US Economy Overview
We have seen how the current president of the United States of North America is cancelling bilateral and multilateral trade agreements in favour of a protectionist trade policy.
Explain what the Consequences of such a policy may have in the mid and long term.
According to Picciotto (2016), trade agreement comprises a broad range including tax, tariff and trade treaty and investment guarantees. Bilateral agreements are agreed between two countries and multilateral countries are contracted between more than two countries. Presently, the president of North America has proposed to cancel trade agreements in order to protectionist trade policy. The below report present discussion and analysis on same topic. Further, a detail assessment of mid-term and long-term consequences of the decision has been presented in detail. Lastly, the overall impact of the decision has been concluded that necessity of renegotiating the terms of trade is required in order to sustain the economic growth of United States of North America (Aggarwal, 2013).
United States of North America
As per Cooper (2014), the US economy is a mixed economy which is highly developed as compared to other countries. It is considered to be the largest economy of the world in terms of its nominal GDP, and it is the second largest with regard to its purchasing power parity (PPP). In 2016, the U.S. GDP was anticipated to be $18.46 trillion (Villareal, 2017). The country has the seventh-highest per capita GDP (nominal) in the world, and it is ranked as a country with the eleventh-highest per capita GDP (PPP). The most used currency in international transactions is the U.S. dollar. It is the world's leading reserve currency which is backed by science and technology. The US government has a high probability to reimburse its debts. The economy has played a central role in various international institutions since World War II. Many countries of the world use US dollar as their official currency, and in many other countries, the currency serves as de facto currency. The largest trading partners of the country are Mexico, China, Japan, Canada, Germany, United Kingdom, South Korea, India, France and Taiwan. The economy is boosted by the availability of plentiful natural resources, a well-developed infrastructure, and high productivity. The country has second highest net estimated value of natural resources which were valued at $45 trillion in 2016 (Komar, 2016). The Americans have the highest household and employee income among other nations.
NAFTA and Its Importance
Free Trade Agreement (North- American)
According to the words of Moser (2014), free Trade agreement is usually contracted to liberalize the terms and policies of trade and to boost the economic growth of the countries indulged in the agreement. NAFTA which stands for North American Free Trade Agreement is a 3rd country accord agreed by the Canadian, Mexican and US government that come into existence in January 1994. Terms and conditions of NAFTA were regularly adopted by January 2008, the same offered for the abolition of product traffic operated around these 3 countries (Rugman, 2017). Trade liberalization regarding textiles, manufacturing of automobiles, agriculture was the main consideration. The agreement also required to safeguard property and set-up dispute resolution system and via side deals, adopt labour and environmental protection. NAFTA primarily restructured relations of the North American economy, driving an exceptional incorporation among developed economy of US and Canada, Mexico (developing country).
As per the words of Lester (2016), NAFTA took pleasure from the bipartisan backing, been negotiated by the George H.W. Bush (President) and further approved it through Congress and adopted by the President Bill Clinton of democracy. It promoted approximately thrice the local trade and investments across the board among the 3 countries also developed considerably. However, NAFTA remained at a constant target in the wider debate on the free trading. Donald J. Trump (President) stated that the agreement had passed job, production and manufacturing in the United States to Mexico. During August 2017 his management re-opened Canadian and Mexican negotiations with the purpose of restructuring it (Caliendo, 2015).
Debate over the cancellation of bilateral and multilateral trade agreements
According to the views of Lim (2015), the NAFTA negotiations started in 1991, the objective of these specified countries was the incorporation of Mexico with highly employed and developed US and Canada economy. They believe that the free trading would pass more strong and steady growth in the economy to Mexico, offering opportunities and work for increasing human resource. For US and Canada, Mexico was considered to be a promising new market for abroad selling, and reduced investment in cost location that ensure the U.S. and Canadian competitiveness of companies. Although in 1998 the US finished an agreement of trade with Canada, the integration of Mexico was extraordinary. Challengers of NAFTA take hold of wage-difference with Mexico, having a per-capita income of 30% as compared to US (Nevitte, 2017). Candidate of united state presidential (Ross Perot) put an argument in 1992 that liberalization of trade might result in a giant sucking sound of the jobs of United States escaping all around the border. Followers such as Bush and Clinton opposed that the deal will do several jobs in a year, at the same time President of Mexico (Salinas de Gortiari) took it as an opportunity in order to modify the economy of Mexico. NAFTA conducted a present age of local and bilateral FTA which means free trade agreements that thrived as the WTO (World Trade Organization) worldwide trade negotiations have declined. The US presently has free trade agreements which 20 countries, which is further approaching for key regional agreement with Europe and Asia (Koch, 2017). NAFTA also established integration of the provision of environment and labour in the agreements of trade in the United States, and the provisions are becoming comprehensive after FTA.
Consequences of Cancelling Bilateral and Multilateral Trade Agreements
As per the views of Reyes (2014), most of the Economists end up to an agreement that NAFTA has offered several advantages to the economy of North America. Investment of cross-border also flowed with the FDI stock of United States in Mexico rising since the era from $15 billion to reach at $100 billion (Mansfield, 2016). Experts also stated that it is evident that there is complexity to mock the effects of agreement of other factors, inclusive of change in technology, expansion in trade with countries like China and irrelevant development in domestic trade. The debate continued in relation to the legacy of NAFTA on the wages and jobs, with some workforce and company suffering from painful disorders.
Consequences of decision on bilateral agreement in mid as well as long-term
According to the opinion of Bureau (2016), trade agreements are often regional and usually evolve a small no. of countries. One of the major bilateral agreements which have been negotiated in Western Hemisphere over past twelve year is Canada and United States Agreement (CUSTA). Even other significant bilateral agreements exist which comprise agreement with Mexico. A variety of trade barriers and tariffs were removed between the member countries; however the same had no effect on trade policies with non-participants. It has been assessed by market researchers that Trump is preparing for renegotiation and reevaluation of trade policy in order to upend economic relationship which United State has held for years (Kohl, 2017).
Mid-term Impact of cancellation of bilateral agreements:
In accordance with Bove (2014), the main consequences for a midterm in case of the bilateral agreement due to the cancellation of policy will be the trade barriers and tariffs which were removed or mitigated while forming these agreements will be no more available. Economic integration and trade liberalization are asked to have a profound effect on major aspects of social life. The cancellation of NAFTA is criticized as “worst trade deal” ever signed by the US. The main reason behind this agreement is high U.S. trade deficit and loss of jobs to the country. As the economic relations between the member states will be affected significantly by the cancellation of free trade policy. Now Canada will have more strong relation with Mexico, and they will strongly defend to access US market. This contract will make harder to attain and prolong the negotiations. Moreover, an increase in uncertainty relating to the final rules and investment in NAFTA could be limited as the organizations wait to assess the reaction of change in policies. The same will have the negative effect on economic growth as now bilateral agreements will no more exist and increase in trade barriers will exist which will affect US exports. Due to the cancellation of bilateral agreements imposition of taxes would result in increase in prices of many goods and inflation too (Deardorff, 2014).
Loss of Jobs and Economic Growth
It is not an easy job to assess the impact of new trade barriers due to the cancellation of bilateral trade agreements on restoring jobs in U.S. It is expected by a market analyst that it might be possible that U.S. companies continue to outsource production to other countries at lower labour cost in order to retain international competitiveness. However, in long-term deterioration in trade and investment relationship with U.S. will have a negative effect on the economy. After the cancellation of the bilateral agreement, it is expected that tariff and other trade measures to restrict trade within NAFTA countries could negatively affect US organization in these sectors. Even the foreign subsidiaries of US automakers have approximately an investment of $15 billion plants, property and equipment in Mexico and Canada (Villareal, 2014). Efficient efforts have been made by Trump to transfer the production back to US firms as they have higher labour cost (Elena, 2017). In case the same is not succeeded that it could seriously damage their competitiveness in comparison to foreign producers.
Long-term Impact of cancellation of bilateral agreements:
The main advantage which was attained due to bilateral NAFTA agreements and which will be no more available due to the cancellation of these agreements have been specified below. In other words, it can be said that no surety exists for the existence of this advantages as it depends on the terms of renegotiated trade agreements.
Lowered Prices: As lower tariffs usually result in a decrease in import price of products and services. The same leads to decrease the risk of inflation and also allows Federal Reserve to keep interest rate low. However, if the situation remains same for long-term then it might lead to increase in the rate of products as no advantage relating to lower tariff will exist after the cancellation of bilateral agreements. Due to increase in prices, the same will have a significant impact on the quantum of international trade; as it will eventually decrease in the long term and affect the economy of the country.
Impact on economic growth: NAFTA has increased U.S. economic growth approximately 0.5 percent a year. The main sectors which have been benefited through same are agriculture automobiles and service industry. Total farm exports have been assessed $39.4 billion in the year 2015 (Mansfield, 2017). However, the significant impact on economic growth has been expected by the economist due to the cancellation of bilateral agreements. The reason behind the same is that the cancellation will have a significant impact on trade and investment within countries in which agreement has been done, and a direct relationship exists between economic growth rate and international trade.
Impact on Investment and Trade Relationship with other Countries
Decline in welfare of the country
Economists considered NAFTA to be beneficial for the United States. A survey conducted by leading economists in 2012, reported that 95% supported the benefits. In 2015, a study found that the welfare of the country increased by 0.08% as a result of tariff reductions under NAFTA, and the intra-bloc trade of US increased by 41% (Sundaram, 2016). However, the cancellation of such a beneficial policy will definitely affect these figures significantly.
NAFTA helped the U.S. to compete against China and saved U.S. jobs. Now the country will certainly face difficulties to compete for the development of China by losing the majority of the jobs to it. While some jobs were lost to Mexico within NAFTA, the country will lose more jobs with revocation.
Impact on trade environment
The framework of free trade policy was formulated to create a focused and organized body of evidence regarding the first hypotheses about NAFTA and its impact on the environment. Thus, with the cancellation of such a policy may raise a concern regarding a race between three countries with respect to environmental regulation. This would increase the pressure on the government for increasing their mechanisms for measuring the result of a trade on the policies of environmental protection.
Impact on Intellectual property
The cancellation of NAFTA would reverse all the changes made on acquiring the intellectual property through free trade between countries. The implementation of North American Free trade policy made considerable changes by restoring copyright to the US copyright law which foreshadowed the Uruguay Round Agreements Act of 1994.
From the initial negotiation, agriculture was the most controversial topic within the framework of NAFTA. Agriculture still remains the most discussed topic for determining the impacts of NAFTA cancellation. There were no bilateral agreements signed in the field of agriculture. The agreements executed between Canada and U.S. contained important restrictions and tariff quotas on agricultural products. Thus, the free trade was restricted up to a large extent; and the cancellation of the same did not remove any of the tariff quotas. The agricultural sector still remains unaffected by the cancellation.
Negative Impact on US Economy
The overall effect of revocation of NAFTA on the economy of U.S. appears to have a relatively modest impact since the trade with Canada and Mexico accounted for a very small percentage of the GDP of the country. However, the agreement led to the reduced cost of worker and adjustment costs. This may create a negative impact on the overall economy. NAFTA added $80 billion to the US economy after its implementation (Anderson, 2016). The U.S. Chamber of Commerce concludes NAFTA for increasing the trade of goods and services in the country.
Advantages of Bilateral Trade Agreements
The U.S. had a trade surplus in 2009 with NAFTA of $28.3 billion for service sector and a trade deficit of $94.6 billion in the goods sector in 2010 (Gantz, 2016). According to the American Journal of Agricultural Economics, NAFTA increased agricultural exports of U.S to Mexico and Canada. All these exports will fall as a result, which may lead to trade imbalance of the country.
Impact on trade relations with other countries
With NAFTA, the positive benefits not only accrued to the US; instead, many other countries also grew with entering free trade agreements. The cancellation of such a policy may also result in negative impacts on those countries as well. This, in turn, may impact the foreign trade relation of US.
Canada- with NAFTA, Canada received a positive economic benefit in terms of GDP. Many industries were expected to suffer due to decline in trade; however, entering the free trade agreements lead to the growth of many such industries. Canadian employment rate increased despite downward trend. Thus, one of biggest economic effects of cancellation on U.S. Canada trade was the fall in the agriculture sector in both the countries. In the year 2008, Canadian exports to US and Mexico were $381.3 billion (Caliendo, 2015). The imports in the same year were at $245.1 billion. These figures are expected to fall sharply in both countries.
Mexico- Many American jobs were lost to Mexico, since many agricultural plants were moved from US to Mexico. Mexico will suffer a loss in income in the sector of maquiladora sector; which has increased by 15.5% with the implementation of NAFTA (Limão, 2016). Other sectors which benefitted from the free trade agreement in context of share of exports from non-border states will decrease. This will hinder the speedy growth of metropolitan non-border areas. The overall effect of the revocation of Mexico–U.S. agricultural agreement is a matter of argument. This is because Mexico did not invest in the necessary infrastructure needed for mitigating competition which led to difficult living conditions for the poor of the non- border areas. All this is expected to increase the tension between two lands
Future aspects of NAFTA
The deal stays as a target of politics. During 2008, Barack Obama gave a response to the broad trade disbelief on the basis of democracy by ensuring to re-negotiate to comprise strong standard environmental and legal aspects. The problem reappeared in the campaign held in 2016; with Senator Bernie Sanders as well as Donald Trump condemned the impact of losing jobs.
Since May 2017, Donald organized better campaigning promising to re-negotiate NAFTA, legally notified Congress that negotiations would be reformed with Mexico and Canada. As the details of negotiations are categorized, the administration of president Trump has stated that it will give consideration on lowering the trade deficit of United States-Mexico, narrowing the requirements of rules, restructuring the dispute resolution system, and upgrading the fact to comprise intellectual property and new digital and online services. As the talks are continued, Trump has to repeat his danger to remove the United States on the whole.
In the midst of the experts of policy, most of the debate has given focal point regarding the mitigation of negative aspects of agreements such as , if by paying compensation to workers who have lost their jobs or offering workers programs of retention to assist them evolution to new industries.
Particularly, the expansion of federal TAA which stands for Trade Adjustment Assistance, which will further assist workforce to invest in education and training programs to search for new jobs, can assist control anger engaged in the liberalization of trading. Most of the economists claimed that its present levels of funding are insufficient to deal with the boost the trade-regarding losing the jobs. The presence of these pockets emphasizes our failure of policy in assisting regional and community to adjust from the influence of globalization. Several experts argued for deep incorporation of North America, particularly in locations like border protection, energy and migration reforms. Ultimately, Obama gave stretch to U.S.-led TPP along with 11 countries, inclusive of Mexico and Canada. Further, the agreement was signed and approved in in February 2016. However, president Donal Triumph refused the terms of TPP besides reopening NAFTA; the new management is organized in order to up end decades of bipartisan consensus regarding the efficient effort for exploring the multilateral trade relationships the United States.
Books and journals
Aggarwal, Vinod, and Shujiro Urata, eds. Bilateral trade agreements in the Asia-Pacific: Origins, evolution, and implications. Routledge, 2013.
Anderson, James E., and Yoto V. Yotov. "Terms of trade and global efficiency effects of free trade agreements, 1990–2002." Journal of International Economics 99 (2016): 279-298.
Bove, Vincenzo, Leandro Elia, and Petros G. Sekeris. "US security strategy and the gains from bilateral trade." Review of International Economics 22.5 (2014): 863-885.
Bureau, Jean-Christophe, Houssein Guimbard, and Sébastien Jean. "Competing Liberalizations: Tariffs and Trade in the 21st Century." (2016).
Caliendo, Lorenzo, and Fernando Parro. "Estimates of the Trade and Welfare Effects of NAFTA." The Review of Economic Studies82.1 (2015): 1-44.
Caliendo, Lorenzo, and Fernando Parro. "Estimates of the Trade and Welfare Effects of NAFTA." The Review of Economic Studies82.1 (2015): 1-44.
Cooper, William H. "Free trade agreements: Impact on US trade and implications for US trade policy." Current Politics and Economics of the United States, Canada and Mexico 16.3 (2014): 425.
Deardorff, Alan V. Terms of trade: glossary of international economics. World Scientific, 2014.
Elana H. Trump wants to renegotiate NAFTA. available Through < https://www.businessinsider.in/Trump-wants-to-renegotiate- /articleshow/56986397.cms>. (2017).
Gantz, David A. "Introduction To US Free Trade Agreements." British Journal of American Legal Studies 5.2 (2016): 299-314.
Koch, M. K. Trump-Trade in Historical Perspective Three Lessons from the History of US Trade Policy. MS thesis. 2017.
Kohl, Tristan. "The WTO’s effect on trade: What you give is what you get." Globalization. Springer Berlin Heidelberg, 2017. 459-493.
Komar, Nataliya, Alla Uniiat, and Ruslana Lutsiv. "Efficiency of the North American Free Trade Zone." Journal of european economy15,? 3 (2016): 279-293.
Lester, Simon, Bryan Mercurio, and Lorand Bartels, eds. Bilateral and regional trade agreements: Commentary and analysis. Vol. 1. Cambridge University Press, 2016.
Lim, Sijeong, Layna Mosley, and Aseem Prakash. "Revenue substitution? how foreign aid inflows moderate the effect of bilateral trade pressures on labor rights." World Development 67 (2015): 295-309.
Limão, Nuno. "Preferential trade agreements." Handbook of Commercial Policy 1 (2016): 279-367.
Mansfield, Edward D., and Helen V. Milner. "The domestic politics of preferential trade agreements in hard times." World Trade Review (2017): 1-33.
Mansfield, Edward D., Diana C. Mutz, and Devon Brackbill. "Effects of the Great Recession on American Attitudes Toward Trade." British Journal of Political Science (2016): 1-22.
Moser, Christoph, and Andrew K. Rose. "Who benefits from regional trade agreements? The view from the stock market." European Economic Review 68 (2014): 31-47.
Nevitte, Neil. The North American Trajectory: Cultural, Economic, and Political Ties among the United States, Canada and Mexico. Routledge, 2017.
Picciotto, Sol, and Ruth Mayne, eds. Regulating international business: beyond liberalization. Springer, 2016.
Reyes, Javier, Rossitza Wooster, and Stuart Shirrell. "Regional trade agreements and the pattern of trade: A networks approach." The World Economy 37.8 (2014): 1128-1151.
Rugman, Alan M., and Alain Verbeke. Global corporate strategy and trade policy. Vol. 12. Routledge, 2017.
Sundaram, Jomo Kwame. "Free Trade Agreements, Trade Policy and Multilateralism." Development 59.1-2 (2016): 40-47.
Villareal, M., and Ian F. Fergusson. "NAFTA at 20: Overview and trade effects." (2014).
Villareal, M., and Ian F. Fergusson. "The North American Free Trade Agreement (NAFTA)." (2017)
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