International Impacts on the US
By Clint Kennedy MA
BasicEconomicsToday.com
July 14,2011

The US runs the largest trade deficit in the world.  In April, 2011, it was $43.7 billion (US Census Bureau, Foreign Trade, 2011).  Of course it would be better if the US exported more goods and services.  There would be increased demand for US goods and increased profits for US companies.  The US needs to move in the direction of competing to be outsourced.  This is a global competition and most US companies are not used to competing for business on all five continents.

The US is by far the largest producer in the world.  US companies usually don't have to go too far to sell to consumers with significant buying power.  However, as the global economy grows more and more integrated, factors of production will be obtained with the lowest possible cost in all parts of the world.  Consumer products will reach the lowest possible costs with the greatest possible selection.  This is in the long run, taking place over the next century and beyond.  There will be many glitches along the way: nationalistic greed, egocentric exclusion and nation oligopolies to name a few.  Nation oligopolies would be when groups of nations act together with monopolistic pricing power.

Increased equitable distribution is inevitable around the world.  Rich countries will continue to share aid as they grow to higher standards of living.  Poor countries will break through to obtain the goods, services and benefits that they observe everyone else having.  The US has the largest GDP in the world, but China is quickly making ground.  Other countries will follow.  It is not realistic to expect the US to stay the richest country in the world by far.  The natural flow of trade and global competition will not allow it.  It is also our nature to say that others deserve the prosperity that we have: national and local security from the most powerful armed forces, technological advances available to all consumers and freedoms to use the best possible goods and services.   

This is does not mean that the US has an impending fall of empire that all past empires of had, such as the Romans and Great Britain.  The global economy prevents a major national power from utter economic collapse.  It is a globally integrated economy where international impacts have a benefit and a cost to all nations.  

That means even for countries like the US that have been less reliant on exports, there are immediate and profound impacts from any major global event.  Let's consider two major recent events: the devastation in Japan and the economic collapse of Greece.

The Japanese earthquake and tsunami will cost Japan trillions of dollars to recover from.  There was an immediate impact on global stock markets sending stock values downward.  Stock market investors are savvy of negative impacts that appear and will quickly try to sell to avoid losses.  Japanese supply of factors of production and final product was put on hold.  This caused a second impact from Japan, which was a shortage of supply of products made in Japan or made with Japanese capital.  This negatively impacted certain US company profits, because they couldn’t meet demand.  Japanese cars and electronic items may not have been available to US companies and consumers.  This is a significant and direct economic impact.  The US gets 5 percent of its imports from Japan and sends 4.2 percent of its exports to Japan (US Census Bureau, Foreign Trade Statistics, 2011).  In the first quarter of 2011 US imports were only about 17 percent of GDP.  Imports from Japan were 5 percent of that 17 percent, or about half of a percent of total GDP.  This is an insignificant value.  What would make changes in the   Japanese supply have an impact is the way the Japanese supply fits into the US business cycle.  The Japanese supply is a small part of a much larger American final product.  When Japanese exports are delayed, a larger quantity of US final product is delayed.      

The economic collapse of Greece had virtually no impact on US imports or exports.  Were stock market investors correct in selling in response to bad economic news from Greece?  Did Greece really have a global impact?

The European Union has been debating how to deal with Greece’s debt (The Economist, 2011).  Greece has not been growing in a way to substantiate future income that will pay off the debt.  The EU and the IMF have been financing large portions of the Greek debt.  To continue sustaining Greece with more financing the EU requires restructuring to liberalize Greek markets (The Economist, 2011).  If Greece does not respond quickly enough it may be dropped from the European Union.  Greece is only one of several countries that are struggling in the EU.  Greece, Ireland and Portugal have reached government debt in excess of their annual GDP.  The EU lending countries are feeling the burden of aiding three countries that are not set up to compete well. 

If Greece makes a large scale default on its debt, the entire European Union will be saddled with a heavy economic burden.  Other countries would need debt assistance.  There would be a possible domino effect.  The decline of Greece is symbolic of far reaching problems.  Because of the interconnectedness of the national economies around the world, one country’s problems are carried by all of the others.  This integrated domino effect will continue to build in the future as countries become more and more reliant on each other.

Since the 2007 global financial crisis, many countries around the world have increased their debts.  The US also has reached the limit where total federal debt will exceed 100 percent of the annual GDP.  The characteristics of the decline of Greece are global in nature and the integrated impacts are a global domino effect. Stock investors were accurately anticipating the negative impacts from Greece.

Global GDP growth in 1st quarter 2011 was 4.3 percent (IMF, 2011).  The connectedness of the national economies shows in GDP growth and inflation rates from 2007 to 2011.  The graphed data for the world, emerging economies and advanced economies all follow virtually the same exact shape.  The three separate groups closely follow each other.  The GDP growth rate for each dipped from 2007 to mid 2008, then quickly recovered, and since 2009 has remained stabile (IMF, 2011, Figure 1).  Inflation for each separate group mimics each other’s movements as well.  The last couple of years have seen a recent modest decline in global inflation to about 3 percent (IMF, 2011, Figure 1).

The IMF projects the world output to grow at a little bit faster rate of 4.5 percent in 2012 (2011, Table 1).  The US is forecasted to grow at 2.5 percent in 2011 and 2.7 percent in 2012.  Germany's growth rate is projected to decrease from 3.2 percent in 2011 to 2.0 percent in 2012.  This is a major concern since Germany is the leading economy in Europe.  Emerging and developing economies will go from 6.6 percent to 6.4 percent.  China will go from 9.6 percent to 9.5 percent.  India will go from 8.2 to 7.8 percent.  Faster growth rates of emerging economies supports increased equitable distribution in the long run.  The global economy moves towards an equilibrium with optimal distributions.  The main impediments are human egocentric or sociocentric attitudes.  The main facilitators are free markets and transpersonal views.  Even the government controlled communist and socialist countries must participate in the global markets.  It is only a matter of time for selfish hording to break down.

China and India are the two fastest growing economies in the world.  The data shows their economies are forecasted to remain stable and continue rapid growth.  Their populations are the largest in the world.  China has a population of 1.34 billion (CIA Population, 2011).  India has a population of 1.19 billion.  The US has a population of 313 million.  Each of the two countries has its own unique impact on the US.

China is the largest importer from the US at 16.6 percent (US Census Bureau, Foreign Trade, 2011).  It is the third largest exporter from the US at 6.4 percent.  China has a GDP of about $10 trillion (CIA GDP, 2011).  If it continues its current growth it will eventually surpass the US and become the largest producer in the world.  China assembles many final products using factors of production made in China and in other countries.  China has an abundant labor supply with low labor costs relative to the US.  Due to its final product assembly it has a significant percentage of capital intensive production.  China has bought enough US debt to contribute to the demand and stability of the US Treasury Bonds.  China will continue to grow and buy more US exports.  China will continue to expand its participation in global markets, internally and externally.  The United Nations must mandate human rights rules and pollution controls with China.

India is only 1.8 percent of US imports (US Census Bureau, Foreign Trade, 2011).  Exports to India are not significant.  It has a total GDP of about $10 trillion, which is the fourth largest national output in the world (CIA GDP, 2011).  India is the largest democracy in the world by population.  Since the 1990s India has moved in the direction of capitalist free markets and has grown in the services sector, specifically in IT (Williamson, 2006).  India exports to and is outsourced by many different countries.  Technological innovations in India have taken place with smaller cheaper cars, heart operation devices, mobile phones, information systems, and more.  India has a low GDP per capita.  The markets of India have had to create products and production methods at the lowest possible cost.  India’s entrepreneurialism has met these low costs and benefited the world.

Conclusions:

The world is moving toward more beneficial trade outcomes which are more and more integrated.  Any significant global event has a ripple effect around the globe.  The nature of free markets and global trade pushes for optimal distributions of factors of production and final product.  Emerging economies are growing faster and may receive aid from the major industrial nations.  The global economy and the US are forecasted to maintain modest growth.  In markets around the world, such as India, innovation is spurred with reduced production costs.  Though some other countries are growing faster than the US, the US will continue to achieve higher levels of GDP per capita and better standards of living.  The success of other countries and the inevitable increased equitable distribution around the world benefits the US.


References


CIA (2011). Country Comparison. GDP (Purchasing Power Parity). Central Intelligence Agency.                

        The World Factbook.  Retrieved June 22, 2011 from

        https://www.cia.gov/library/publications/the-world-factbook/rankorder/rankorderguide.html 


CIA (2011). Country Comparison. Population. Central Intelligence Agency. The World 

        Factbook.  Retrieved June 22, 2011 from https://www.cia.gov/library/publications/the-

        world-factbook/rankorder/rankorderguide.html


IMF (2011, June 17). World Economic Outlook Update Mild Slowdown of the Global

        Expansion, and Increasing Risks. International Monetary Fund. Retrieved from

        http://www.imf.org/external/pubs/ft/weo/2011/update/02/index.htm


The Economist (2011, June 18). Briefing the Euro Crisis a Second Wave. The Economist,

        399(8738), 29-31. 


US Census Bureau. Foreign Trade (2011, April). Goods and Services Deficit Decreases in April

        2011. US Census Bureau, Foreign Trade, US International Trade in Goods and Services

        Highlights. Retrieved from http://www.census.gov/indicator/www/ustrade.html


Williamson (2006, March). The Rise of the Indian Economy. American Diplomacy.org.

        Retrieved from

        http://www.unc.edu/depts/diplomat/item/2006/0406/will/williamson_india.html  

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