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Chapter 13
The United States
in the World
Economy
Learning Objectives
• Identify the major changes in U.S. economic
relations that have led to more attention towards
bilateral and plurilateral agreements.
• Evaluate the relative importance of the North
American Free Trade Agreement, both for what it
accomplished and as a model for subsequent
agreements.
• Explain when purchasing power parity estimates of
income per person are superior to the alternatives,
and when they are inferior.
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Learning Objectives
(cont.)
• Differentiate free trade agreements from
preferential trade agreements and give examples
of each.
• State why it is difficult to have precise estimates of
job gains and losses due to trade, and give
specific examples of how imports may create jobs
and exports may occur after a loss of jobs.
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Introduction: A New World
Economy
• The United States role in the global economy is
shaped by size, wealth, and role as a military super
power
• Endowed with
- wide range of resources
- abundant and fertile farmland
- a relatively well educated population
- disproportionate share of the world’s top
research universities
- Nobel Prize winners
- venture capital
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Introduction: A New World
Economy (cont.)
• US is third most populous country after China and
India, and GDP more than twice China’s, the
world’s second largest economy
• The bipolar world of two superpowers and two
economic systems suddenly disappeared with the
collapse of the Berlin Wall in 1989 and the
dissolution of the Soviet Union in 1991
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Background and Context
• As the world’s largest economy anything the
United States does has an impact on the rest of
the world
• Given its large economy and population U.S.
trade with the rest of the world has been a
smaller share of its GDP than in most other
developed economies
• Over the last fifty years the trade share of GDP
has more than tripled
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TABLE 13.1 U.S. Size and Rank
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FIGURE 13.1 The Trade-to-GDP Ratio
for the United States, 1960-2010
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TABLE 13.2 Leading U.S. Trade
Partners, 1990 and 2010
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FIGURE 13.2 Real Value Added and
Employment in Manufacturing, 1960-2011
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The Shifting Focus of US Trade
Relations
• Throughout most of the post-World War II period
the United States was a strong supporter of
multilateral trade
• Three factors have shifted the U.S. focus towards
greater use of bilateral and plurilateral trade
agreements
• The United States is still supportive of the WTO
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The Shifting Focus of US Trade
Relations (cont.)
• First, multilateral trade negotiations became more
complicated as the GATT and then WTO added
new members
• When the GATT was originally signed in 1947 it
had twenty-three members
• By the time of the Uruguay Round (1986–1994)
there were 128 signatories to GATT
• Currently there are 155 member countries in the
WTO
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The Shifting Focus of US Trade
Relations (cont.)
• Second, many quotas have been converted to
tariffs and tariffs in general have fallen dramatically
• New multilateral trade negotiations in the Doha
Round focused on more difficult issues
- agricultural support systems,
- intellectual property,
- services trade,
- government procurement, and
- assistance for developing countries.
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The Shifting Focus of US Trade
Relations (cont.)
• Third, the end of the Cold War removed one of the
pressures that caused the United States to offer
trade concessions to other countries
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TABLE 13.3 Free Trade Agreements,
Exports, and Imports in Billions of Dollars,
2010
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Demographic and Economic
Characteristics of North America
• Income per capita is measured in two ways:
- In U.S. dollars converted from Canadian dollars and
Mexican pesos at market exchange rates
- In dollars measured in terms of purchasing
power parity (PPP)
• The North American market is marked by numerous
difficult policy questions on migration and
environmental and labor standards
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TABLE 13.4 Population and GDP for
NAFTA Region, 2011
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Canada-US Trade Relations
• The United States and Canada have the largest
bilateral trade relationship of any two countries in
the world with two-way merchandise goods trade in
2011 of more than $597 billion
• Due to a shared border, a common historical
background, and a similar culture
• Also the result of three stages of integration: Auto
Pact of 1965, Canada-U.S. Free Trade Agreement
(CUSTA) in 1989, NAFTA agreement in 1994
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Mexican Economic Reforms
• From the 1950s until the onset of the crisis in
1982, Mexican per capita growth averaged 3.3
percent per year in real terms doubling living
standards approximately every generation
• Mexico’s long growth boom occurred under import
substitution industrialization (ISI) policies
• ISI policies target the development of
manufacturing through support for domestic
industries that produce goods which substitute for
imports.
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Mexican Economic Reforms
(cont.)
• A major weakness of ISI policies: they
discriminate against exports by raising the rate of
return for domestic market producing firms
• Domestic market producing firms have high
protectionist walls and charge higher prices while
facing little or no competition
• Problems emerged in 1981 and in August 1982,
the debt crisis began: Mexico suspended
payments of the principal of its debts
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Mexican Economic Reforms
(cont.)
• The debt crisis in Mexico was the result of a series
of factors and spread to the rest of Latin America
-
poor macroeconomic management
accumulation of a large amount of debt
heavy borrowing from foreign banks
weak tax systems
rising world interest rates that made debt service more
expensive
• This period came to be known as the Lost Decade
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Mexican Economic Reforms
(cont.)
• The solution to the debt crisis required multiple
policy changes
• In the 1980s, Mexico privatized many firms that had
been drains on the federal budget
• Brought its federal budget under control
• Reduced its restrictions on foreign direct investment
• Opened its markets to greater competition
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The North American Free Trade
Agreement
• NAFTA was ratified in 1993 taking effect January 1,
1994
• Trade flows increased significantly, but had been
growing before implementation partly in anticipation
of an agreement
• The first important feature of NAFTA- most forms of
trade barriers came down
• Most of the change came on the Mexican side
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The North American Free Trade
Agreement (cont.)
• Some tariffs and investment restrictions on cross
border investment were eliminated immediately,
but in many cases there was a variable period of
phasing out tariffs and investment restrictions
• A second feature of NAFTA is that it specifies
North American content
• Requirements for goods subject to free trade
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The North American Free Trade
Agreement (cont.)
• A third feature of NAFTA is three separate dispute
resolution mechanisms, depending on the source
of the disagreement
• Individual chapters cover disputes related to
dumping and anti-dumping duties; treatment of
foreign investors by national policies, called
investor-state disputes
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The North American Free Trade
Agreement (cont.)
• Fourth significant feature of the agreement
• NAFTA itself did not contain language regarding
labor and environmental standards or concerns
• Two side agreements were ratified and
implemented; North American Agreement on
Labor Cooperation and the North American
Agreement on Environmental Cooperation.
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Two NAFTA-Specific Issues
• Illegal immigration is a contentious issue in U.S.Mexico relations
– Proponents argue that illegal immigrants support the
U.S. economy by buying goods and services and help
keep prices low by increasing labor supply
– Opponents argue that the U.S. should not ignore illegal
behavior and that the increased labor from illegal
immigration suppresses wages for legal workers
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Two NAFTA-Specific Issues
(cont.)
• Attempts at stricter border enforcement have been
largely unsuccessful at stopping illegal immigration
– The border is too long – 2,000 miles
– The economic incentive the enter the U.S. is too high
– Nearly half of the illegal immigrants entered legal, but
did not return home when their visa’s expired
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Two NAFTA-Specific Issues
(cont.)
• The unprecedented wave of migration appears to
be ending for three main reasons
• One, the border has become harder and more
dangerous to cross
• Two, the political and economic environment of
the United States is more difficult
• Three, and most significant for the long term, the
demography of Mexico is changing reducing the
number of potential migrants
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Two NAFTA-Specific Issues
(cont.)
• A second issue in the NAFTA region is the rise in
drug violence in Mexico
• This issue has far more than trade implications
since it concerns law enforcement, medicine,
public health, economic well-being, civil liberties,
and other areas
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New and Old Agreements
• The United States has put in place a series of
unilateral agreements providing market access
without demanding reciprocation, called
preferential agreements
• This type of agreement is enacted to support the
development efforts of a set of countries, or for a
specific political reason
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The Impact of NAFTA on U.S.Mexico Trade
• Trade flows between U.S. and Mexico have risen
• The growth in trade between all three NAFTA
partners indicates increased specialization,
economies of scale, and efficiency
• The exact impact of NAFTA is hard to assess
– Bilateral trade has expanded already since 1989 thanks to
Mexico’s economic reforms
– Mexico’s 1994–1995 peso crisis and recession caused
U.S. exports to decline momentarily to Mexico
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TABLE 13.5 Key Trade
Initiatives of the United States
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Labor and Environmental
Standards
• In nearly all the trade agreements since NFATA,
North American Agreement on Labor
Cooperation and North American Agreement on
Environmental Cooperation have served as
frameworks for labor and environmental clauses
• Both of these agreements operate on the principle
countries should enforce their own laws and not be
used as tools for attracting trade or investment
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Labor and Environmental
Standards (cont.)
• Enforcement relies on consultations with parties
levying a complaint
• Agreements attempt to create public awareness of
non-compliance without setting specific standards or
encroaching on the sovereignty of national
governments
• General recognition of labor rights is set forth in the
International Labour Organization’s (ILO)
Declaration on Fundamental Principles and
Rights at Work
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Two NAFTA-Specific Issues
(cont.)
These four basic rights are built into conventions
drafted by the ILO that countries are encouraged to
sign
1. Freedom of association and the effective recognition
of the right to collective bargaining
2. The elimination of all forms of forced or compulsory
labor
3. The effective abolition of child labor
4. The elimination of discrimination with respect to
employment and occupation
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Two NAFTA-Specific Issues
(cont.)
• The environmental side agreement of NAFTA
established a framework for incorporating
environmental clauses into subsequent free trade
agreements
• In many respects, it is parallel to the labor clause
motivated by similar concerns that low
environmental standards not be used to gain
competitive advantages
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Two NAFTA-Specific Issues
(cont.)
• Critics of the labor and environmental clauses
come in two forms
• Some economists think that trade agreements
should not be about labor and the environment so
these clauses do not belong in trade agreements
• Another set of economists argue the clauses are
meaningless because there is no real enforcement
mechanism
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Investor-State Relations
• The United States has forty bilateral investment
treaties (BIT) with countries across the globe
• These agreements set out the rules governing
cross-border investment and dispute resolution
• Emphasizes national treatment of foreign investors
eliminating distinctions between national and
foreign investors
• Eliminate the use of most performance
requirements for foreign investment
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Job Loss Due to Trade
• There are a quite a few estimates of the job gains
or losses caused by NAFTA and other trade
agreements
• Within five years of NAFTA’s implementation, the
estimates ranged from a net loss of 98,000 a year
to a net gain of 42,000 a year
• The politics of trade makes the discussion of job
impacts necessary
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Job Loss Due to Trade
(cont.)
• The ability of an economy to generate jobs is
determined by factors that do not include trade
• Far more important than NAFTA or any other
agreement are the business cycle, demography,
and labor market policies
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FIGURE 13.3 Gross job gains and
losses, quarterly, 2001-2010
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