Insight Washington 1: THE ECONOMIC BENEFITS OF U.S. TRADE

Why does President Obama advocate Trans-Pacific Partnership (TPP)? How can TPP grow U.S. businesses, create local jobs, and expand the middle class? The Council of Economic Advisors published a report, The Economic Benefits of U.S. Trade 2015 (click for the full report), which presents original empirical evidence, alongside a summary of the extensive economic literature, on a broad range of effects of enhanced U.S. trade and U.S. free trade agreements (FTAs). Highlights from this report include:

  1. U.S. businesses must overcome an average tariff hurdle of 6.8 percent, in addition to numerous non-tariff barriers (NTBs), to serve the roughly 95 percent of the world’s customers outside our borders.
  1. Exporters pay higher wages, and the average industry’s export growth over the past twenty years translated into $1,300 higher annual earnings for the typical employee.
  1. Middle-class Americans gain more than a quarter of their purchasing power from trade. Trade allows U.S. consumers to buy a wider variety of goods at lower prices, raising real wages and helping families purchase more with their current incomes.
  1. Over the past twenty years, the average industry’s increase in exports translated into 8 percent higher labor productivity, or almost a quarter of the total productivity increase over that time.
  1. When countries make trade deals with China, outsourcing of American jobs increases, while U.S. trade agreements do not change the rate of U.S. investment abroad.
  1. Trade raises labor standards and incomes abroad, helping developing countries lift people out of poverty and expanding markets for U.S. exports.
  1. The United States has a $43 billion surplus in agricultural trade and is a worldwide leader in agriculture, employing almost 1.5 million American workers.

 

Domestic trade is driving the UK economic recovery

By , 6:00AM BST 22 Apr 2014

Small and medium-sized businesses (SMEs) believe domestic trade is single-handedly powering the UK’s economic recovery, but fear the improving pound could mar their export opportunities further afield.

While company chiefs expect some improvement in the business environment this year, they are still plagued by worries over the state of the global economy, the eurozone and currency volatility, according to a new report.

Full Story here.

image from:http://www.purefx.co.uk/

Economic Trends to Watch in 2014

1. East Asia’s declining share of world output

Washington’s strategic pivot to Asia seems to have fizzled — but has the world’s economic pivot as well? In 2013, East Asia’s share of global output was expected to drop, relative to those of the United States and the European Union. For years, investors have been borrowing cheaply in the United States and elsewhere to capture high rates of return in East Asia. But a midyear signal from the Federal Reserve that the days of easy money are numbered has sent the East Asia’s emerging markets tumbling, while manufacturing looks to be returning to Western shores. With China possibly cooling as well during its process of economic and financial reform, will other regions take the lead in growth?

 
2. Eurozone inflation worries

The European Central Bank’s top officials like to say that they have a symmetric target for inflation. Too high is bad, but so is too low. Not surprisingly, inflation fell well under the target of “below, but close to, 2 percent” during the economic downturn of recent years. The question is why it has been allowed to do so again, during a more stable period in which other central banks have continued their aggressive attempts to bolster growth and employment. The officials say risks to prices are balanced right now, but are they really?

 3. Slugging U.S. service sector productivity

For decades, manufacturing employment in the United States has dropped as the productivity of manufacturing workers has increased. Today, about 70 percent of American workers are in private service industries. Those among them who don’t compete with foreign labor — hair stylists, gardeners, doctors, and the like — have slightly more bargaining power than their counterparts in manufacturing and agriculture. But if their productivity doesn’t rise, they’ll still have trouble obtaining higher wages.

 4. The costs of America’s staggering wealth inequality

As I’ve written before, wealth inequality is much more important than income inequality in determining access to opportunity. Severe wealth inequality raises the chance that an opportunity in the economy will go to a rich, stupid person rather than a poor, smart one. This misallocation of opportunities hurts economic efficiency and growth, making the pie smaller for everyone. Right now, the United States has some of the highest wealth inequality in the world; the net worth of the bottom half of families is equivalent to just 1.5 percent of the wealth of the top 10 percent. The results of the 2013 Survey of Consumer Finances will reveal whether this trend is getting even worse.

 5. Oil, oil everywhere

Peak oil? That buzzword of the last several years seems nothing more than a silly catchphrase now. Since prices shot up roughly a decade ago, countries and companies have had a huge incentive to find new sources of the black sticky stuff. Rates of oil production have set new records annually since 2010, thanks to fracking and geological exploration around the world. With proved reserves having risen by half in only a decade, it’s hard to imagine such a rapid increase continuing for long. Yet if it doesn’t, rising demand from the growing global economy will push prices higher again.


6. Buy Japan

Remember Japan, the world’s third-largest economy? It may be the perennial punching bag of the financial press, but it’s still responsible for an important share of world output. Growth in Japan would give the global economic recovery a shot in the arm, and share prices tend to be a good indicator of future booms. Japan’s recent shift to massively expansionary monetary policy could spark growth, but it could also lead to inflation. So far, expectations for inflation in the Bank of Japan’s quarterly survey, which are consistently biased upward, haven’t changed much since Shinzo Abe resumed the office of prime minister in December 2012 and launched the new “three arrows” policy regime. By contrast, stock prices have almost doubled, far exceeding the concurrent rise in the Standard and Poor’s 500.

7. The price of rice

After an enormous spike in early 2008 that led to shortages, export bans, and even riots, the price of rice has finally dipped below its earlier trend. Indeed, stockpiling by governments and other policies intended to encourage production and exports have added plenty of slack to the market. Still, a return to strong and sustained growth in the economies where rice is a staple food could quickly lead these problems to recur. Next time, a global downturn might not arrive just in time to tame demand.

8. China’s shadow-banking housing bubble

Given the lack of transparency in many Chinese companies, real estate is an especially popular investment in the world’s second-biggest economy. Thanks to restrictions in the Chinese financial system, a huge “shadow” banking industry has arisen to finance these purchases. The industry may have been worth about $6 trillion this spring and has been growing fast. Beijing has started a combination of financial reforms that will pave the way for a crackdown on shadow banking, but any dislocations that result could cause havoc throughout the Chinese economy. Because new house prices depend in part on expectations about interest rates and the attractiveness of other assets, they could offer an early tipoff about trouble to come.

9. The rise of bitcoin

A successful currency serves three functions: as a unit of account, a store of value, and a medium of exchange. Bitcoin is making progress as a medium of exchange, with a growing number of vendors accepting it for payment through services like Bitpay. Yet the huge fluctuations in its exchange rate and the apparent ease of theft threaten its usefulness as a store of value and, by consequence, as a unit of account. Who cares how many bitcoins you have if you don’t know what they’re worth from one moment to the next? The adoption of bitcoin around the world is likely to continue in 2014, but it won’t last much longer if the currency fails to stabilize.

See more at: http://www.foreignpolicy.com/articles/2013/12/31/presenting_the_albies_of_2013#sthash.mSYJQ63L.dpuf

Image: http://avenuemedia.ca/wp-content/uploads/2012/10/airs_content_5.jpg

Companies and their Economic Power

The size and scope of global corporations in the 21st century is enormous.  Global corporations have vast reach and economic power. For example, the Coca Cola Company sells it branded products in over 200 countries and Procter & Gamble estimates that 4 billion of the world’s 7 billion people buy P&G brands in 180 countries every year.   A recent Georgetown University study showed that if one were to equate the annual revenues of the largest global corporations with the size of the world’s leading economies, many firms would rank among the top economic powers.  Wal-Mart Stores, with 2010 revenues of approximately $422 billion would rank as the 23rd largest economy in the world, ahead of countries like Norway and Venezuela.  Royal Dutch Shell would rank 26th ahead of Austria, Saudi Arabia, Argentina, and South Africa.  Exxon Mobil would rank 31st ahead of Iran, Thailand, and Denmark.  BP would rank 35th ahead of Greece.  This analysis also revealed that 45 companies would be listed among the top 100 economies.

Of course, the balance of power within a national territory tends to come out on side of the government – in a neck on neck contest, national sovereignty typically wins. This is mainly the case when it comes to the ‘big’ picture – whether or not a country should recognize Cuba or whether certain merchandise should be subject to embargoes or sanctions. The small issues, such as, should our products be adapted to a new market abroad and at what price, tend to be overwhelmingly decided by corporations. Therefore, at this macro level, companies exert major power.

Special thanks to Charles Skuba.

Sources:

World Bank,Gross Domestic Product 2010,  http://siteresources.worldbank.org/DATASTATISTICS/Resources/GDP.pdf, and Fortune Global 500 2011, http://money.cnn.com/magazines/fortune/global500/2011/full_list/, accessed January 27, 2012, Analysis by Charles J. Skuba and Joao Almeida, Georgetown University McDonough School of Business, January 2012