Do Politicians in North America Society Have Any Effect on the Economy - Essay Example

Do Politicians In North America Society Have Any Effect On The Economy? Introduction The impact of politicians on the economy of North America can be evaluated on the basis of the mutual relationship between economics and politics. Politicians play a crucial role in the economic outcomes of the region. They are involved in decision making and policy formulations that impact on economic activities. Economics also impact on the politics of North America. The North American region has an economy that comprises of approximately 528 million people who live in 23 sovereign states. The region is divided into two parts, the predominantly English speaking nations of Canada and U.S, and the Latin America countries. The main trade organization in the region is the North American Free Trade Agreement. This influential trade organization derives its powers from the political systems in the region. In North America, U.S is the largest economy with a per capita GDP of approximately $47,200. The U.S is followed by Canada, which has a per capita GDP of $39,400. Mexico is the third largest economy in the region with a per capita GDP of approximately $15,312 (Chase, 2008). Each of these countries has independent economic and political systems. They also have different interests and concerns, particularly in trade, investment and security. Politicians in this region play crucial role in economic fields such as foreign investments, and international and domestic trade. The political willingness of politicians from countries in North America led to the signing and implementation of the North America Free Trade Agreement. The agreement has helped in facilitating interregional trade between the U.S, Canada and Mexico. However, critics of the agreement argue that it has fallen short in its attempt to generate jobs and support regional economic integration. Regardless, the agreement has created a platform that has broadened trade relations between the countries involved. As a result of the agreement, U.S manufacturers and distributors created supply chains throughout North America (Chase, 2008). Additionally, North American firms are among the most competitive firms in the world. The political willingness to sign the agreement helped in the stimulation of economic growth in the region. Political participation of Presidents from the U.S, Canada and Mexico led to the signing of NAFTA, in 1994. The political thrust of the agreement was the need to foster economic integration through the elimination of tariffs on products that were traded in Canada, U.S and Mexico (Cameron, 1997). Political negotiations led to agreements that gradually eliminated the tariffs. Through political participation and willingness, the deal was fully implemented in 2008. The result of the implementation of the agreement was the removal of import tariffs on several industrial and agricultural products (Chase, 2008). Additionally, the agreement led to the reduction of tariffs on items such as automobiles and textiles. NAFTA implemented intellectual property rights and protections throughout the region. It established mechanisms for dispute resolution and created regional environmental and labor safeguards. The activities of politicians in supporting or opposing trade agreements affect the economy of North America because it destabilizes the labor market. Disagreements persist on the effects of the negotiations of NAFTA in the adjustment of the labor market. Participants in democratic competitions involve politicians disposing unequal organizational, economic and ideological resources (Przeworski, 1991). Most of the supporters of NAFTA state that the trade agreement has positively impacted the economy of the U.S. According to these supporters, the trade agreement has helped in reducing unemployment rates because it supports export related jobs. Additionally, export related jobs pay 15-20% more compared to jobs that focus on the domestic market (Chase, 2008). Critics of the agreement state that wages in the U.S have not kept pace with the levels of productivity. As a result, the trade agreement has facilitated the phenomenon of income inequality. They argue that the trade agreement has pressurized the U.S manufacturing base through the globalization of the U.S economy. Currently, politicians are engaged in negotiations that will lead to the formation of new trade agreements such as the Trans-Pacific Partnership, Investment Partnership and Transatlantic Trade. During these negotiations, for the formation of a new trade agreement, politicians act as the representatives of the people (Cameron, 1997). In most of the cases, the politicians represent their interests and the interests of their political parties. During negotiations for the establishment of a new trade agreement, politicians may fail to consider vital issues such as environmental and safety standards (Chase, 2008). As a result, critics lobby against the trade agreements. This leads to economic loses because the intentions of the agreement will not be realized. In the case of NAFTA, critics argue that politicians focused on job creation without considering the impact of the agreement on direct competition, employee rights and protection. Politicians in North America influence investment opportunities within the region. The influence of politicians on investment opportunities predisposes these opportunities to political risks. Fluctuations of markets in North America are caused by a number of factors. These factors include changes in interest rates, major financial events and major fiscal events. These factors are related to political activities such as shifts in patterns of revenues, borrowing and spending (Chase, 2008). These events have the potentials to influence the economy of the North American region because they may encourage or discourage investors to consider the market. The North American region has industrialized, industrializing and under-developed countries. In such an environment, the main issue in the markets is the electoral cycle and its impact on the business cycle. For instance, it is common for incumbent governments in the U.S to create an economic boom before an election. These expansionary policies, which are aimed at reducing taxes and unemployment, may support the equity markets. However, after an election, the inflationary consequences begin to take effect and economic growth turns to recession. During these periods, the government adopts policies which may disrupt market enthusiasm. The U.S has a well documented presidential cycle (Chase, 2008). During this cycle, equity markets are favored after four years because of the presidential elections. The suggestion in this case is that politicians create expansionary policies with an aim of attracting voters. Once the elections are over, regardless of the outcome, the markets retrench in order to compensate for the politically encouraged pre-election policies. The political business cycle may be disrupted by the commitments of the incoming government. For instance, a government may be fiscally irresponsible. This will have negative impacts on the economy of North America. Therefore, it is important for politicians to have credible reputations in economic management in order to support investor confidence (Cameron, 1997). Additionally, the independence of financial institutions, particularly the Central Bank or Federal Reserve influences the economic outcomes of North America. These institutions control and manage national monetary policies through factors such as interest rates and lending rates. The higher the independence of these institutions, the less likely the government will create an economic boom during an election cycle (Chase, 2008). Additionally, the independence of these institutions protects them from manipulation by politicians. According to a number of studies, independent financial institutions authorize low interest rates and low inflation rates. These authorizations facilitate improved economic growth. In North America, politicians, investors and economists have mutual relationships. In most of the cases, investors visit politicians in order to gain insights on the course of new policies and their impact on investment opportunities (Chase, 2008). In developing countries within North America, investors and politicians have mutual relationships because investors want high returns in a high risk investment environment. Investors who visit politicians are considered to have networks by their clients and business committees. Most of the information platforms used by economist, investors and financial analysts has information on valuable economic data. In the 1930s, the U.S political class abstained from trading blocs. They pursued non-discriminatory trade that favored the liberalization of trade. In 1985, the U.S entered into a politically negotiated automotive trade agreement with Canada (Chase, 2008). The new class of political leaders in the U.S realized that the trade pillars used by the country were not functional in a rapidly globalizing marketplace. Therefore, they began abolishing the pillars of the country’s trade policy. The enlightened political class led by President J.F. Kennedy abolished the trade pillar of trade liberalization because of the pressures of non-tariff barriers. The second pillar to be abolished was the country’s adherence to MFN. This trade pillar was abolished after the U.S began formulating free trade deals with selected countries. These actions by the U.S paved the way for the integration of trade activities within the North American region. The country’s shift from multilateralism to regionalism showed changes in market interests. Previously, the political class was focused on large-scale multinational production. However, competitive pressure from emerging economies forced the U.S economic and political class to establish mutual relationships. The relationships facilitated the creation of policies that would facilitate regional trade and support regional industries. Politicians in North America act in the interest of their people and industries. The U.S government adopted political strategies that would facilitate regional trade initiatives because of a series of external events. U.S manufacturing activities and production faced immense competition from Japanese and European manufacturers. The emergence of China and India also increased the pressure on U.S industries. Therefore, politicians had to act fast to save the country from a collapse of its industries. During President Kennedy’s administration, the tariff schedules were pushed to 10 percent (Chase, 2008). The overvalued dollar supported the importation of goods while hindering exports. This exposed the country to foreign competition. Political interventions such as the suspension of the dollar’s gold convertibility led to a decline in the value of the currency. The consequence of this was an increase in the price of foreign goods. This did not stop the increasing volumes of imports, which continued to grow until the Reagan administration implemented its strong dollar policy. Throughout these instances, political intervention played a crucial role in determining economic activities and outcomes. Political trends inside the U.S have also influenced economics. National responses to economic integration created disputes between U.S and Canada, and U.S and Mexico (Przeworski, 1991). Politicians in Canada created Canada’s Foreign Investment Review Agency that would screen and regulate foreign investments. The agency started to pressurize U.S based multinationals to meet the performance rules and need for exports and local content (Chase, 2008). Additionally, U.S firms were politically pressurized by Canadian politicians to transfer production technologies to Canada, hire Canadian managers and conduct additional research and development activities. The aggressive application of political industrial policies threatened to distort trade in North America in the early 1990s. In an attempt to disorient U.S firms, the Canadian government began to offer investment incentives to Japanese and European firms. For instance, Michelin tires received a government sanctioned grant of $73 million for the construction of two tire plants in Nova Scotia. Volkswagen was given tariff rebated, which were also extended to firms such as Toyota and Honda (Chase, 2008). These regulatory postures, which were politically instigated, provoked threats and retaliation from the U.S. In one of the occasions, the Treasury Department sanctioned countervailing duties on tires imported from Canada. This was the first time the country was using trade remedy laws against investment incentives. The assumption to power by the Carter administration was followed by demands from the administration for political consultations on Canada’s tariff rebates. Political tensions were caused by the fact that Canada was offering tariff rebates on foreign automakers, against the negotiations and agreements reached under APTA (Chase, 2008). The political tensions and dispute peaked when Reagan’s administration targeted FDI regulations as inappropriate and unfair trade barriers. Politicians in the U.S enacted bills that sought to pressure foreign countries to give reciprocity in case they invest in U.S. These events occurred because of political tensions and disputes between politicians in U.S and Canada. As a result, negotiations floundered. Political willingness during President Reagan’s administration provided platforms for the establishment of a regional trading bloc. President Reagan was willing to pursue bilateral and regional trade agreements with other countries in North America (Chase, 2008). Politician willingness by Canadian politicians led to the realization that trade agreements between Canada and the U.S were the best strategies for reducing nontariff barriers, in addition to resolving the investment disputes. In North America, the influence of politicians is felt in the trading blocs. Problems arise in case there are industries that require special development programs. Each politician will act in the interest of their country of origin (Cameron, 1997). Politicians in Mexico forced Mexico to shift to liberalization from nationalization. Mexico made major concessions, which were beyond the conventional agendas of trade negotiation. This strategy was used as an effort to disrupt the payoff of the U.S. Multinationals in pharmaceuticals, automobile, telecommunications, and computers and electronic usually seek the help of politicians whenever they want to invest (Chase, 2008). They also follow the activities of these politicians and their utterances in order to assess market trends. Mexico and Canada use effective strategies in the protection of their home-based industries from domination by American manufacturers and businesses. These strategies are supported by policies that are formulated by politicians (Przeworski, 1991). The most effective strategy used by the two countries is trade protection, which led to the fragmentation of U.S firms, while encouraging local firms to produce in different locations. Conclusion North America is a region that comprises of 528 million people who live in 23 countries. These people have different concerns and interests, which are addressed by their political leaders. These political leaders influence the economic systems that are found in the region. In case of a presidential election, the region is usually economically unstable because of the uncertainly caused by changes in political power. Politicians played a crucial role in the creation of trade agreements such as APTA and NAFTA. They are consulted on various economic issues because they represent the ideas and opinions of their electorates. Reference Cameron, M. (1997). North American Free Trade Negotiations: Liberalization Games between Asymmetric Players. European Journal of International Relations. Vol. 3, (1). Chase, K. (2008). Trading Blocs: States, Firms and Regions in the World Economy. Michigan. The University of Michigan Press. Przeworski, A. (1991). Democracy and the Market: Political and Economic Reforms in Eastern Europe. Cambridge University Press. Read More