Free «International Trade and Finance» Essay Paper

In pursuing economic growth and development for the benefit of all Americans, government has designed a macroeconomic policy that welcomes multilateral trade with other nations around the world. The virtues and advantages of international trade are uncontestable, but it is equally true that international trade must be approached and handled carefully. First, should there ever a balance trade deficit (meaning that the country’s imports exceed its exports), the country’s GDP would decrease and this would signify a direct threat against American produce (as well as American labor, consumption, and the overall standard of living). For example, Chinese imports today signify a surplus in various products, constituting 80% of the country’s toys and 85% of the country’s footwear (University of California, 2009). The import surplus on these products means that they constitute significant competition for domestic toys and footwear; the imported products will be cheaper and so American households will decant in favor of the imported products (thus, compromising domestic production, employment, wages, consumption, etc.).

 

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This is not to say, however, that international trade hinders the country’s economic growth and development. If handled correctly, international trade can potentiate a country’s economic possibilities. First, when talking about the country’s GDP it is important to point out that it is comprised of four basic elements: consumption; investment; government expenditure; net exports (or the difference between exports and imports). International trade affects net exports; the challenge for macroeconomic policy is to guarantee that exports exceed imports (so as to push growth forward). If exports exceed imports, this means that domestic production will increase (as it not only needs to service the domestic market, but overseas markets as well). This will also signify that domestic producers will not have to worry about competition from imported products; loss of domestic market share will be more than compensated overseas. Finally, in discussing exports and imports (and their effects on the economy), it is equally important to mention that international trade incentivizes domestic consumption, given that imports give households (and students) more options in terms of products (and services).

Government recognizes the need to secure a positive balance of trade (one in which exports exceed imports); it resorts to tariffs and quotas to condition international trade to that end. Through tariffs and quotas the amount of imported goods entering the economy is limited; this protects domestic producers and avoids imports from compromising GDP significantly. However, it is important to point out that the country cannot just restrict goods arbitrarily. Even though Chinese imports signify an import surplus on various products, the government cannot just restrict Chinese imports (or limit imports from any other country to the bear minimum) because of bilateral and multilateral trade agreements made with such countries (or simply because it goes directly against the country’s best interest). Continued economic growth and development is positively correlated to international trade. The United States needs foreign markets to position its production surpluses, and it cannot just apply a protectionist policy because this would hurt the country’s exports (as foreign countries would follow suit and restrict American exports should their products be restricted from the American market).

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Finally, it is equally important to consider foreign exchange rates, as they also condition the country’s macroeconomic performance (as well as the country’s final balance of trade). Exchange rates are prices; they determine how much a unit of foreign currency costs in terms of domestic currency. In calculating exchange rates, price comparisons are realized (comparing the price of a homogeneous product in two countries, for example, allows for computation of the real exchange rate). Exchange rates are important insomuch they affect international trade. If the country’s exchange rate devaluates, American products will become cheaper and so exports will increase; the contrary will happen in case of revaluation. Of course, seeking stability in exchange rates is equally important. It is not good for currency to be highly devaluated, given that the high inflation that generates this makes it impossible for households to purchase the goods and services they require to maintain their standard of living (given that prices and salaries do not adjust in the same way).