International Trade and America's Place in the Global Economy

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Chapter 10
International Trade and America's Place in the Global Economy

Those who have money go abroad in the world.

—Chinese proverb

Technology has made it easier to go abroad in the world. American companies can sell their goods and services on a global market. Likewise, American consumers can purchase merchandise made around the world—and they do so in large numbers. Global trade is driven by the same forces that control the U.S. market: supply and demand. But there is the added complication of numerous, very different national governments trying to exert influence over trade and market factors in their favor. The U.S. economy is preeminent in the global economy when it comes to national production. But the United States buys far more from foreign lands than it sells to them. Economists disagree about whether this trade imbalance is a good or bad thing for America.

AMERICA'S PLACE IN THE GLOBAL ECONOMY

According to the Central Intelligence Agency's World Factbook, the international gross domestic product (GDP) was $60.7 trillion during 2005. (See Table 10.1.) The United States had the largest economy of any single nation ($12.4 trillion), followed by China ($8.9 trillion), Japan ($4 trillion), and India ($3.6 trillion). The combined nations of the European Union (EU) had a GDP of $12.2 trillion, putting the EU in a position just below the U.S. in terms of economic strength. The GDP values in Table 10.1 were calculated based on purchasing power parity. This is an accounting method useful for comparing very different economies. The CIA explains that each non-U.S. GDP listed in Table 10.1 was calculated by valuing that economy's goods and services at the prices prevailing in the United States.

In 2005 the United States accounted for 20% of the world's GDP, but it was home to less than 5% of the world's population.

How the U.S. Compares

America's rise as the global economic leader has resulted from a combination of many factors—geographical, political, social, and financial. The United States has also been fortunate, in that it escaped the ravages of two world wars that severely damaged the industrial infrastructure of other nations. In general, America's dominance is attributed to its wealth in natural resources, a motivated and educated labor force, numerous technological innovations, and a sociopolitical climate conducive to economic growth.

NATURAL RESOURCES

Natural resources are commodities that can be taken from the environment and either used in the manufacture of other products or sold in their original form. Forestry, fishing, and mining are classified as natural resources industries. Natural resources are considered either renewable or nonrenewable. Renewable resources are those that can be replanted or restocked (such as trees and fish), while nonrenewable resources, such as minerals, cannot be replaced once they become depleted. A country's natural resources can affect the overall health of its economy. As the fourth-largest country in the world, at 3.7 million square miles, the United States has direct access to two oceans; numerous rivers and waterways; coal, oil, and mineral deposits; fertile soil for farming; and many heavily forested areas, all of which make it one of the richest geographical regions on the planet.

LABOR

The highly skilled and well-trained U.S. labor force is one of the most important elements of America's economic success. As of the first quarter of 2006, the labor force consisted of more than 150 million employees. The U.S. Department of Labor's Bureau of Labor Statistics (BLS) measures the productivity of American workers using the ratio of output of goods and services to labor hours devoted to producing that output. According to the BLS, productivity of the nonfarm business sector increased by 3.7% in the first quarter of 2006 and has experienced annual increases in excess of 2% each year since 1998.

TABLE 10.1
Gross domestic product (purchasing power parity), 25 wealthiest countries, 2005
Rank Country GDP (purchasing power parity) Date of Information
Source: Adapted from "Rank Order—GDP (Purchasing Power Parity)," in The World Factbook, Central Intelligence Agency, June 13, 2006, http://www.cia.gov/cia/publications/factbook/rankorder/2001rank.html (accessed June 29, 2006)
1World$60,710,000,000,0002005 est.
2United States$12,360,000,000,0002005 est.
3European Union$12,180,000,000,0002005 est.
4China$8,859,000,000,0002005 est.
5Japan$4,018,000,000,0002005 est.
6India$3,611,000,000,0002005 est.
7Germany$2,504,000,000,0002005 est.
8United Kingdom$1,830,000,000,0002005 est.
9France$1,816,000,000,0002005 est.
10Italy$1,698,000,000,0002005 est.
11Russia$1,589,000,000,0002005 est.
12Brazil$1,556,000,000,0002005 est.
13Canada$1,114,000,000,0002005 est.
14Mexico$1,067,000,000,0002005 est.
15Spain$1,029,000,000,0002005 est.
16Korea, South$965,300,000,0002005 est.
17Indonesia$865,600,000,0002005 est.
18Australia$640,100,000,0002005 est.
19Taiwan$631,200,000,0002005 est.
20Turkey$572,000,000,0002005 est.
21Iran$561,600,000,0002005 est.
22Thailand$560,700,000,0002005 est.
23South Africa$533,200,000,0002005 est.
24Argentina$518,100,000,0002005 est.
25Poland$514,000,000,0002005 est.

Technology

American companies have long been at the forefront of technological innovation, pioneering such developments over the years as electricity, factory assembly lines, and computer software. These new technologies have increased both worker productivity and business efficiency, which, in turn, allows companies to deliver goods and services at lower costs to consumers, stimulating spending and boosting the economy. At the same time, advances in technology can affect the job market. At times new technologies lead to more jobs as workers are needed to design, manufacture, and service them. On the other hand, such advances can also cause job losses as increased efficiency streamlines processes so that fewer employees are needed.

SOCIOPOLITICAL ENVIRONMENT

The sociopolitical environment of the United States has played a major role in the nation's rise to dominance in the global economy. Although people argue about the proper role of government in the nation's economic affairs, the relatively free-market-based system that has developed in the United States has proved to be conducive to economic growth.

GLOBAL AND U.S. TRADE

World trade totaled $11 trillion in 2004 according to International Trade Statistics 2005, a publication of the World Trade Organization (WTO; http://www.wto.org/english/res_e/statis_e/its2005_e/its05_toc_e.htm). The value of merchandise trade was $8.9 trillion, while trade in commercial services was $2.1 trillion. Manufactured products accounted for nearly three-fourths of the value of trade in merchandise. The two single-largest sectors in commercial services were travel and transportation, each accounting for around one-fourth of the total value of that category. Overall, the WTO reports that the value of worldwide trade increased by 9% between 2000 and 2004.

According to the U.S. Department of Commerce's International Trade Administration, the United States had $2.9 trillion in trade during 2004. This is just over a quarter of all global trade reported by the WTO for that year. As shown in Figure 10.1, more than three-quarters of U.S. trade volume during 2004 was in goods. Services comprised only 22% of the total by volume.

U.S. Trade in Goods

Table 10.2 provides a breakdown of goods imported and exported by the United States in 2003, 2004, and 2005. Two different totals are given—a total using a balance of payments (BOP) basis and a total using a Census basis. These values represent different accounting methods used by the Bureau of Economic Analysis (BEA) and the U.S. Census Bureau, respectively, to track international trade of goods.

TABLE 10.2
Imports and exports of goods by principal end-use category, 2003–05
[In millions of dollars. Seasonally adjusted.]
Period Total balance of payments basis Net adjustments Total census basisa End-use commodity category
Foods, feeds, beverages Industrial suppliesb Capital goods Automotive vehicles, etc. Consumer goods Other goods
aDetailed data are presented on a census basis. The information needed to convert to a BOP basis is not available.
bIncludes petroleum and petroleum products.
Note: Details may not equal totals due to seasonal adjustment and rounding.
Source: Adapted from "Exhibit 5. Exports of Goods by Principal End-Use Category," and "Exhibit 5a. Imports of Goods by Principal End-Use Category," in U.S. International Trade in Goods and Services, Annual Revision for 2005, U.S. Department of Commerce, Bureau of Economic Analysis, 2006, http://www.bea.gov/bea/newsrelarchive/2006/trad1306.xls (accessed June 29, 2006)
Exports
2003713,415−11,356724,77155,026173,043293,67380,633 89,90832,487
2004807,516−11,259818,77556,570203,960331,55589,213103,07534,404
2005894,631−11,347905,97858,955233,079362,68698,578115,71536,964
Imports
20031,260,7173,5961,257,12155,831313,818295,867210,139333,87847,587
20041,472,9263,2211,469,70462,143412,827343,491228,195372,94350,106
20051,677,3713,9161,673,45568,094523,881379,227239,512407,16855,572

IMPORTED GOODS

As shown in Table 10.2, nearly $1.7 trillion in goods was imported into the United States in 2005. The industrial supplies category had the most imports, accounting for $524 billion of the total. According to the BEA, petroleum and petroleum products comprised nearly half of the industrial supplies shipped into the country during 2005. Consumer goods accounted for more than $400 billion of total imports. This category includes a wide variety of household, sporting, and personal use items. The largest value components were pharmaceutical preparations, apparel, and household goods, including televisions. The U.S. imported $379 billion in capital goods in 2005. Capital goods are items such as machinery, equipment, apparatuses, engines, machine parts, aircraft, tractors, telecommunication devices, computers and computer accessories, and similar goods (excluding automotive vehicles and parts). Computer and telecommunication devices were the largest value components of this category. Nearly $240 billion in automotive vehicles, parts, and engines were imported in 2005. Foods, feeds, and beverages accounted for $68 billion in imports, with fish and seafood comprising the largest percentage by value. Other goods imported into the U.S. during 2005 had a value of nearly $56 billion.

The U.S. Census Bureau tracks total imports and exports of goods to and from the United States on a monthly and yearly basis. For calendar year 2005 America's top ten trading partners and the value of goods traded with them were as follows:

  • Canada—$499 billion
  • Mexico—$290 billion
  • China—$285 billion
  • Japan—$194 billion
  • Germany—$119 billion
  • United Kingdom—$90 billion
  • South Korea—$71 billion
  • Taiwan—$57 billion
  • France—$56 billion
  • Malaysia—$44 billion

Together these ten countries accounted for just over two-thirds of all U.S. trade value during 2005 (http://www.census. gov/foreign-trade/statistics/highlights/top/top0512.html).

EXPORTED GOODS

The United States exported around $900 billion worth of goods in 2005, as shown in Table 10.2. The largest category of exports was capital goods, totaling nearly $363 billion. Computers and computer equipment (particularly semiconductors) and civilian aircraft were major exports for the United States. Just over $233 billion in industrial supplies were exported. Chemicals and plastic materials were the largest single components of this category. The value of exported consumer goods was nearly $116 billion in 2005. Pharmaceutical preparations were, by far, the largest component. Exports of automotive vehicles, engines, and parts totaled nearly $99 billion. The sum for exported foods, feeds, and beverages was approximately $59 billion. Soybeans, grains, and meat products accounted for the largest percentage by value. Other goods exported during 2005 totaled nearly $37 billion.

U.S. Trade in Services

U.S. trade in services during 2004 is broken down by import and export categories in Figure 10.2. American businesses sold more than $323 billion worth of services that year. American consumers paid for just over $258 billion in foreign-provided services. Travel services were the primary component of both imports and exports. Other major categories included business, professional, and technical services and royalties and license fees.

The service export values do not completely show America's business presence in foreign lands. Increasingly, U.S. companies operate affiliate offices abroad, and their sales of services have become an important factor in American trade. This growth is shown in Figure 10.3, which tracks the value of U.S. exports of services and the sales of services by U.S.-owned foreign affiliates from 1994 through 2003. In 2003 the latter sector had $477 billion in sales, up from less than $200 billion in 1994. According to the U.S. International Trade Commission, the industries accounting for the largest shares of foreign affiliate sales of services during 2003 were insurance (17%), finance (9%), and broadcasting and telecommunications (7%). The major locations of these affiliates were in the United Kingdom (which accounted for nearly a fourth of all foreign locations), Japan, Canada, and various European countries. Taken as a whole, Europe accounted for more than half of all foreign locations for U.S.-owned affiliates.

U.S. TRADE BALANCE

The difference between exports and imports over a specific time period is known as the balance of trade (balance of trade = exports − imports). A positive balance of trade is called a surplus. This is a situation in which the value of exports is greater than the value of imports. A negative balance of trade is called a deficit. This occurs when the value of imports exceeds the value of exports.

As shown in Figure 10.4, the United States has had a trade deficit for goods every year since 1976, with record levels reached in the 2000s. The values in Figure 10.4 were calculated using the balance of payments basis. In 2004 there was a trade surplus of $48.5 billion for services. This was more than offset by an enormous trade deficit of $666.2 billion for goods. Obviously, the United States imported far more in goods during 2004 than it exported. Likewise, the numbers shown in Table 10.2 for 2005 trade of goods indicate that an even larger trade deficit in goods (more than $780 billion) occurred during that year.

The historical trade balance in services has been quite different. It grew from mildly negative numbers during the 1960s to a peak of $91 billion in the late 1990s. But the surplus has been shrinking since that time. This is illustrated in Figure 10.5, which shows that growth in service exports was not as strong as the growth in service imports during the early 2000s.

The Trade Deficit and the Dollar

The trade deficit is directly linked to the value of the U.S. dollar on foreign exchange markets. A dollar can be exchanged for equivalent amounts of any other foreign currency. The exchange rate for any given foreign currency at any given time depends on many complex economic factors, and exchange rates can vary widely over time.

When the dollar weakens compared with a foreign currency, it means that each dollar "buys" less of the foreign currency than it did before. Consequently, each dollar buys less goods from that nation. On the other hand, each unit of the foreign currency is now worth more in American dollars and has more purchasing power of American goods. For example, when the dollar weakens compared with the Japanese yen, Japanese goods cost more to Americans, but American goods become cheaper for Japanese consumers. As a result, imports from Japan to the United States are likely to decrease, while exports from the U.S. to Japan will probably increase.

Likewise, when the dollar strengthens, it buys more foreign currency (and more foreign goods) than it did before. Thus, a stronger dollar is associated with higher imports into the United States, and fewer exports to foreign lands. According to the Federal Reserve, the dollar appreciated by 5.8% compared with the Euro and by 4.8% against the yen on an average annual basis during the late 1990s (August 2001, "To What Extent Does Productivity Drive the Dollar?," http://www.ny.frb.org/research/current_issues/ci7-8/ci7-8.html). The relatively strong dollar made foreign goods cheaper for Americans and American goods more expensive for other countries, and unsurprisingly this period coincided with ballooning growth in the U.S. trade deficit, as shown in Figure 10.4.

Many economists believe that the reduced U.S. trade deficit in goods during the late 1980s and early 1990s was associated with a rapid weakening of the dollar that occurred at the same time. The trade deficit reduction is evidenced as an upward spike in the bottom line in Figure 10.4 during this period. The trade deficit grew increasingly larger each year between 1980 and 1987 and then suddenly reversed its path for several years. During this time Americans were importing fewer foreign goods than before, because foreign goods suddenly cost more.

The Trade Deficit and the Flow of Capital

When Americans buy more foreign goods, more dollars flow into the foreign exchange markets. This provides greater opportunities for foreigners to invest in U.S. financial instruments, such as stock, bonds, and T-bills. These purchases are tracked by the federal government in what is called the capital account. As shown in Figure 10.6, net capital inflows to the United States increased dramatically beginning in the late 1990s. This represented a large capital account surplus, meaning that foreign investors purchased much more in U.S. assets than American investors purchased in foreign assets. These assets include financial instruments, loans, and foreign direct investments. Capital inflows have grown to become a significant factor in the U.S. economy. In 2004 they accounted for nearly 6% of the nation's GDP.

Is the Trade Deficit Good or Bad?

America's enormous trade deficit is a subject of great debate among economists and politicians. Some believe that the deficit is bad for the economy and that steps should be taken by the government to correct the imbalance. Others contend that the deficit is a natural consequence of a strong U.S. economy and should not be an issue of concern.

THE TRADE DEFICIT—THE NEGATIVE VIEWPOINT

The Economic Policy Institute (EPI) is a nonprofit, non-partisan think tank located in Washington, D.C., that prides itself on analyzing economic issues so as to represent the interests of low- and middle-income Americans. In 1999 an EPI economist, Robert E. Scott, testified before a Congressional committee on international trade issues. The written testimony is titled "The U.S. Trade Deficit: Are We Trading Away Our Future?" (July 22, 1999, http://www.epinet.org/content.cfm/webfeatures_viewpoints_tradetestimony) and is considered representative of the viewpoints of those who believe that the U.S. trade deficit has negative consequences for America.

In his testimony Scott asserts that a growing trade deficit has been extremely harmful to the United States and is associated with the elimination of American jobs (particularly high-paying jobs for skilled workers in manufacturing and other goods-producing industries) and a reduction in the wages of noncollege-educated workers. Scott blames "unbalanced trading relationships" that the U.S. has developed with other countries and a "pattern of neglect" on behalf of the federal government toward American industry.

THE TRADE DEFICIT—THE POSITIVE VIEWPOINT

The Cato Institute is an independent policy research organization located in Washington, D.C. Its Center for Trade Policy Studies is a noted advocate of free (unfettered) global trade. On its Web site (http://www.freetrade.org/pubs/pas/tpa-002.html) the organization includes an article written by Daniel T. Griswold titled "America's Maligned and Misunderstood Trade Deficit" (April 20, 1998). The article covers many of the arguments commonly expressed by those who believe that the ballooning trade deficit is not a bad phenomenon.

Griswold notes that negative attitudes about a trade deficit have deep historical roots and probably stem from the days when precious metals, such as gold and silver, were used to pay for imports. Because nations wanted to increase their hoards of gold and silver, it was desirable to export more goods than were imported. Griswold believes that now people misinterpret a growing trade deficit as a sign that America's industrial competitiveness is weakening and that foreign nations are using unfair trade policies against the United States. He disputes both these claims and asserts that the trade deficit simply reflects macroeconomic factors, such as national tendencies to spend, save, or invest money. Griswold concludes: "Trade deficits may even be good news for the economy, because they signal global investor confidence in the United States and rising purchasing power among domestic consumers."

TRADE AGREEMENTS

The U.S. government has long been part of free trade agreements with other individual countries (known as "bilateral" agreements) and with groups of countries (known as trading "blocs"). U.S. bilateral free trade agreements in effect as of May 2006 are listed in Table 10.3. They apply to Australia, Bahrain, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Jordan, Morocco, Nicaragua, Oman, Peru, and Singapore.

In this context free trade means the ability to buy and sell goods across international borders with a minimum of tariffs or other interferences. Tariffs (or import taxes) are fees charged by a country to import goods into that country. Figure 10.7 shows the average U.S. tariff as a percent charged on imported goods from 1930 through 2005. U.S. tariffs were relatively high during the early 1930s but decreased dramatically over the following decades. Table 10.4 lists important milestones in American trade history that have affected U.S. tariffs.

Opponents to trading blocs argue that when countries with strong economies—like the United States, Japan, and the countries of the EU—negotiate agreements, smaller nations with developing economies are left at an unfair disadvantage because they are excluded from the favorable terms of the agreement ("The Pros and Cons of Pursuing Free-Trade Agreements," Economic and Budget Issue Brief, Congressional Budget Office, July 31, 2003, http://www.cbo.gov/showdoc.cfm?index=4458&sequence=0).

Priorities regarding trade policy have shifted over the years according to the state of the economy. During the recession of the late 1970s, American producers called for the government to institute measures—such as high tariffs—to protect them from international competition. During the growth period of the 1980s, however, the focus of companies turned to their own international expansion, and by the 1990s a push for free trade had gained increased momentum.

NAFTA

The United States, Canada, and Mexico implemented the North American Free Trade Agreement (NAFTA) on January 1, 1994. A primary objective of NAFTA has been the complete elimination of barriers to trade among the three signing countries. Many tariffs were dropped immediately; others have been or are being phased out. Agricultural products were an integral part of NAFTA. All agricultural provisions are to be implemented by 2008.

TABLE 10.3
U.S. bilateral trade agreements
Free trade agreement Signed Entered into force
aRatified by the United States, the Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua. Pending ratification by Costa Rica.
bTrade Promotion Agreement (TPA).
cNegotiations were concluded February 2006.
dPending ratification by parties.
Note: Negotiations are planned or pending with Korea, Malaysia, Panama, the Southern African Customs Union (SACU), Thailand, and the United Arab Emirates.
Source: "Table 2-1. U.S. Bilateral Agreements," in Recent Trends in U.S. Services Trade: 2006 Annual Report, U.S. International Trade Commission, June 2006, http://hotdocs.usitc.gov/docs/pubs/332/pub3857.pdf (accessed June 28, 2006)
AustraliaMay 2004January 2005
BahrainSeptember 2004January 2006
Central America-Dominican Republic (CAFTA-DR)August 2004a
ChileJune 2003January 2004
Colombiabc
IsraelApril 1985September 1985
JordanOctober 2000December 2001
MoroccoJune 2004January 2006
OmanJanuary 2006d
PerubApril 2006d
SingaporeMay 2003January 2004

NAFTA has had a positive effect on the marketability of goods among the participating nations. Efficient production of goods that are exported from one country to another keeps pricing fair and competitive as nations produce and export the goods for which they already have the natural resources and the best pools of employee talent.

But there has been concern that importing goods from other countries could cause the loss of jobs in the United States. In "The High Price of 'Free' Trade" (November 17, 2003, http://www.epinet.org/content.cfm/briefingpapers_bp147), Robert E. Scott of the Economic Policy Institute estimated that by 2002 approximately 879,000 U.S. jobs—mostly high-paying manufacturing industry positions—were displaced as a result of NAFTA's removal of trade barriers.

Until 2002 workers displaced due to NAFTA were eligible for the NAFTA-Transitional Adjustment Assistance program, administered by the U.S. Department of Labor Employment and Training Administration (ETA) division, which offered "rapid and early response to the threat of unemployment and the opportunity to receive reemployment assistance, including job search assistance, retraining and income support while in training, to enhance and ease the transition to a new job." The ETA estimates that more than five hundred thousand workers received help through the program (http://www.doleta.gov/tradeact/nafta_certs.cfm). Because of the impact on U.S. employment, free trade agreements such as NAFTA remain controversial.

The European Union

In 1957 six European countries signed the Treaty of Rome, establishing the European Economic Community (EEC). In 1992 the Maastricht Treaty was signed, officially establishing the EU. After centuries of war, leaders of European countries hoped that by engaging in commerce they could create long-term stability and enforce the rule of law in cooperative democratic societies. The EU, one of the most important trading partners of the United States, expanded in 2004 from fifteen nations to twenty-five, creating the largest trading bloc in history.

As of May 2006, the EU included Austria, Belgium, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden, The Netherlands, and United Kingdom. Candidate countries for admission to the EU in the future included Bulgaria, Croatia, Romania, and Turkey.

GATT and the World Trade Organization

One of the most important trade agreements is the General Agreement on Tariffs and Trade (GATT), which was first signed by the United States and twenty-two other countries in 1947. This agreement dealt primarily with industrial products and marked a trend toward the increasing globalization of the world economy. The agreement reduced tariffs, removed other obstacles to international trade, and clarified rules surrounding barriers to free trade. Agriculture was for the most part kept out of the initial negotiations. By the end of the 1980s more than one hundred countries had ratified the GATT.

TABLE 10.4
Important milestones in U.S. trade history
Milestone (years of negotiation) Year signed into U.S. law Administrations involved
Source: "Table 7-1. Important Milestones in American Trade History," in Economic Report of the President, U.S. Government Printing Office, February 2006, http://www.gpoaccess.gov/eop/2006/2006_erp.pdf (accessed June 28, 2006)
Reciprocal Trade Agreements Act of 19341934Roosevelt
Kennedy Round (1962–1967)1962Kennedy, Johnson
Tokyo Round (1973–1979)1979Nixon, Ford, Carter
Uruguay Round Agreements Act (1986–1994)1994Reagan, G.H.W. Bush, Clinton
North American Free Trade Agreement (1990–1993)1994G.H.W. Bush, Clinton
Trade Act of 2002 and Renewal of Trade Promotion Authority (2001–2002)2002G.W. Bush

A series of GATT negotiations that concluded in 1994 created the World Trade Organization (WTO), which replaced GATT and now functions as the principal international body charged with administering rules for trade among member countries. The new agreements covered a range of topics, including agriculture, food safety, animal and plant health regulations, technical standards (testing and certification), import licensing procedures, trade in services, intellectual property rights (including trade in counterfeit goods), as well as rules and procedures for settling disputes. As of December 2005, the WTO consisted of 149 member countries.

THE INTERNATIONAL MONETARY FUND

At the United Nations Monetary and Financial Conference—more commonly known as the Bretton Woods conference because it took place in Bretton Woods, New Hampshire—in July 1944, the forty-five countries fighting on the side of the Allied forces in World War II negotiated the creation of the International Monetary Fund (IMF), a global financial system. The IMF extends short-term loans to members experiencing economic instability. As a condition of receiving its credit assistance, the IMF requires the debtor country to enact significant reform of its economic structure, and often of its political structure as well, eliminating corruption and establishing effective institutions such as courts. The conditions for being granted a loan can include drastic cuts in government spending; privatizing government-owned enterprises, such as railroads and utilities; establishing higher interest rates; increasing taxes; and eliminating subsidies on such necessities as food and fuel.

Critics have maintained that the austerity demanded by the IMF can have devastating social consequences, including severe unemployment, crippling price increases in the cost of basic goods, and political instability resulting from widespread dissatisfaction. As of July 2006 the IMF included 184 member countries.

THE WORLD BANK

At the same conference that created the International Monetary Fund in July 1944, the International Bank for Reconstruction and Development (IBRD) was established. The IBRD and the International Development Association (IDA) are commonly known as the World Bank. The World Bank is not a bank in the traditional sense of the word but an agency of the United Nations. The World Bank works to combat world poverty by providing low-interest loans, interest-free credit, and grants to developing countries. As of July 2006 the IBRD and IDA included 184 and 165 member countries, respectively.

In its early days the World Bank often participated in such large projects as dam building. Today it supports the efforts of governments in developing countries to build schools and health centers, provide water and electricity, fight disease, and protect the environment. The World Bank is one of the world's largest sources of development assistance. According to The World Bank Annual Report 2005, the organization provided $22 billion in loans during 2005 to developing countries worldwide.

GLOBALIZATION AND THE ANTIGLOBALIZATION MOVEMENT

The move toward global free trade, or "globalization," has generated intense controversy. Proponents maintain that globalization has the potential to improve living standards throughout the world. Their arguments include the following:

  • Countries and regions will become more productive by concentrating on industries in which they have a natural advantage and trading with other nations for goods in which they do not have an advantage.
  • Multinational corporations will be able to realize economies of scale—that is, operate more economically because they are buying in bulk, selling to a much larger market, and utilizing a much larger labor pool. This will increase productivity and lead to greater prosperity.
  • Free trade will lead to faster growth in developing countries.
  • Increased incomes and the development of job-related skills among the citizens of poorer nations will foster the spread of information, education, and, ultimately, democracy.

Critics of globalization point out the negative effects that multinational corporations have on people in the developing world. They argue that most of the profits from free trade flow to the United States and other industrialized countries; that local industries can be destroyed by competition from wealthier nations, causing widespread unemployment and social disruption; that centuries of cultural tradition can be quickly obliterated by the influence of international companies; and that multinational corporations often impinge on national sovereignty to protect their profits.

Critics also note that the free trade policies are often applied unfairly, as the United States insists that other countries open their markets to American goods at the same time that it protects its own producers from competition. For example, the U.S. government has established numerous tariffs and regulations that raise the prices of imported food products, denying poor farmers in the developing world access to the lucrative U.S. market. In addition, opponents of globalization point out that the spread of multinational corporations can be detrimental to workers in industrialized nations by exporting high-paying jobs to countries with lower labor costs, and that international competition in the labor market could actually lead to lower living standards in the industrialized world.

The "antiglobalization movement" is not an organized group but rather an umbrella term for many independent organizations who oppose the pursuit of corporate profits at the expense of social justice in the developing world. These groups often protest the actions of such organizations as the WTO, the IMF, and the World Bank for their perceived bias toward corporations and wealthy nations. In 1999 a WTO conference in Seattle, Washington, became a lightning rod for the movement, drawing more than forty thousand protestors in a massive demonstration that generated intense media attention and completely overshadowed the meeting itself.

SANCTIONS

The United States has used trade sanctions (stopping some or all forms of trade with a country) as a political tool against countries that are thought to violate human rights, tolerate drug trafficking, support terrorism, and, most recently, with nations that are suspected of producing or storing weapons of mass destruction. In recent decades the U.S. has imposed trade embargoes on countries including Iraq, Cuba, and North Korea. The United States has also restricted trade with Burma, Iran, Libya, Sudan, and Syria. As of August 2006, more specific sanctions against Iran were being considered because of that country's burgeoning nuclear weapons industry. Because of the immense size of the U.S. economy, the effect of sanctions can be crippling.

The Trade Act of 1974 allowed the United States to impose sanctions on countries with unfair trade policies. The Jackson-Vanik amendment to this legislation barred the president from granting favorable trade status to countries that limited emigration, and required annual certification for communist countries, including China. This amendment was repealed in 2000, marking a major step in the restoration of relations between China and the United States. The Chinese market presents an enormous opportunity for U.S. exports, but it has remained difficult to penetrate by U.S. exporters. On December 11, 2001, China was admitted as a member of the WTO.

THE CHANGING FACE OF FREE TRADE

Trade Promotion Authority

President George W. Bush signed the Trade Act of 2002 (HR 3009) on August 6, 2002. The act gives the U.S. president Trade Promotion Authority (TPA), under which future international trade agreements will be subject to an up-or-down vote, but not amendment, in Congress. TPA is designed to promote freer trade by giving other countries confidence that the agreements they negotiate with the U.S. diplomats will not be subject to attempts and changes and renegotiation when they are submitted to Congress for ratification.

Parity in Labor Standards and Environmental Laws

Discrepancies in labor and environmental regulations among trading nations have formed another barrier to free trade. The administration of President Bill Clinton pushed to impose the same labor and environmental standards on trading nations that the United States imposes on itself. The move was designed to discourage trading partners from exploiting workers and abusing the environment in order to keep capital costs lower and prices down, thus making their goods and services more competitive than U.S. goods in the global market. Before NAFTA was signed, the United States insisted on assurances from Canada and Mexico that they would enforce labor and environmental laws before it would ratify the agreement.

Intellectual Property

Technological advancements have posed new challenges to world trade. As private-sector investment in information technology continues, world economies are becoming even more interconnected. Proponents of free trade, including the United States, have pushed for more protection of intellectual property rights, abuse of which poses a major barrier to world trade. As defined by the UN in the Convention Establishing the World Intellectual Property Organization (July 14, 1967; amended September 28, 1979), intellectual property includes:

  • Literary, artistic, and scientific works
  • Performances of performing artists, phonograms, and broadcasts
  • Inventions in all fields of human endeavor
  • Scientific discoveries
  • Industrial designs
  • Trademarks, service marks, and commercial names and designations
  • Protection against unfair competition and all other rights resulting from intellectual activity in the industrial, scientific, literary or artistic fields

Challenges for the international community include establishing minimum standards for protecting intellectual property rights and procedures for enforcement and dispute resolution. These challenges are not new. As early as 1883, with the fourteen-member Paris Union for the Protection of Industrial Property, states recognized the special nature of creative works, including inventions, trademarks, and industrial designs. Soon afterward, in 1886, the Berne Union for the Protection of Literary and Artistic Works extended the model of international protection to such copyrighted works as novels, short stories, poems, plays, songs, operas, musicals, sonatas, drawings, paintings, sculptures, and architectural works.

WORLD INTELLECTUAL PROPERTY ORGANIZATION

In 1893 the Paris Union and the Berne Union combined to form the United International Bureaus for the Protection of Intellectual Property, which maintained its headquarters in Berne, Switzerland. This organization evolved eventually into the World Intellectual Property Organization (WIPO), located in Geneva, Switzerland, which carries out a program designed to:

  • Harmonize national intellectual property legislation and procedures
  • Provide services for international applications for industrial property rights
  • Exchange intellectual property information
  • Provide legal and technical assistance to developing and other countries
  • Facilitate the resolution of private intellectual property disputes
  • Marshal information technology as a tool for storing, accessing, and using valuable intellectual property information

As of 2006, WIPO included 183 member nations, including the United States.

FEDERAL INITIATIVES—FOCUS ON KNOCKOFFS

Knockoffs (or counterfeit goods) are copies of legitimate goods sold in the marketplace. In the past knockoffs were primarily imitations of select items with upscale brand names, such as designer purses or watches. They appealed to some consumers who wanted to pay low prices for inferior-quality merchandise that could masquerade as expensive brand-name items. Purchases were usually conducted by street or back-alley vendors in large cities. In recent years the knockoff industry has greatly matured, spreading its scope to include many different consumer goods that can be purchased (knowingly or unknowingly) in a wide variety of markets.

During the early 2000s the U.S. government stepped up its campaign against the manufacture, distribution, and sale of knockoffs. In March 2004 Attorney General John Ashcroft established an Intellectual Property Task Force within the U.S. Department of Justice. The task force published recommendations calling for greater focus on criminal prosecution both at home and abroad, additional regulatory measures, and enhanced public education about the negative impact of intellectual property crime on the American economy. Later that year the U.S. Department of Commerce launched the Strategy Targeting Organized Piracy (STOP) initiative to link together numerous agencies engaged in the protection of intellectual property rights.

In March 2006 President Bush signed the Stop Counterfeiting in Manufactured Goods Act to strengthen federal laws and expand the tools available to law enforcement agencies to combat goods counterfeiting. The action was driven by growing evidence that knockoffs pose a serious problem to the U.S. and global economies, public safety, and even national security. In 2005 law enforcement officials testified before a U.S. Senate subcommittee that international terrorist groups were involved in knockoff trade in the United States to raise money for their organizations ("Hezbollah Pushes Prada?" March 26, 2005, http://money.cnn.com/2005/05/26/news/terror_knockoffs/index.htm).

Officials note that knockoffs have moved out of back allies and into mainstream American markets. A position paper published by the U.S. Chamber of Commerce in 2005 warns that "fakes are infiltrating the supply chain and making their way into legitimate retail outlets" (http://www.uschamber.com/ncf/initiatives/counterfeiting.htm). The Chamber cites a number of events in which consumers were harmed by defective knockoffs, including counterfeit batteries sold at retail stores. According to the Seattle Post Intelligencer, several upscale companies, such as Gucci, have hired legal firms to search the Internet looking for Web sites selling knockoffs of brand-name goods ("Lawyers Fighting Online Knockoffs," March 29, 2006, http://seattlepi.nwsource.com/business/264694_fakes29.html). According to the article, the exclusive jeweler Tiffany & Co. has filed a lawsuit against the online auction service eBay alleging that eBay participated in trademark fraud by facilitating the sale of Tiffany knockoffs during 2004. The case was expected to go to trial in late 2006.

The U.S. Chamber of Commerce's 2005 paper What Are Counterfeiting and Piracy Costing the American Economy? reports that knockoffs cost U.S. businesses $200 to $250 billion in lost sales in 2004. Global losses were estimated at around $500 billion.

Foreign Ownership of U.S. Assets

The huge growth in the U.S. trade deficit is associated with like growth in foreign ownership of U.S. stocks, bonds, and other financial instruments. In addition, the overall strength of the American economy has encouraged foreign businesses to enter or expand their participation in U.S. industries. This trend is of major concern to some analysts and politicians, who fear that America has become too dependent on foreign money. The danger to the U.S. economy as a whole lies in the possibility that foreigners might suddenly decide to pull out of American financial assets. This could destabilize the stock market and result in higher interest rates, which would dampen U.S. economic growth.

In February 2005 a committee of the U.S. Treasury reported on the issue with respect to foreign ownership of government securities (http://www.ustreas.gov/press/releases/js2221.htm). At that time just over 50% of U.S. Treasury securities were held by foreigners, including private and government sectors. The committee concluded that this situation did not pose a threat to the overall health of the U.S. economy. In fact, it was noted that having a broad global pool of investors was more desirable from a stability standpoint than relying on a more narrow pool of only domestic investors. The Treasury committee also believes that if foreign investment were to slow or cease, domestic investors would "fill the void." The report notes that "high foreign ownership of U.S. Treasuries—and of U.S. financial assets in general—should pose little risk to the economy. It is a reflection of the globalization of financial markets as well as the particular attraction of U.S. assets that foreign ownership of virtually all U.S. financial assets has risen sharply."

Foreign participation in U.S.-based industries has garnered a lot of public attention during the 2000s. In February 2006 DP World, a company owned by the Middle Eastern nation the United Arab Emirates (UAE), announced its intention to purchase Peninsular and Oriental (P&O) Steam Navigation Company, a British company that manages operations at numerous U.S. ports. DP World is based in the city of Dubai in the UAE. The Dubai ports deal (as it came to be known) set off a firestorm of controversy in the United States. Although the deal was staunchly supported by President Bush, critics noted that some of the hijackers of U.S. airplanes on September 11, 2001, were from the United Arab Emirates. They also pointed out the national security implications of putting ports management into the hands of a foreign-owned company, particularly one based in the Middle East.

The deal received widespread media attention and garnered intense opposition from the public and many Republican and Democratic leaders in the House and the Senate. In March 2006 DP World announced its intention to finalize its deal with P&O but divest itself of U.S. port operations. According to Fox News, the U.S. port operations were to be fully transferred to a U.S.-based company on the condition that DP World "will not suffer economic loss" ("Bush Faces Rancor over Port Deal," March 10, 2006, http://www.foxnews.com/story/0,2933,187431,00.html).