Global Financial Imbalances Essay The WritePass Journal

Global Financial Imbalances Essay Global Financial Imbalances Essay How the arrangements of global trade act as a driver of global imbalances Global Financial Imbalances Essay , p. 47). Against such kind of economic activities, the trade deficits constitute a major hindrance to economic activities as they reduce employment and demand and as a consequence forces governments to intervene by running huge fiscal deficits. The external demand that the surplus economies rely on is heavily dependent on unsustainable policies in the economies with deficits. You can also review Finance Essay on Savings and Loans Crisis Theoretical foundation Unger: institutional arrangements and outcomes Roberto Unger proposes an institutional arrangement for the organisation of civil societies, democracies and market economies. He claims that neo-liberalisation of trade is based on theory of comparative advantage that is too partial. It is this partiality that has created global trade imbalances. Roberto Unger argues that the current model of comparative advantage used for free trade arguments is not only partial but is also incomplete and empirically inaccurate to permit the formulation of global business policies. His major concern is the trade policies and designs of the global trading systems which he thinks are inherently designed to create trade imbalances (Claessens, et al 2010, p.81). The theory of comparative advantage is incomplete because it has as a premise the existence of an established comparative advantage. The comparative advantage in the real world is a function of a complex array of economic, social, and political factors. As such it is not possible to determine a case for free trade until fully taking into account the manner in which these factors interact to create the regime of an economy. It is these differences relative to unit costs across countries that create comparative advantage. Different trade agreements often have an effect on the patterns of advantage that an economy can develop and then eventual gains it can attain from free trade. In addition to this, the trade theories often find that multiple world equilibriums exists both in the presence of increasing returns and scale economies as well as the conventional return models (Unger 2005, p. 89). Whichever of these equilibriums the global economy leads a country into affects the aggregate efficiency and distribution of the gains from trade across nations. In the process of selecting equilibrium, broader political and social processes are likely to play a significant role. Only once the effects of trade restrictions on social and political forces have been determined and the eventual selection of an equilibrium made, can a definitive case for or against liberal trade policies be made. This is the reason why Unger proposed the development of a more complex theory of trade premised on a set of basic ideas that play analogous role for labelling the assumptions of a formal model. Without the formal model that takes into account all the factors that affect equilibrium, then the trade imbalances will continue to exist. Other Causes of Trade Imbalance Some countries like China are fuelling imbalance in the global economy by devaluing the Yuan like the Japanese did 26 years ago (Aaronson Zimmerman 2008, p.81). The country is accused of intentionally devaluing its exchange rates. Although it is not easy to accurately calculate the exchange rate of the Yuan, economists believe it is undervalued by up to 40% and consensus indicate that the policy of China of stockpiling foreign exchange reserves is responsible for this (Aaronson Zimmerman 2008, p.33). The country has been able to use its huge trade surplus to buy US currency and treasuries in order to maintain a high demand for the US Dollar and make the Yuan appear relatively cheap. This raises the price competitiveness of China against the United States. Acts of money intervention by China to create trade imbalance is deliberate as it spends a lot of money in the market to keep the Yuan undervalued. This market interference by China is fuelling trade deficits in the United States because American companies are forced to outsource jobs to China in order to be able to enjoy cheap labour (Claessens, Evenett Hoekman 2010, p. 64). The purchasing power of the Chinese is equally suppressed because they are less able to afford foreign products and increase their living standards. This makes it hard for foreign companies to sell their products in the country because the weak Yuan renders them expensive for the average Chinese consumer. The manipulation of trade by China is also fuelling overconsumption in the United States by buying up government treasuries. The artificial suppression of the value of Yuan allows the treasury department to lower the long term interest rates. This fuels the western and American debt, over consumption and ensures that the demand for the Chinese exports is sustained. Although such a practice is not illegal, it creates imbalance in the global trade arena. Although the East and China have played a major role in the provision of attractively priced commodities and financing the western debts, the west has also been responsible for the creation of trade imbalance owing to their inability to control their over consumption (Berger and Nitsch 2010, p. 62). Other than the manipulation of currency by China, the country also supresses labour rights thus lowering the costs of production in the country. The repression of labour by the Chinese government has lowered the manufacturing wages of the workers by approximately 47% to 86% (Chen et al 2012, p.86). The country also provides huge direct export subsidies to its major industries in order to boost production for the export market. Finally, China maintains strict non-tariff barriers to imports. This has ensured that the country maintains trade imbalance with other countries and as at 2011 the Chinese exports to the US were more than four times what the United States exported to China. This trade imbalance from China was further enhanced partly when the country was accepted into the World Trade Organisation without inclusion of a clause to improve the environmental standards and the labour conditions. The entry of China into the economic playing field has further worsened things for the domestic workers in the United States in favour of the multinational companies working in China. You can also review Free International Relations Trade Dissertation Essay Conclusion This essay has identified the different factors affecting the balance of trade on the international arena. Some countries are deliberately carrying out actions to influence the balance of trade in their favour at the expense of the other partners. Although there are countries that are interfering with the global balance provided by the international market, there is need for countries to look into better ways of ensuring that a good business environment is provided for all and proper mechanisms enacted to ensure that no member state flouts the rules and policies You can also review International Business Environment  Essay References Aaronson, S. A., Zimmerman, J. M. (2008). Trade imbalance: The struggle to weigh human rights concerns in trade policymaking. New York, N.Y., : Cambridge University Press. Berger, H., Nitsch, V., International Monetary Fund. (2010). The Euro?s Effect on Trade Imbalances. Washington, D.C: International Monetary Fund. Chen, R., Milesi-Ferretti, G.-M., Tressel, T., International Monetary Fund., International Monetary Fund. (2012). External imbalances in the Euro area. Washington, D.C.: International Monetary Fund. Claessens, S., Evenett, S. J., Hoekman, B. M. (2010). Rebalancing the global economy: A primer for policymaking. London: Centre for Economic Policy Research. Duncan, R. (2013). The dollar crisis: Causes, consequences, cures. Hoboken, N.J: Wiley. Fund, I. M. (2010). European Financial Linkages. Washington: International Monetary Fund. Haddad, M., Shepherd, B., World Bank. (2011). Managing openness: Trade and outward-oriented growth after the crisis. Washington, D.C: World Bank. Hall, P. V., McCalla, R. J., Comtois, C., Slack, B. (2011). Integrating seaports and trade corridors. Farnham, Surrey: Ashgate. Koo, R. C. (2011). The Holy Grail of Macroeconomics: Lessons from Japans Great Recession. Hoboken: John Wiley Sons. Korea-World Bank High Level Conference on Post-Crisis Growth and Development, Fardoust, S., Kim, Y., Sepulveda, C. P., World Bank., Taeoe Kyŏngje Chŏngchaek Yŏnguwŏn (Korea). (2011). Postcrisis growth and development: A development agenda for the G-20. Washington, D.C: World Bank. Morrison, C. E., Pedrosa, E., Pacific Economic Cooperation Council., APEC Business Advisory Council., Institute of Southeast Asian Studies. (2007). An APEC trade agenda?: The political economy of a free trade area of the Asia-Pacific. Singapore: Institute of Southeast Asian Studies. Pettis, M. (2013). The great rebalancing: Trade, conflict, and the perilous road ahead for the world economy. Princeton: Princeton University Press. Rebucci, A., Batini, N., Cova, P., Pisani, M. (2009). Global Imbalances. Washington: International Monetary Fund. Unger, R. M. (2005). What should the Left propose?. London: Verso. 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