U.S. Dollar

The USA is the country with the biggest trade deficit in the world. How is it possible that a country with immense debts is the world strongest economy?

In the early 60’s the U.S. had a positive trade balance of their imports and exports of $3.508 billion. Now 2007 they had a deficit of $700.258 billion. The explanation is globalization. The global interdependence already started in the 60’s and dramatically increased in the 80’s and the following years, till today.

As we learned in class the process of globalization changed the economic markets a lot. Instead of producing goods and services, developed countries as the G7 (USA, Japan, Germany, Great Britain, France, Italy und Canada) are focusing on invent, design and marketing products and services. Countries like in Asia, China, Mexico and Brazil are the ones which are producing now. Before the U.S. economic strength was to manufacturing goods to than exporting them in other countries. That is what have them made successful and accepted in the whole world.

According to the fact that it is cheaper to produce products and services in undeveloped countries, companies moved abroad to reduce cost and to work more efficiently. As a result the U.S. has to import all the goods to satisfy its market, therefore imports increased especially from china and exports decreased, because less is produced within the country. This trend climbed as much as the development of globalization.

The statistics of the U.S. trade balance sheet confirm this trend. Till the end of the 60’s the trade balance was still positive, after in the 70’s it became a deficit. As globalization moved on the deficit increased even more, with a little break in the early 90’s were the last big recession hold on. In 2007 there is a deficit of $700.258 billion, which is not the highest one after 2005 and 2006 according to the American Credit Crunch.

Back to the fact that lot of companies moved to undeveloped countries to reduce costs in labour, land and machinery is the explanation how the U.S. can still survive with the trade deficit. For example China, the exports of the companies, who are producing there, are going to the Chinese banks. The banks invest this money in American gilt-edged securities, shares of companies and shares of mortgages. On this way the money comes back to the developed countries, because they are attractive to invest in.
Especially the U.S. has an advantage, because they have the world currency, so everybody, mainly undeveloped countries due to to the fact that they are more dependent, is interested in the dollar and therefore invest in the USA. According to this, the financial income was $900 billion, which is circa $200 billion higher than the trade deficit. However the United States could keep the interest low that American citizen borrows money to consume products from abroad.

The circle makes the dollar strong and valuable, because so many countries are investing in it. The downside is the highly dependence on the investors and consumption of American citizen. If the market is not interesting enough anymore the value of the dollar will dramatically fall and as well if the consumption is going down, because the exports will be lower, therefore the undeveloped countries have less to spend or invest.

It is hard to say whether closed linkage to others is good for the dollar or not. As soon the circle is flowing it is good stabilized and everybody is benefiting from it. On the other side it has to take in consideration that market values in terms of shares can not growth the whole time, they can not increase their value to infinity and soon there is no growth in U.S. market shares there will be no profit and therefore the trade deficit can not balanced by the financial system. Than the government or the FED has to increase interest rates and this again will decrease consumer spending and so on. Then fact is that a bigger deficit would decrease value of the dollar.

To stabilize dollar, the U.S. government should try to reduce the overseas military expenditures and transferring cost of maintaining bases to foreign governments.

Free Trade in America

The American dream, where a man comes from the bottom of the society and has the chance to become one of the richest men in the world, is deep inside the American mentality. Everybody could come to the United States and try to live this dream. Due to globalization the chance of getting rich, as a poor person, has dramatically decreased. It is more difficult to earn a lot of money when you are coming from the poor than before. This is based of more competition due to other nations that entering the American market and the recession the USA is facing. On this account the actually candidate for president, Barack Obama, wants to fight against the current economic developments.
His democracy party is focusing on the requirements of the middle and lower class in the United States. Statistics has been shown that the middle class is decreasing during the gab between the richest and the poorest is increasing.
To be blamed are the multinationals, which are producing abroad in countries like Mexico and China to reduce production costs and the immigrations, which are working for a cheaper loan by producing in the same quality in the same time as the Americans.
Also the huge trade deficit, that the USA is facing, is not conductive to increase job opportunities. According to that the unemployment is rising and the people feel helplessness. Nevertheless the party of Obama give good explanations for the last economic developments. One of the heaviest faults the last governments did was the NAFTA, which allows companies to expand to Mexico and Canada and this leads to losses in American jobs and legal and illegal immigration.
Thus the party wants to limit the agreement between these three countries, so that the free trade zone will be more regulated in advance for the middle class and lower class. Additional, other regulations will be followed, such as higher general trade barriers in form of tariffs and quotes.
To strength the middle and lower class, Obama wants to cut taxes, whereas the rich people have to pay more taxes. These new implications should give the people more money to live and to pay mortgages and therewith should give them their optimism back, the optimism of the American dream. However there becomes the question if his response to stabilise the middle class in the US is the right one or is there another way to solve the problem.
The other candidate, McCain, from the Republican Party wants to solve the actual social problem in a more economically way. He says that globalization will cost American jobs, but will also create new jobs and through education and training programs people can learn new jobs and find work again. For him the free trade and going with the globalization is priority number one and is the key factor for future success in America.
In an economic point of view, Obama is going a wrong way by limiting the free trade in order to protect the American workers. When the US is shutting down its boarder for trade other countries will follow than global businesses for America will decrease, imports costs will increase as well as limited and than multinational will go out of the country, which again will increase the unemployment.
Thus to play against globalization is not in the interest of the country. Either way the globalization cuts job, but also will create new opportunities. Instead of complaining the united citizen of America should concentrate on the future and try to specialize on new developments, which will ensure the future revenues. Before, the US specialization has been on production and manufacturing of goods and services. Now, due to globalization it is cheaper to produce in developing countries and the USA has to use the new free producing power to specialize in other features, that support exports and fits the interest of the whole country the best. Examples on which sectors the economy should concentrate would be services, technology developments, etc. Amazing is that already 1, 3 million new jobs were created by exports and more will be followed, if the US will go with globalization and free trade, not against it. To go with the future was always part of the US policy in the last century. This was the way how the American dream was able to realized by so many people, therefore why stopping now, when a new challenge is coming instead of taking the chance to be a big part of a big global future.

NAFTA vs EU

The role of trade blocs is clearly defined. They are created to increase the wealth and standard of living for the citizen in its member countries and they also provide more availability of goods and services. The NAFTA (North American Free Trade Agreement) is created by the governments of the United States, Canada and Mexico. On 1 January the member states signed the agreement and since than the NAFTA is one of the biggest free trade blocs in the world. It is well developed, because the agreement is not only based on trade issues but also on labour, environment, investment, intellectual property and service issues. It has circa 380 million inhabitants and 7, 9% of the world trade is made by the NAFTA, whereas the EU (European Union) makes 22, 8% of the world trade. The EU has 27 member states, which are located in whole Europe and thus it has 489 million inhabitants.

The last few years have shown that the European Union is much more successful than the NAFTA. Even the fact that the NAFTA is dominated by one of the strongest economies, the USA, it can not beat the European Union. For example, since the implementation of the bloc Canada has been have an average growth in its GDP of 3%, whereas a lot of countries such as Poland, Ireland and Czech Republic had an average rate of 5 %. There are several reasons for it.

The most significant one is that the NAFTA does not have a common external Tariff. The three countries are still divided in regulations in economic and social issues, so there are still a lot of barriers, which have to be entered for businesses and also for individuals. For example, the three countries do not have the same currency and Mexican inhabitants can not go to the USA without passing several bureaucracy barriers. This complicates not only the individual lives also businesses have to spend time in organizing bureaucracy issue and time costs money. The EU is more combined, it has the same currency and people can live in the member countries as long as they want to and also work as much as the want to without passing any criterions, they just have to be European.

Furthermore the NAFTA includes three countries and the EU includes 27 and more countries will be participating. Due to the fact of same regulations and currency the inhabitants of the EU feel more comfortable to trade with each other than they did before. That’s why most of its trade is done within the member countries. So only the fact that there are more countries to trade with is already an advantage that Europe has compared to America. Every country can concentrate on specific productions and services, so that everybody can do what they can do the best and out of it the Union can work more efficiently in costs and labour.

Another reason is the location and the history of Europe. Capitalism, which can take place the best in a democracy, is the foundation of a strong economy and strong economies are fundamental for trade. Everything starts with the industrial revolution, which took place in Europe in countries such as Great Britain, France, Italy, Germany and the Scandinavian countries. All these countries made the foundation for today’s developments in economic and political issues. After, the USA became a strong economy, than Japan and now china, but the core is Europe. Even more than hundred years developments could not stop the strong power, which Europe countries have and important for the EU is, that all these countries are members.

An advantage is also the location of the European Union. It is next to Asia and Russia as well really closed to Africa and transfers to America are well developed too. In contrast North America is closed to South America and East Asia. Thus the ways for trading products and services are much longer than for the EU. Additional due to history the members of the EU have special and closed relationships to their old colonies in Africa and South America, which made trade much easier.

The NAFTA has a lot of problems with itself. The economic, political and cultural gab between Mexico and USA is rarely high and was not adapted before the Agreement. That’s why the American people have the feeling, that there are more illegal immigrants, trade deficits instead of over pluses and loss of hundreds thousand of jobs, as before. On the other hand Canada and Mexico are highly dominated by the USA, which declines their trade freedom. Thus the relationships within this bloc are complicated and tight, and this is not a good base for businesses and trade. Nevertheless NAFTA is one of the most powerful blocs in the world, but it has potential for improvements. However the NAFTA can not obtain the same level as the EU, caused to the lacks in history, location and developed countries.

Globalization

The question who is benefiting from globalization and who is not is a quite complex one. It is not possible to give a clear answer, because it is not white and black everybody in the whole world has with this new era changes and also threats. To have a look of the whole extend ones can say that Europe and USA are benefiting the most from the globalization and countries like in Africa aiming benefits too, but not in this extend as the western world. Due to the fact that is much easier to get richer when you are already rich, compared to poor ones, because it is different when the US is able to increase their GDP to 1% and an African country is increasing its GDP to 1 or even more percentages.

In the following there are some illustrations how the effect of globalization is in different areas.

Consequences for the freight market

On the freight market, the market for products, globalization offers a significantly higher option for import and export goods and services very cheaply and easily in specific areas. A greater supply leads to lower prices. This is the case in markets where simple goods are traded, such as textiles.
Many local firms can not survive under the high pressure of prices and have to take consequences: either they go there, where they can produce cheaper, or they must abandon the production.

Globalization can also lead to a much bigger demand, due to the fact that world market is offering a high natural business market.
The consequences for businesses are twofold. There are companies which benefit that the market has become bigger and there are companies that are under price pressure and to suffer consequences.

Consequences for the capital market

As mentioned above, the offer on the labour market increased dramatically. The capital supply, however, is hardly grown.
Labour and capital are the fundamental factors of production. In the capital, this means the capital for the same job, but a significantly increased labour supply, the price of capital increases.
The price of capital is the interest or investment returns.

Each investor has in the whole world the possibility of them his money. He will have the opportunity to choose where the profit is greatest. The consequences for the capital market are thus a higher return on investment capital.
This is also a reason for the sharp rise in profits often many international companies.
On the other hand, the financial markets relatively little regulated, so that speculation is preparing the way.
The Asian crisis, for example, was by speculators triggered the capital markets and plunged an entire region into crisis

Consequences for the company

There are companies that benefit from globalisation and companies under the globalization suffer.
A company needs a lot of international think and act as even a few decades. For investments abroad must also be considered.
The capital market demands high returns and many companies are forced production to relocate abroad.
Decisions as going abroad do not always based only on cost savings. With internationalization can also sales targets or a limit of the exchange rate risk prosecution

Consequences for the environment

Globalization has a negative impact on the environment.

The globalization caused by the growth of world economy on the other hand, involves substantial risks for the environment. In particular, in emerging countries is the need for environmental protection have not yet detected and the industrial plants pollute the environment. The danger for the environment is therefore the growth of world economy brought about by globalization is possible.

Consequences for the industrialized countries

In industrialized countries; in particular the change in the labour market is often a serious problem. Many poorly educated workforces are unemployed .This leads to social problems and higher costs of social systems. The labour markets have changed fundamentally, many professions have little future.

Only activities that are not able to move have a good performance as a car mechanic. Cars to Poland can not be brought in for repair.

The companies, however, benefit from a large capital stock, which leads to high returns by the major global markets.
In particular, these scissors is difficult to convey to the public. The companies make record profits while many people are unemployed.
Especially for the policy accrue do big areas with a lot of potential problems, as the viewing horizon and the effect of options are limited mostly nationally, but the company has long think globally and little to show patriotism when it comes to the profits of corporations.

Consequences for developing countries

The developing countries have, through globalisation many new possibilities. The products may be included in the whole world be sold and there is a huge cost advantage in the workforce.
In the developing world is no large capital stock, so that the developing countries in many cases of investors from the Western industrialized countries depend.

This dependency ratio is often exploited.
Problems for developing countries in particular protectionist measures by the richer countries dar.
Especially in the agricultural sector, there are numerous limitations and restrictions of free trade. These are covered by subsidies and import restrictions. For developing countries with their often very limited agricultural economies, this is a major disadvantage of the many opportunities of globalization construction.

To summarize and end these blog I will describe again and very briefly the advantages and disadvantages of globalization.

Benefits of globalization

Globalization offers the possibility of international trade.
Due to the division of labour, the entire economic performance and prosperity is able to increase.
Now countries and regions have better opportunities to sell their products and aid the economic development. This will increase the social prosperity.
Of course there are real advantages: In the western world, such as West Europe and North America, is the opportunity to eat fresh fruit, to drink qualified coffee and tea and also to trade with cheap goods throughout the whole year, because everything can be bought in China so easily. Without globalization, these products are not to buy or much more expensive.
You can almost the whole world and travel all over the world communicates with each other.

Disadvantages of globalization

Globalization in its present speed overburdens the adaptability of a lot of people. Many employees confront the unemployment or are already affected. Especially for older workers, it is difficult to adapt to the new situation and skills. A whole generation of workers falls into a deep crisis.
In developing countries, many people feel that they do not participate in prosperity.
In those countries the people can feel a difference compared to the life standard 20 years ago, but they feel the prosperity, power and abundance is unevenly distributed. There are extremely rich people and on the other hand, many very poor people who live in slums.