Trade Deficit and Consumption

Globalization, the increasing integration of economics, communication, and culture across national boundaries, has been a direct cause of the United States' increasing trade deficit. Because the United States is a capitalistic society, it is founded on the concept that people have the constant desire to consume that is reliant on a limited supply. Therefore, it is necessary as consumption, or demand increases, that the supply increases to meet the demand. However, if all resources can not be acquired domestically, such as the case with the United States, then it is imperative for goods to be acquired elsewhere and eventually consumed. Trade liberalization, or freedom to trade with other countries with little regulation, allows for increased integration to take place and has caused America to import and consume manufactured goods, increasing the United States' dependency and widening the debt owed to the emerging markets. It is because of trade liberalization that the processes by which the United States regulates its exports and imports, the expansion of multinational corporations, and political policies have all contributed to the expanding trade deficit.

The expanding deficit starts with the most basic need in a functioning economy, natural resources, which are essential in making manufactured goods and, therefore, are the basis of any economy in order for consumption to occur. The United States has been increasingly importing manufactured goods more than exporting raw materials over the years, making more money flow out of the country rather than into the country. This excessive flow of money out of the country has given the United States an unfavorable balance of trade, or in other words, a trade deficit. The trade deficit, also called the trade gap, is the difference between imports and exports and has also increased to record breaking levels as it reached almost 61 billion dollars in April 2008 (US Trade Deficit Jumps 1). In May of 2008, the trade gap was 59.8 billion dollars (Jeannine 1). The May 2008 deficit was better than previous months, such as the April 2008 deficit; however, America has not seen trade growth since 1976 (A Widening Deficit 1). Though it gets better at times, the trade gap has reached an all time low within the past decade (Hirvonen 2). With a trade gap this immense, sustaining growth or even breaking even will not be possible for many years to come.

As the United States becomes more integrated in the globalized economy, it is becoming indebted to other foreign countries because of its overgrown need to consume manufactured goods. Because of trade liberalization, the United States continues to plummet into a larger trade deficit due to the demand for goods that can not be supplied domestically. America can not keep up its balance of payments because the exports, or raw materials, are far less than its imports, or manufactured goods, and its imports are increasing at a more alarming rate (Hirvonen 1). In addition, there are more foreign assets owned in the United States than United States assets in foreign countries with a 2.5 trillion dollar debt on net United States international investment assets as of the year 2006 (Quenemoen 1). As the value of the dollar continues to decrease and other foreign currencies increase, the amount of exports America ships will increase because the goods will be less expensive and more attractive to foreign buyers. This will help, to some degree, fuel money back into the United States economy, unless the United States continues to import foreign goods at a higher rate, as the trend over the past decade indicates.

With the rise of multinational corporations, it is possible for the ever expanding deficit to increase further as the globalized companies gain more power. Of the top 100 economies in the world, 51 of the largest economies in the world are companies, while 49 are countries, making companies stronger than countries by a simple majority (Anderson 1). However, the United States still remains the largest economy in the world, with a value of 13 trillion dollars (Anderson 1). While these companies continue to make more profit, the workers are getting less profit because the companies are becoming more efficient. In fact, the top 200 corporations in the world only employ less than three-quarters of a percent of the world's working population, about 18.8 million people (Anderson 2). Outsourcing labor to underdeveloped countries, or investing in new technology are two ways in which companies can become more efficient and replace workers for a higher profit. This causes industrialized countries, such as the United States, to suffer because there is no way for the unemployed people to generate income. Therefore, as these corporations continue to gain more power through merging or acquiring other companies or expanding into other countries, they could have the potential to become more powerful and influential than a country's government, as some believe they have already become (Dobbs 53).

The top 200 corporations control more than a quarter of the world's economic activity, while one-third of all world trade is transactions made from within the same corporation (Anderson 1). This free and unregulated trade allows for companies to become more globalized and expand, if necessary, because the United States and foreign governments impose little regulations on companies. It is no surprise that one-third of all trade is made from within a company itself seeing as how the companies expand to other countries and integrate. Because of this, a company can move the goods it produces to where the demand is when the markets become saturated, making more profit for the company and promotes trade from within itself. Lack of regulation allows companies the freedom to expand to its fullest potential and, in turn, fulfill its obligation to its shareholders, making profit and allowing the companies to succeed. However, trade liberalization allows companies to act in their own interest, which is the interest of the stockholders, rather than the interest of the nation it belongs to as a whole. If a company's best interest is to outsource labor to somewhere it will be cheaper, get its raw materials from places other than the United States, or manufacture goods that will be imported to the United States to be consumed, then the company will do it. Because the companies, while gaining more power, act in their own selfish interest instead of the needs of the people and its government, then the United States' deficit will never drop.

A deficit of this magnitude has never occurred before in the history of the United States, and some analysts believe that multinational corporations take advantage of free trade as trade becomes more liberalized. America has reached this grand trade deficit because multinational corporations, such as Wal-Mart, decide that it is necessary to outsource labor, for example, to other countries because it is cheaper than manufacturing it domestically. Because America exports few raw materials, Wal-Mart, being the largest multinational corporation in the world, has to get its resources from other countries in order to manufacture a substantial amount of goods to sell back to its biggest consumer, the United States. This comes at a price, however, because Wal-Mart is continuously expanding to other countries and hurting its parent country, America, in the process by expanding the deficit. Actually, in the year 2002, Wal-Mart alone imported 12 billion dollars worth of goods from the Chinese, which was one-tenth of the Chinese imports into the United States (Gross 1).

Free trade in this new globalized world could crumble a once industrialized country, while industrialization occurs elsewhere due to outsourcing. As multinational corporations continue to make profit from America without actually using it in the process developmental process, then it becomes problematic. Multinational corporations, such as Wal-Mart, are becoming more powerful than the government itself and ignoring the large trade imbalance that is causing America to suffer while the companies reap the benefits. Because trade liberalization allows free trade, large United States multinational corporations can optimize trade in a way that benefits itself and its stockholders but also at the same time, crumble the once industrialized Untied States.

The government itself has helped the expansion of trade liberalization by taking away regulations on trade, which companies take advantage of. Politically, the last decade has been defined as an era of free trade, because the Clinton and Bush administrations advocated NAFTA, or the North American Free Trade Agreement. Multinational corporations, which encourage free trade, are directly linked to the expanding deficit, because they benefit from being able to pass goods over national boundaries without being taxed on profits earned in foreign markets (Dobbs 60). Therefore, NAFTA directly assists multinational corporations in trading freely, and thus is a direct cause of the expanding deficit. Though the amounts of both imports and exports have increased as a result of NAFTA, imports have been increasing at a higher rate. Canada and Mexico send 81 percent of their exports to the United States and are America's biggest trading partners because of NAFTA, and the United States' struggle creates problems for them as well (Lynch 2). Though the United States is in debt, as the largest economy in the world, other countries depend on the United States for business. Programs such as NAFTA, which supported free trade, spurred more job losses and though the short term effects controlled the debt for a while, the long term effects have been disastrous.

The United States borrows foreign capital from other countries to buy their goods; however, when the interest rates rise, it will be harder for the United States to pay back the increasing debt. Because of the credit crunch, a short supply of money available to be borrowed, accompanied by high interest rates, the United States is climbing into a deeper hole because the debt keeps compounding ever year it is not reduced (Whitehouse 1). The consumer credit and home mortgage rates have also been main contributors to Americans not being able to pay off their debts (Lynch 1). Food stamps, a sign of poverty and lower living, have increased to 28 million, the highest it has ever been, due to loss of jobs, house foreclosures, and rising prices. (Usborn 1) Without a job, the citizens of the United States do not have the money to reinvest into the economy by purchasing goods. In addition, the United States government loses billions of tax dollars each year because of the loss of income tax at state and federal levels, and sales tax on goods not purchased. Though rebates would help consumption recommence, the money would most likely be spent on goods that were made elsewhere, thus feeding the multinational corporations, spurring an outflow of money, and further increasing the trade deficit. Even more unfortunate, any profit the United States does make will be contributed to the nation's debt until it is paid off. In order for the foreign debt to be reduced, Americans will have to lower their standard of living unless they want to work more to maintain the same standard of living. This should cause the demand for certain items to go down and, in turn, cause the United States to import less (Whitehouse 1).

Though there are many different factors contributing to the processes by which trade liberalization increases the trade deficit through exports and imports, the expansion of multinational corporations, and political policies, the debt is not permanent. The biggest problem that the United States is currently facing is not only a problem about paying off the existing debt but also how to control future it from festering further into a more complicated problem. There is not just one solution that the United States could use to approach this problem though. One way the United States could cut down the deficit would be to reduce the trade gap by slowing consumption, in addition to attracting foreign buyers into importing more goods from the Untied States providing a trade surplus. Another possibility would be to offer tax incentives to those multinational corporations who keep jobs in the United States to stimulate economic growth and provide jobs. Though the expanding deficit is causing problems now, it does not mean that there is no solution to resolve the compounding deficit problem, because eventually, the United States' problem will become everyone's problem.

Source: Essay UK - http://turkiyegoz.com/free-essays/economics/trade-deficit-consumption.php


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