Setbacks to International Trade over the Last Ten Years - Term Paper Example

OUTLINE Despite setbacks to International Trade over the last ten years due to a variety of factors, the global economy is more integrated than it ever was and these setbacks have proved to be transient and the resilience of the global economy has ensured recovery. However, the current economic slowdown is threatening the international system like never before and the concern is that International Trade may suffer as a result of protectionist measures adopted by the governments of the world as a response to their shrinking economies. I argue in this paper about the government’s stimulus package and its effects on the economy with specific reference to International Trade. My point throughout the paper is what I had emphasized at the beginning of the previous paragraph. The contention here is that the world needs trade more than anything else and hence it would be prudent on the part of the governments of the world not to jettison free trade and globalization. I discuss the reasons for the current economic slowdown and the efforts of the government in containing the crisis and providing relief to the beleaguered sectors of the economy. I make the point that the current administration is taking steps to revive the economy, though the effects of those steps may not be felt in the short term. I make the case for international trade, albeit with a different focus by learning from the mistakes of the past. The indebtedness of the US economy vis-à-vis the Chinese economy is discussed along with some suggestions to redress the balance. INTRODUCTION The US economy has been going through a period of turbulence for the last few years. The economic downturn that began in 2007 and is continuing to this day is a manifestation of the excessive credit policies and bad lending practices coupled with poor regulatory oversight by the authorities. The combination of these factors has ensured that the credit bubble when it burst did really cause the entire global economic system to go into a severe contraction. What makes this crisis different from the periodic cyclical downturns one witnesses during alternating periods of boom and bust is that this crisis has been caused by borrowing and lending practices that were highly questionable and on top of that excessive leveraging of the financial sector meant that the sector’s contribution. As Kevin Philips (2009) notes, “The principal wave of credit card use for debt consolidation and consumption crested in 2005, but industry growth had been enormous. Over the period from 1990 to 2003, the number of card-holding Americans jumped by 75 percent—to 144 million from 82 million. However, the amount that they had charged quadrupled”i. Liquidity, debt, and leverage provided the essential structure of the Multi-bubble, and its principal architect, from 1987 to 2006, was Federal Reserve Board Chairman Alan Greenspan. He kept the liquidity flowing and declined to regulate the ultimate excesses, be they rogue derivatives, exotic mortgages, merger mania, margin-loan speculation, or a giddy succession of asset bubbles. Over his nearly two decades at the helm of U.S. monetary policy, total credit market debt in the United States quadrupled from under $11 trillion to a mind-numbing $44 trillion. The principal growth, moreover, came not in government debt but in private borrowing and credit—the unsung, but indispensable oxygen of grand-scale financial leverage and speculationii. CURRENT ECONOMIC CRISIS The best way to understand what went wrong is to conduct a postmortem on the twenty-five year metastasis by which the financial sector’s influence in America grew from a supporting role with 10-12 percent of the U.S. economy circa 1980 to an arguably crippling 20-21 percent predominance. Many of the products, processes, ambitions, and major financial firms conspicuous in this rapid overexpansion fed on one another and figured prominently in the eventual 2007-2009 debacle. This calamitous nexus is worth the closest scrutiny. Hedge funds, still virtually unregulated, mushroomed from a couple of hundred in the early 1990s to roughly ten thousand in 2007, boasting assets of close to $2 trillion. Back in 1993, the notional or nominal value of U.S. derivative instruments had been some $14 trillion. By 2001, it was approaching $100 trillion. Then over seven years, one of the most extraordinary and perilous transformations in world financial history would lift the 2008 total to $600 trillion. The current crisis has been brought about by a combination of factors that can be defined as “Bad in the systemic sense further applies to letting a financial elite elevate, expand, and entrench itself as a country’s GNP-and profits-dominating sector, as has been done in the United States over the last quarter century. Doing this so hurriedly has wound up institutionalizing runaway public and private debt, gross runaway public and private debt, gross speculative biases, tenfold and twenty fold leveraged gambling, unchecked and barely regulated “product” innovation, and a tendency toward periodic panics and instability” iii. Thus, as one event led to another, it was the underlying principle of profit making coupled with an insatiable greed that wanted more instead of being content with the profits that they were earning that led to the bubble being inflated. STIMULUS PACKAGE While the first of the stimulus packages passed by Senate was for the purpose of bailing out the banks, the second stimulus package passed by the Obama administration was with the purpose of providing much needed funds to the sectors that were affected. According to many observers, this package is being compared to the “New Deal” of FDR. Thus, a lot was expected of President Obama from the manufacturing and engineering sectors. And true to his campaign promise, one of the first things that he did was to prod Congress and Senate on accepting his economic package plan. According to a senior advisor to Obama, Brian Deese, “Jumpstarting job growth is the top priority of the Recovery and Reinvestment Plan. Construction jobs to rebuild our nations crumbling infrastructure....technology jobs to bring put medical records online and lower health care costs while reducing medical errors...engineering jobs to modernize federal buildings and save billions in annual energy costs...jobs equipping our schools and colleges so the countrys best young minds have a place to grow...and jobs laying broadband lines so a business in rural America can compete with any other business in the world”iv. The rationale behind the stimulus package is that businesses in the engineering and other core sectors would use the funds to invest in new projects employing more people. And the tax breaks for workers and small businessmen are intended to put more money in the pockets of the former and ensure that the latter spend the money on re-investment into their businesses. The economic stimulus package passed by senate has the potential to millions of new jobs in the construction and engineering industry. According to the Council on Foreign Relations (2009), the plan envisages a spending “including $30 billion for highways; $31 billion to modernize federal buildings and other public infrastructure; $19 billion for clean water, flood control, and other environmental investments; and $10 billion to improve public transit and rail infrastructure”v. This is expected to create stimulate enough demand and make the sectors competitive again. EFFECT ON INTERNATIONAL TRADE The attacks of 9/11 were a definite setback to the processes of International Tradevi. In a sense, the world turned inwards after 9/11 with greater visa restrictions making it hard for easier movement of people around the world. Since this is a critical component of International Trade, it was a throwback to the old days of protectionism. Also, there was a movement towards localization with countries in the immediate aftermath suspending many of the neo-liberal policies that they were pursuing till then. But recent evidence shows that the world has effectively surmounted some of the challenges thrown up by 9/11 and is picking up steam towards the processes of International Trade. Apart from these barriers, as I have listed in the first section, there needs to be a corresponding liberalization of the institutions in the developing countries if the concept and notion of free trade leading to higher growth has to be achieved. As Subramanian et al (2002) state, “The intensity of an economy’s integration with the rest Of the world can be measured by flows of trade or the height of trade barriers. The quality of institutions can be measured with a range of perceptions-based indicators of property rights and the rule of law. The difficulty lies instead in sorting out the complex web of causality that entangles these factors”vii. Thus, a country can be never be fully integrated unless it undertakes comprehensive reform of its institutions as well. In this context, it is pertinent to note the successes of the Tiger economies in liberalizing their governance and bureaucratic framework whereas countries like China have lagged behind in overhauling their systems. This may be the most potent danger to the success of free trade in the future. The other aspect that we discuss in the next paragraph has to do with the export of free markets around the world without thought for how they would fit in to the political and social framework in those countries. . Amy Chua in her book, The World on Fire, points to how exporting markets to the eastern countries without determining the suitability of the recipient countries to adapt to the system of free markets and laissez faire capitalismviii. She argues that “exporting markets” to the East without a well thought out strategy breeds ethnic hatred and rise of crony capitalism in those countries. These two forces feed on each other with the rise of a relatively small ethnic minority controlling large parts of the economy leading to the majority detesting the success of this minority. What the current process of International Trade could well do with is a saner re-assessment of the realities of “imposing” International Trade on the world and take a nuanced view instead of a “one size fits all” approach. As the thesis of this paper is all about how International Trade produces more winners than losers, it is the contention of this author that unless the policy makers of the world indulge in some serious introspection about the direction of the process, there are going to be the setbacks and backlash that I have described in the previous section. What we need is an expansion of “real” economic activity instead of “irrationally exuberant” market fundamentalism. Given the interconnectedness of the global economy, movement of large amounts of “mobile” financial flows may well be attractive to the elites of a particular country in the short run. However, it has to be remembered that such flows are transient and can very well turn to a “flight out” of the country at the first sign of panic. This was evident in the East Asian financial crisis of 1997 where there was a massive flight of capital out of the countries in East Asia leading to severe depression like conditions in those countries. Ultimately, it is the poor people of the countries who pay a price and thus the promise of International Trade of lifting people from poverty is negated. The intention of this author is not to deride these processes. As David Smick shows in “The World is Curved”, International Trade has succeeded in lifting absolute numbers of people around the world out of poverty in a scale unprecedented in historyix. However, if we are to reap the benefits of this process, a cautious approach is needed and one that is sustainable and structured rather than one driven by a desire to indulge in what has been called “casino capitalism”. We cannot pursue policies that take the global economy to the brink and then expect the market to correct itself. And when the market corrects itself, it is more often the case that it is too late and too many people have been affected. FUTURE OF INTERNATIONAL TRADE At the macroeconomic level, potential fallout of International Trade has been the steady indebtedness of the American economy to the Chinese. This is an area that still has not been openly discussed except in the last few days when Obama declared that he does not want “America to be a debtor nation to China”. How this works is that by exporting goods and providing services to the American consumers and corporations, the Chinese gain dollars to the extent that they are sitting on over 2 Trillion dollars of reserves. In view of the recent economic crisis in the US, this makes easy for the Chinese to participate in the American economy by buying bonds and securities issued by the Federal government. Thus, we have a situation where the transfer of dollars to China has resulted in the US being a net debtor instead of a creditor. And this is one bone that the opponents of International Trade would gleefully pick with the proponents of the same. And there is the issue of the loss of competitiveness of the American companies to the point where regaining the edge in Manufacturing and Services may prove difficult. The current economic crisis is a time of opportunity for those who want to re-assess the process. As many commentators have pointed out, with the mounting global food crisis and the resource scarcities that we are witnessing, what is needed is a point of view that takes into account the needs of the developing countries as well as the developed world. In a game which essentially thrives on give and take or barter, it is the willingness of rich countries to budge on their positions and the shedding of reluctance on the part of poor countries to ensure an optimum transfer of resources to all sections that would ultimately see the process going forward and gaining momentum. CONCLUSION In conclusion, it is apparent that International Trade, if it has to benefit the people at large has to take a bottom-up approach blended with policy guidance from the top. Without a fair measure of integration of the world markets with that of the native structures of production, there would be serious imbalances in the way in which trade is carried out. Rise in consumption alone does not suffice. It is by understanding the deep linkages between all the aspects of the production and consumption cycle that any meaningful progress can be achieved. I end with the hope and belief that this is a temporary setback to International Trade and we would soon see a recovery down the road. On a personal note, I have benefited immensely from studying the process as part of writing this paper and it has been my endeavor to put my point of view across in a persuasive manner. Sources Read More