is always desirable that along with free international trade the currencies of the countries also trade freely in the international market so that unnecessary trade restrictions and tariffs are not imposed on each other. Again, it is a fact that NAFTA increased the real wages of the workers thus, whatever loss the countries had due to displacement of workers were compensated by the increase in aggregate incomes of the large section of the workers who participated in the free trade. It is quite clear that the idea of comparative advantage is here to stay because it brings the economic well being of the masses across the world. Displacement of the workers is harsh reality of free trade and that needs to be tackled through skill improvement and education; government needs to provide extra resources and run a special drive to settle the workers in a profession where comparative advantage can change their fortunes. References Douma, S. W.; Schreuder, H. (2008). Economic Approaches to Organizations. Prentice Hall, New York. Print. Foreign Trade (2012). Trade in Goods with China. Retrieved November 23 2012 from http://www.census.gov/foreign-trade/balance/c5700.html Morrison W. M.; Labonte, M. (2010). China’s Currency: An Analysis of the Economic Issues. Congressional Research Service. Retrieved November 23, 2012 from http://fpc.state.gov/documents/organization/154184.pdf O’Leary, C. J., Eberts, R. W. and Pittelko, B. M. (2012), “Effects of NAFTA on US Employment and Policy Responses”, OECD Trade Policy Working Papers, No. 131, OECD Publishing. Suranovic, S. (2011). International Trade: Theory and Policy. 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