Chapter 10: International Trade and the United States' Place in the Global Economy

The United States' Place in the Global Economy
Global and U.S. Trade
U.S. Trade Balance
Trade Agreements
The International Monetary Fund
The World Bank
Globalization and the Antiglobalization Movement
Sanctions
The Changing Face of Free Trade

Those who have money go abroad in the world.

—Chinese proverb

Technology has made it easier to go abroad in the world. U.S. companies can sell their goods and services on a global market. Likewise, U.S. 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. However, there is the added complication of many 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. Yet, 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 the nation.

The United States' Place in the Global Economy

According to the Central Intelligence Agency (CIA), in World Factbook (June 13, 2008, https://www.cia.gov/library/publications/the-world-factbook/rankorder/2001rank.html), the international gross domestic product (GDP) was $65.8 trillion in 2007. (See Table 10.1.) The United States had the largest economy of any single nation ($13.9 trillion), followed by China ($7 trillion), Japan ($4.4 trillion), and India ($3 trillion). The combined nations of the European Union (EU) had a gross domestic product (GDP; the total market value of final goods and services produced within an economy in a given year) of $14.5 trillion, putting the EU in a position above the United States 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 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.

How the United States Compares

The United States' rise as the global economic leader has resulted from a combination of four 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, the United States' dominance is attributed to its wealth in natural resources, a motivated and educated labor force, many 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), whereas 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. According to the CIA, in World Factbook (July 15, 2008, https://www.cia.gov/library/publications/the-world-factbook/geos/us.html#Geo), the United States is the third largest country in the world (after Russia and Canada), at 3.8 million square miles (9.8 million sq km). The United States has direct access to two oceans; many 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 the United States' economic success. The U.S. Department of Labor's Bureau of Labor Statistics (BLS) indicates in the press release “Employment Situation Summary” (July 3, 2008, http://www.bls.gov/news.release/empsit.nr0.htm) that in

June 2008 the civilian labor force consisted of 154.4 million employees. The BLS also 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, in the press release “Productivity and Costs, First Quarter 2008 Revised” (June 4, 2008, http://www.bls.gov/news.release/prod2.nr0.htm), productivity of the nonfarm business sector increased by 2.6% in the first quarter of 2008 and had experienced an annual average increase of 2.7% from 2000 to 2006.

TECHNOLOGY. U.S. companies have long been at the forefront of technological innovation, pioneering developments such as electricity, factory assembly lines, and computer software. These new technologies have increased both worker productivity and business efficiency, which, in turn, allow companies to deliver goods and services at lower costs to consumers, thereby stimulating spending and boosting the economy. At the same time, advances in technology can affect the job market. New technologies lead to more jobs as workers are needed to design, manufacture, and service them. By contrast, 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. Even though 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

The World Trade Organization (WTO) states in International Trade Statistics 2007 (2007, http://www.wto.org/english/res_e/statis_e/its2007_e/its2007_e.pdf) that world trade was more than $14 trillion in 2006. The value of merchandise trade was $11.5 trillion, and trade in commercial services was $2.8 trillion. Manufactured products accounted for more than 70% of the value of trade in merchandise. The two single largest sectors in commercial services were travel and transportation, accounting for 27% and 26%, respectively, of the total value of that category. Overall, the WTO reports that the value of worldwide trade increased by 8% between 2005 and 2006.

According to the WTO, the United States was the world's leading importer of goods in 2006, accounting for $1.9 trillion in imports, or 15.5% of the world total. Finishing out the top-five list of importers were Germany, China, the United Kingdom, and Japan. The United States was the second largest exporter of goods, ranking behind Germany. U.S. exports amounted to over $1 billion in 2006, accounting for 8.6% of world merchandise exports. Other nations in the top five were China, Japan, and France. The United States was the top exporter and importer of commercial services in 2006, with $307.8 billion in imports and $388.8 billion in exports. U.S. trade accounted for more than 11% of the world total in both imports and exports of commercial services.

U.S. Trade in Goods

Table 10.2 provides a breakdown of goods imported and exported by the United States in 2004, 2005, and 2006. Two different totals are given—a total using a balance of payments 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.

IMPORTED GOODS. Nearly $1.9 trillion in goods was imported into the United States in 2006. (See Table 10.2.) The industrial supplies category had the most imports, accounting for $601.9 billion of the total. According to the BEA, in U.S. International Trade in Goods and Services, Annual Revision for 2006 (June 8, 2007, http://www.bea.gov/newsreleases/international/trade/2007/pdf/trad1307.pdf), crude oil was the largest component in this category, accounting for more than one-third of industrial supply imports. Nearly $217 billion in crude oil was imported

into the United States in 2006. Other industrial supply imports included petroleum products ($44.2 billion), natural gas ($28.3 billion), and fuel oil ($27.1 billion). The top nonfuel import in this category was iron and steel mill products ($22.4 billion).

Consumer goods accounted for $442.6 billion of U.S. imports in 2006. (See Table 10.2.) This category includes a wide variety of household, sporting, and personal use items. The BEA indicates that pharmaceutical preparations were the largest single component of this category, accounting for $64.4 billion of the total. They were followed by miscellaneous household goods ($51.9 billion), apparel and household goods made of cotton ($48.7 billion), televisions and video cassette recorders ($35.9 billion), and apparel and textile goods—nonwool or cotton ($31.1 billion).

The United States imported $418.3 billion in capital goods in 2006. (See Table 10.2.) 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). According to the BEA, the largest value components were computer accessories ($67.6 billion), telecommunications equipment ($40.3 billion), computers ($33.8 billion), electric apparatuses ($33.6 billion), and miscellaneous industrial machines ($29.1 billion).

Nearly $257 billion in automotive vehicles, parts, and engines were imported in 2006. (See Table 10.2.) The BEA states that foods, feeds, and beverages accounted for $74.9 billion in imports, with fish and seafood making up the largest percentage by value ($13.2 billion). This was followed by miscellaneous foods ($7.9 billion); wine, beer, and related products ($7.8 billion); fruits and frozen juices ($7.5 billion); and meat products ($7.4 billion).

Other goods imported into the United States during 2006 had a value of $59.5 billion. (See Table 10.2.)

EXPORTED GOODS. The United States exported over $1 trillion worth of goods in 2006. (See Table 10.2.) The largest category of exports was capital goods, totaling $413.9 billion. In U.S. International Trade in Goods and Services, the BEA notes that semiconductors were the top export in this category, accounting for $52.4 billion in capital good exports. Other top exports included civilian aircraft ($40.8 billion), computer accessories ($36 billion), miscellaneous industrial machines ($32.7 billion), and electric apparatuses ($29.8 billion).

Just over $276 billion in industrial supplies were exported in 2006. (See Table 10.2.) According to the BEA, organic chemicals accounted for $27.1 billion of the total, followed by plastic materials ($25.1 billion), miscellaneous industrial supplies ($18.9 billion), miscellaneous chemicals ($18.6 billion), and fuel oil ($12.1 billion).

The value of exported consumer goods was $129.9 billion in 2006. (See Table 10.2.) The BEA explains that pharmaceutical preparations were the largest component at $30.9 billion. Other top exports in this category included miscellaneous household goods ($14.1 billion); gem diamonds ($9.9 billion); toys, games, and sporting goods ($9 billion); and toiletries and cosmetics ($6.8 billion).

U.S. exports of automotive vehicles, engines, and parts totaled $107.2 billion in 2006. (See Table 10.2.) The sum for exported foods, feeds, and beverages was $65.9 billion. The BEA indicates that corn accounted for $8.2 billion of the total, followed by meat and poultry ($7.8 billion), soybeans and miscellaneous foods ($7.3 billion each), and fruits and frozen juices ($5.6 billion).

Other goods exported by the United States during 2006 totaled $43.6 billion. (See Table 10.2.)

U.S. Trade in Services

According to the Census Bureau, in U.S. International Trade in Goods and Services, May 2008 (July 11, 2008, http://www.census.gov/foreign-trade/Press-Release/current_press_release/ft900.pdf), U.S. businesses sold $497.2 billion worth of services in 2007. American consumers paid for $378.1 billion in foreign-provided services. Specific major types of imported services include travel ($76.2 billion), other transportation ($67.1 billion), and direct defense expenditures ($32.8 billion). However, the largest category of imported services was “other private services” ($144.4 billion). This category includes business, professional, and technical services; insurance services; and financial services. Major exported services in 2007 were “other private services” ($223.4 billion), travel ($96.7 billion), and royalties and license fees ($82.6 billion).

The service export values do not completely show the United States' business presence in foreign lands. Increasingly, U.S. companies operate affiliate offices abroad, and their sales of services have become an important factor in U.S. trade. This growth is shown in Figure 10.1, which tracks the value of U.S. exports of services and the sales of services by U.S.-owned foreign affiliates from 1995 to 2004.

In 2004 sales of services by U.S.-owned foreign affiliates totaled $490 billion, up from less than $200 billion in 1995. According to the U.S. International Trade Commission, in Recent Trends in U.S. Services Trade: 2007 Annual Report (June 2007, http://hotdocs.usitc.gov/docs/Pubs/332/Pub3925.pdf), the industries accounting for the largest shares of foreign affiliate sales of services during 2004 were insurance (17.4%), computer systems design (9.1%), utilities (6.8%), telecommunications (6.6%), and transportation and warehousing (6.4%). 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. Trading Partners

In “Top Trading Partners: Total Trade, Exports, Imports” (February 14, 2008, http://www.census.gov/foreign-trade/statistics/highlights/top/top0712.html), the Census Bureau tracks the total imports and exports of goods to and from the United States on a monthly and yearly basis. In 2007 the United States' top-ten trading partners and the value of goods traded with them were:

• Canada—$562 billion
• China—$386.7 billion
• Mexico—$347.3 billion
• Japan—$208.1 billion
• Germany—$144 billion
• United Kingdom—$107.2 billion
• South Korea—$82.3 billion
• France—$69 billion
• Taiwan—$64.7 billion
• Netherlands—$51.4 billion

Together, these ten countries accounted for nearly two-thirds of all U.S. trade value during 2007.

U.S. Trade Balance

The difference between exports and imports over a specific time period is known as the balance of trade (exports C0 imports ¼ balance of trade). 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.

The United States has had a trade deficit for goods every year since 1976, with record levels reached in the 2000s. (See Figure 10.2.) In 2007 there was a trade surplus of $107 billion for services. In other words, the value of exported services exceeded the value of imported services

by $107 billion. This surplus was more than offset by an enormous trade deficit of $815 billion for goods. In other words, the value of imported goods was $815 billion greater than the value of exported goods. Even though the trade deficit in goods was down slightly in 2007, it is still high by historical standards.

The historical trade balance in services has been quite different. It has grown from mildly negative numbers during the 1960s to more than $100 billion in the last half of the first decade of the 2000s. From 1996 to 2005 the service trade balance has varied only slightly, even as imports and exports have increased. (See Figure 10.3.)

The Trade Deficit and the U.S. 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 U.S. dollar weakens compared to 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. By contrast, each unit of the foreign currency is now worth more in U.S. dollars and has more purchasing power of American goods. For example, when the dollar weakens compared to 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, whereas exports from the United States 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.

Many economists believe 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 10.2 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.

Ce´ dric Tille, Nicolas Stoffels, and Olga Gorbachev indicate in “To What Extent Does Productivity Drive the

Dollar?” (Current Issues in Economics and Finance, vol.7, no. 8, August 2001) that the dollar appreciated by 5.8% against the euro and by 4.8% against the yen on an average annual basis during the late 1990s. 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. (See Figure 10.2.)

In the early 2000s the value of the dollar began to drop compared to foreign currencies. In contrast to conventional economic wisdom, the U.S. trade deficit continued to grow even as the dollar weakened. This contradiction is examined by Peter S. Goodman and Nell Henderson in “Dollar at 20-Month Low against the Euro” (Washington Post, November 29, 2006). Goodman and Henderson note that other factors allowed the U.S. trade deficit to grow as the dollar was shrinking—primarily huge buys of U.S. government securities by the governments of China and Japan. However, dollar value changes can take many months to several years to be reflected in the U.S. trade balance. Goodman and Henderson's observation proved to be prophetic as the growth in the U.S. trade deficit was less dramatic between 2005 and 2006 and actually decreased between 2006 and 2007. (See Figure 10.2.)

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 stocks, bonds, and Treasury bills. These purchases are tracked by the federal government in what is called the capital account. As of June 30, 2007, foreign holdings of U.S. securities totaled $9.7 trillion. (See Table 10.3.) The vast majority of the holdings ($9.1 trillion) consisted of long-term securities (securities with maturity time more than one year). A much smaller value ($635 billion) of short-term debt was in foreign hands.

The U.S. Department of the Treasury states in the press release “Report on U.S. Portfolio Holdings of Foreign Securities at End-Year 2006” (November 30, 2007, http://www.ustreas.gov/press/releases/hp705.htm) that in November 2007 U.S. holdings of foreign securities totaled nearly $6 trillion at the end of 2006. This value was up from $4.6 trillion reported at year-end 2005.

Is the Trade Deficit Good or Bad?

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

In “The U.S. Trade Deficit: Causes, Consequences, and Cures” (January 25, 2008, http://italy.usembassy.gov/pdf/other/RL31032.pdf), Craig K. Elwell of the Congressional Research Service outlines the perceived good and bad effects of a large trade deficit. Elwell notes that the U.S. trade deficit reached $811.5 billion in 2006 and grew by $20 billion from the year before. This growth was driven by an increase in import purchases by Americans.

As noted earlier, there is a direct link between the trade deficit and the flow of capital. As Americans buy more foreign goods, foreigners have more money to invest in U.S. financial instruments (e.g., stocks, bonds, and Treasury notes). On the plus side, these investments indicate strong foreign confidence in the security and future growth of the U.S. economy. Also, much of the money flowing into the country has been invested in productive capital—that is, invested in growing U.S. industry. However, in many cases these purchases represent debt obligations that the United States will have to pay in the future. In essence, the United States is becoming indebted to foreign nations. Elwell states that “borrowing from abroad allows the United States to live better today, but the payback must mean some decrement to the rate of advance of U.S. living standards in the future.”

In a broader sense, large capital inflows demonstrate that Americans prefer spending their money on foreign imports rather than investing it in domestic financial instruments. Put simply, Americans prefer spending to saving. Elwell points out that the opposite is true in most other nations with healthy economies. In those countries people prefer saving (by investing in U.S. financial instruments), to buying American goods. Elwell notes, “So long as domestic saving in the United States falls short of domestic investment and an inflow of foreign saving is available to fill all or part of the gap, the United States will run a trade deficit.”

Many critics of the trade deficit claim it hurts the U.S. economy overall, particularly by raising unemployment. Elwell disputes this claim, explaining that the dramatic growth of the trade deficit during the 1990s and 2000s has coincided with a generally healthy U.S. economy and relatively low unemployment rates. However, Elwell acknowledges that extensive foreign imports have hurt some U.S. manufacturing industries, particularly textiles, apparel, and steel.

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). The U.S. bilateral free trade agreements in force, pending, or in negotiations as of May 2008 are listed in Table 10.4.

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 (import taxes) are fees charged by a country to import goods into that country. Figure 10.4 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.

Priorities regarding trade policy have shifted over the years according to the state of the economy. During the

recession of the late 1970s, U.S. 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.

According to Bruce Arnold of the Congressional Budget Office, in The Pros and Cons of Pursuing Free-Trade Agreements (July 31, 2003, http://www.cbo.gov/showdoc.cfm?index=4458&sequence=0), opponents to trading blocs argue that when countries with strong economies—such as 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.

North American Free Trade Agreement

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, and others were scheduled to be phased out over time. Agricultural products were an integral part of NAFTA and had some of the longest phase-out schedules. All agricultural provisions of NAFTA were implemented by January 2008.

NAFTA has had a positive effect on the marketability of goods among the participating nations. The 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.

However, 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 estimates that by 2002, 879,280 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 because of NAFTA were eligible for the NAFTA Transitional Adjustment Assistance program, administered by the Department of Labor's Employment and Training Administration (ETA; January 12, 2006, http://www.doleta.gov/tradeact/nafta_taa.cfm), 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 (November 15, 2004, http://www.doleta.gov/tradeact/nafta_certs.cfm) estimates that by 2004, 525,407 workers had received help through the program. 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. In 1992 the Maastrict 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, which is 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.

The Delegation of the European Commission to the United States (May 12, 2008, http://www.eurunion.org/eu/index.php?option=com_content&task=view&id=57&Itemid=51) states that as of May 2008 the EU consisted of twenty-seven countries: Austria, Belgium, Bulgaria, Cyprus, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and the United Kingdom. Candidate countries for admission to the EU in the future included Croatia, the former Yugoslav Republic of Macedonia, and Turkey.

General Agreement on Tariffs and Trade and the WTO

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.

A series of GATT negotiations that concluded in 1994 created the 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 May 2008, the WTO (http://www.wto.org/english/theWTO_e/whatis_e/tif_e/org6_e.htm) consisted of 152 member countries, including the United States.

The International Monetary Fund

At the United Nations (UN) 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 (1939–1945) 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 necessities such as food and fuel.

Critics maintain 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 June 2008, the IMF (http://www.imf.org/external/about.htm) included 185 member countries, including the United States.

The World Bank

At the same conference that created the IMF 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 UN. The World Bank works to combat world poverty by providing low-interest loans, interest-free credit, and grants to developing countries. As of June 2008, the World Bank (http://web.worldbank.org/) noted that the IBRD and IDA included 185 and 167 member countries, respectively.

In its early days, the World Bank often participated in large projects such as dam building. In the twenty-first century, 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. It is one of the world's largest sources of development assistance. The World Bank notes in Annual Report 2007 (2007, http://go.worldbank.org/A2QP25LQX0) that since 1944 it has provided $433 billion in loans 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 can 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 many 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 an umbrella term for many independent organizations that oppose the pursuit of corporate profits at the expense of social justice in the developing world. These groups often protest the actions of organizations such 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, drew 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 economic and trade sanctions (stopping some or all forms of financial transactions and trade with a country) as a political tool against countries that are thought to violate human rights, tolerate drug trafficking, support terrorism, and produce or store weapons of mass destruction. Sanctions are enforced by the Department of the Treasury's Office of Foreign Assets Control (OFAC). As of June 2008, the OFAC (http://www.ustreas.gov/offices/enforcement/ofac/faq/answer.shtml#9) listed economic and/ or trade sanctions against the following countries: the Balkans, Belarus, Burma, Coˆ te d'Ivoire (Ivory Coast), Cuba, Democratic Republic of the Congo, Iran, Iraq, the former Liberian regime of Charles Taylor, North Korea, Sierra Leone, Sudan, Syria, and Zimbabwe.

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 (1946–) signed the Trade Act of 2002 in August 2002. The act gave the president Trade Promotion Authority (TPA), under which international trade agreements were subject to an up-or-down vote, but not amendment, in Congress. The TPA was designed to promote freer trade by giving other countries confidence that the agreements they negotiated with U.S. diplomats would not be subject to changes and renegotiation when they are submitted to Congress for ratification.

The TPA expired in 2007 and was not renewed amid concerns about its effectiveness. In An Analysis of Free Trade Agreements and Congressional and Private Sector Consultations under Trade Promotion Authority (November 2007, http://www.gao.gov/new.items/d0859.pdf), the U.S. Government Accountability Office (GAO) summarizes its investigation of the TPA. The GAO explains that the TPA was administered by the Office of the U.S. Trade Representative (USTR). The TPA required specific procedural steps, such as meetings between the USTR and congressional committees with jurisdiction over trade matters. The GAO finds that during the five-year period that the TPA was in effect, 1,605 of these meetings took place. Even though congressional committee staff reported that the USTR provided “good information” in these meetings, many staff members were frustrated by their lack of opportunity to provide input to the USTR. The GAO notes that such procedural problems need to be fixed if the TPA is to be reimplemented.

Regarding the overall success of the TPA, the GAO finds that seventeen free trade agreements (FTAs) with forty-seven countries were pursued under the TPA process. Six of these agreements were approved and went into force. Negotiations for an additional four agreements were concluded. The GAO concludes that the number of agreements reached under the TPA was relatively small and notes that “most economic studies find the gains for the United States of the completed FTAs to be relatively small compared with the overall U.S. economy.”

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 (1946–) 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 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 ratifying 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 (May 25, 2007, http://www.wipo.int/treaties/en/convention/trtdocs_wo029.html), which was signed on July 14, 1967, and amended on 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

WORLD INTELLECTUAL PROPERTY ORGANISATION. 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. The World Intellectual Property Organization (WIPO) explains in “Major Events 1883 to 2002” (July 4, 2007, http://www.wipo.int/treaties/en/general/) that 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 copyrighted works such as novels, short stories, poems, plays, songs, operas, musicals, sonatas, drawings, paintings, sculptures, and architectural works.

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 eventually evolved into the 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 October 2007, the WIPO (http://www.wipo.int/members/en/) included 184 member nations, including the United States.

FEDERAL INITIATIVES: FOCUS ON KNOCKOFFS AND COUNTERFEIT PRODUCTS. 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 the U.S. attorney general John D. Ashcroft (1942–) 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 U.S. economy. Later that year, the U.S. Department of Commerce launched the Strategy Targeting Organized Piracy initiative to link together many 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. According to the article “Hezbollah Pushes Prada?” (CNNMoney.com, March 26, 2005), in 2005 law enforcement officials testified before the U.S. Senate Homeland Security Subcommittee that international terrorist groups were involved in the knockoff trade in the United States to raise money for their organizations.

Officials note that knockoffs have moved out of back allies and into mainstream American markets. The U.S. Chamber of Commerce warns in What Are Counterfeiting and Piracy Costing the American Economy? (2005, http://www.uschamber.com/) that “fakes are infiltrating the supply chain and making their way into legitimate retail outlets.” The organization cites a number of events in which consumers were harmed by defective knockoffs, including counterfeit batteries sold at retail stores. Furthermore, it reports that knockoffs cost U.S. businesses $200 billion to $250 billion in lost sales in 2004. Global losses were estimated at around $500 billion.

In the press release “May Is National Electrical Safety Month: CPSC Warns of Dangerous Counterfeit Electrical Products” (May 9, 2007, http://www.cpsc.gov/cpscpub/prerel/prhtml07/07185.html), the U.S. Consumer Product Safety Commission notes that as of May 2007 it had recalled a total of more than one million counterfeit electrical products, including defective cell phone batteries, circuit breakers, and extension cords. The agency states that “many counterfeit products are made in China.” Maureen Fan reports in “China's Olympic Turnabout on Knockoffs” (Washington Post, June 13, 2008) that in June 2008 Chinese authorities had begun a massive crackdown on counterfeiters in preparation for the summer Olympic Games, which were scheduled for August 2008. Fan notes that “for years, China has been known as the leading exporter of fake goods.” Chinese officials have been raiding markets and bazaars and seizing counterfeit products. According to Fan, part of the motivation is to prevent the sale of illegal replicas of the Olympic mascots. China stands to make tens of millions of dollars in profit from Olympic goods and does not want to lose this money to counterfeiters.

Foreign Ownership of U.S. Assets

The huge growth in the U.S. trade deficit is associated with similar growth in foreign ownership of U.S. stocks, bonds, and other financial instruments. In addition, the overall strength of the U.S. 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 the United States 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 U.S. financial assets. This could destabilize the stock market and result in higher interest rates, which would dampen U.S. economic growth.

In Report to the Secretary of the Treasury (February 2, 2005, http://www.ustreas.gov/press/releases/js2221.htm), the Treasury Borrowing Advisory Committee addresses this issue with respect to foreign ownership of government securities. In 2005 just over 50% of Treasury securities were held by foreigners, including private and government sectors. The committee concludes 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 committee also indicates that if foreign investment were to slow or cease, domestic investors would “fill the void.” Furthermore, the committee notes that “high foreign ownership of US Treasuries—and of US 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 US assets, that foreign ownership of virtually all US financial assets has risen sharply.”

According to the article “Foreign Ownership of U.S. Companies Jumps—Report” (Reuters, August 27, 2008), the financial consulting firm Grant Thornton, LLP, reported in August 2008 that foreign ownership of U.S. companies increased dramatically between 1996 and 2005 based on an analysis of Internal Revenue Service data. On a revenue basis, foreign ownership of U.S. companies more than doubled from $1.7 trillion in 1996 to $3.5 trillion in 2005. Nearly 14% of corporate U.S. assets were owned by foreign companies in 2005. The United Kingdom received the largest share of dividends from the foreign-owned businesses (20.5%), followed by Japan (16.2%), Germany (12.7%), and the Netherlands (12.3%).

In February 2006 DP World, a company owned by 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 many U.S. ports. DP World is based in the Middle Eastern 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. Even though 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 UAE. 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 U.S. House of Representatives 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. Later that year, DP World sold the U.S. ports contract to the U.S.-based company AIG Global Investment Group.

In July 2008 the Belgian beer company InBev agreed to buy American brewer Anheuser-Busch for an estimated $52 billion. As of September 2008 the deal was still pending approval by federal regulators.