Mid-Course Exam II
Questions Attempted:
- You are chief economic advisor to your nation’s president, and you are facing a crisis.
The country’s balance of payments is in severe deficit, the domestic economy is in deep
recession, and foreign investors are fleeing. Taking due account of both economic and
political factors, what course of action (or actions) would you recommend?
- The last twenty years have seen a rapid proliferation of regional trade agreements (also
known as preferential trade agreements). Is this a good thing or a bad thing?
Question 1. A Remedy to Economic Recession and Deficit in Balance of Payments
In a situation of an economic crisis where the nation has a deficit in the balance of payments, the country’s economy is in recession, and foreign investors are shifting operations from the state, a raft of measures are needed to save the country from further economic meltdown. As the chief economic advisor to the president, my proposals for the course of action to take would be based on fiscal policies. Specifically, I would propose expansionary fiscal policies that would increase government spending, reduces tax levies, and promote increased demand so as to save the economy from further recession. Therefore, for the economy to come out of recession, the government must implement demand-enhancing policies such as implementing tax reliefs, increased government spending and increase tariffs on imports.
To reduce the deficit on balance of payments, I would advise the president to impose tariffs and import quotas on the majority of the nation’s imports. Imposing import quotas and duties on the nation’s imports would make foreign firms more competitive. Domestic firms, if protected by restricting imports, will be able to produce more for both domestic consumption and the international market. Tariffs have proved to be a significant source of government revenue, as manifested by Trump’s administration. That is evident from Trump’s imposition of tariffs on Chinese imports. As Trump once said, he was happy that the US economy was benefiting from over $100 billion a year from the taxes (Chad & Douglas, 2020). Therefore, the president should consider imposing tariffs on all imports since that will help to remedy the deficit on the balance of payments.
To address the challenge of economic recession, the president will have to implement demand stimulating policies. Such policies include increased government spending as well as a reduction in taxes. Increased government spending includes implementing capital intensive projects such as infrastructure development, among others. Such projects will employ more citizens, hence reducing unemployment. An increase in employment rates will stimulate demand and help pull out the economy from the recession (Chappelow, 2020). Reducing taxation will have a similar impact, like increased spending.
Lastly, to encourage foreign investors to stay, the president should consider offering such firms tax reliefs and government subsidies. Such a move will help them to become competitive and continue investing in the country. A combination of the above measures will help to pull the economy out of recession, reduce the deficit of payment, and promote foreign investment.
Question 2. Whether the Proliferation of Regional Trade Agreements in the Last Twenty years is a Good or Bad Thing
In the last twenty years, there has been an unprecedented increase in trade agreements between different countries and continents. That increase in trade deals has been fueled by the rise of globalization, which has made the world a virtual village. Globalization has facilitated the flow of capital, goods, and services across the globe, and that has made it necessary for nations to develop regional trade agreements and deals to govern trade between them. The rise of trade agreements has been both beneficial and detrimental to the nations’ economies. Therefore, it is both a good and a bad thing. On the positive side, regional trade agreements have helped to minimize trade wars, has expanded the scope of business through access to regional markets, and has helped to remove trade barriers between nations. On the contrary, regional trade agreements have led to some of the participating nations lose competitive advantage and has promoted outsourcing, which leads to unemployment in the host country (Fletcher, 2009). However, the benefits of regional trade agreements outweigh the disadvantages, and therefore, trade agreements are a good thing.
Trade agreements have helped to minimize trade wars between nations. For instance, the US has been in trade agreements such as NAFTA, TPP, among others. However, the current president’s threats and initiative to withdraw from these agreements have resulted in trading wars with other nations and especially China. As a result, the US has imposed tariffs on Chinese imports, and China has responded by equally imposing tariffs (Chad & Douglas, 2020). Such acts result in unnecessary trade wars. Its, therefore, justified to state that trade agreements are good.
Regional agreements are useful since they allow firms to have access to a broader market. As illustrated by Chad and Douglas (2020), US firms have been able to access the over 1.4 billion Chinese market, thanks to existing trade agreements. Trade agreements allow nations to reach markets outside their local setups, and this leads to more significant profit margins hence economic growth. Regional agreements have prompted countries to scrap tariffs on members, thus easing trade between the nations.
On the contrary, trade agreements have led to countries losing competitive advantage. It has increased competition by opening up a country’s economy to external goods. Increased competition is detrimental to local firms. Besides, trade agreements have allowed firms to outsource cheap labor from neighboring nations (Fletcher, 2009). Such an act leads to the loss of jobs in the country the firm is located. Therefore, in such a situation, trade agreements are bad for the economy. Nevertheless, the benefits of trade agreements are more than the shortcomings, and therefore, the increase in trade agreements in the last twenty years has been a good thing.
References
Chad, B.P., and Douglas, A.I. (2020). Trump’s assault on the global trading system: And why decoupling from China will change everything. World Trade Organization.
Chappelow, J. (2020). Guide to economic recession: Fiscal policy. Investopedia. https://www.investopedia.com/terms/f/fiscalpolicy.asp
Fletcher, I. (2009). Free trade doesn’t work: What should replace it? US business & Industry Council.