In the wake of the debt crisis starting in Greece and spreading to other Eurozone countries, effectively crippling the European economy and contributing to the world economic fallout as a whole, questions have arisen regarding debts and deficits, consumption and production. For us in the U.S., we recognize that over time, we have become the largest debtor nation in the world largely due to our level of consumption relative to the rest of the world. This is evidenced by a $700 billion annual trade deficit in 2008 that has nearly doubled since 2000. At these kinds of deficit levels, will the U.S. continue to be the economic engine on which the world runs? Will the world eventually lose confidence in the value and longevity of the U.S. dollar, creating a problem for the world economy and stifling international trade for the U.S.? We addressed these questions by focusing on three related, but distinct issues:
1. The Trade Deficit for the U.S. is Not a Long-Term Concern 2. U.S. Government Policy on Foreign and Domestic Oil Stifles U.S. Economic Activity 3. The U.S. Government Should Take Action Against China Who Benefits From Unfair Trade Practices
The sections that follow will address each stated issue above and introduce the topic as it relates to the trade deficit of the U.S.
I. The Trade Deficit for the U.S. is Not a Long-Term Concern As international trade expands, it is clear that U.S. consumption of foreign goods leads foreign producers to benefit from our consumption. Is the strength of the U.S. as a world economic power at risk as a result of carrying a significant international trade deficit? The principles of free trade and consumption versus protectionist policies and national savings are examined to explain what the future holds for the U.S. as a result of its trade policies. Argument in Support:
First of all, a basic concept of free market capitalism is the Theory of Comparative Advantage. One case study from the early 1800’s includes the tradeoffs between the cost of making wine or cloth in Portugal or England. While both countries could make cloth, it was immensely easier to make wine in Portugal than England. So, Portugal possessed a comparative advantage in wine making as compared with England. As a result, the English did not waste time trying to make wine anymore and were free to become cloth makers. Wine was more widely available in England at lower prices, and the Portuguese benefited as well. The cloth/wine trade between England and Portugal was mutually beneficial. Trade created an opportunity for each partner to focus on a product they could make best. So, how does Comparative Advantage relate to the U.S. trade deficit? Our relative high standard of living makes it hard to be competitive with lesser-developed countries where labor is far cheaper. Since many of the goods and services in demand can be produced more cheaply overseas, we have become a net importer. A common presumption is that the economy is a zero sum game and that every dollar spent must account for a dollar earned. However, this zero sum game outlook overlooks wealth appreciation. Wealth is being created and destroyed continuously by market forces. In the U.S., our GDP has expanded more than tenfold since 1970. Another reason for the trade deficit is that U.S. financial markets are the safe haven for the world’s investors. The Fed does a good job of keeping inflation in check so that investments in U.S. Treasuries are not subject to value erosion. Our equity markets are strong and highly regulated to control corruption or stock price manipulation. We have a stable form of government, a strong military, and a well-developed code of justice and laws to protect citizens and corporations. These favorable conditions induce foreigners with cash to invest in U.S. companies, real estate and treasuries. One argument against the U.S. trade deficit is that we are exploiting poor people in lesser developed...
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