Basing my argument on e-Activity trade agreement helps the U.S. economy. A trade agreement refers to a contractual consensus between two or more countries on the terms of trade that will exist between them. These agreements facilitate the formation of trade unions, and in most cases, tariffs taxes and trade pacts are loosened for all countries in the union. In the U.S, trade agreements will increase the flow of output because of low cost. In addition, the country will be exposed to a wide market subjected to low tariffs. Although the U.S will lose revenues because of low trade tariffs, it is likely to recover them from other tax bases like income taxes, which is likely to increase because of increasing output.
Despite the increase in output and the subsequent growth of Gross Domestic Product (GDP), consumers would be uneasy about the consequences of free trade with foreign countries because of several reasons. First, free trade can facilitate entry of low quality or substandard products into the U.S. Sometimes it is difficult to distinguish between genuine and substandard counterfeit products, and this is likely to cause consumers’ uneasy. Secondly, free trade may facilitate entry of illegal products like drugs.
A fixed exchange rate refers to a situation where a country’ currency exchanges at a constant rate set by the central bank. Whether the currency deprecates or appreciates does not change the price, at which it is selling, this system is applicable in planned economies where the government sets the pace for all economic activities. This system is viable in economies that experience frequent shocks on their exchange rate since it will help reduce chances of hyperinflation.
Advantages and disadvantages of tariffs
Tariffs are charges levied to importers and exporters in a country. They have some advantages like generation of revenue to the government. It is the government's responsibility to levy tariffs and thus the money corrected add to its revenues. Secondly, tariffs facilitate regulation of the amount of imports brought to a country. This will enable local industry protection by eliminating unfair competition from low cost countries.
Tariffs have their disadvantages like discouraging investments. Tariffs increase the cost of the commodity, which tax is levied. This is likely to repel foreign investment who will shift to countries with no or low tariffs. Secondly, tariffs reduce citizen’s welfare. This is because they increase the cost of consumer-imported goods consequently reducing their purchasing power.
The most significant canon is the laissez-faire principle. The principle explains the structure of free market and explains how foreign exchange market rates are determined by forces of demand and supply. This principle in more significant than others, because all world economies are influenced by exchange foreign rates, and this is not the case with other principles.
Message in a time capsule
Financial crisis caused by insurance companies in the U.S makes the economic times of my lifetime. During this period, these companies had lent beyond their capacity in mortgages and the beneficially failed to meet their obligations. This caused massive shortage of cash leading to the financial crisis. To avoid such a crisis, the central bank should intervene and control the financial institutions lending activities.
My career has always been trading in the export processing zone market. This course has enlightened me on various tariffs and their application on both imports and exports.
Trade agreements and foreign exchange are the two economic concepts that have a significant impact on US in the next 19 years. The U.S grows through trade interaction with other countries, and these two concepts are applied simultaneously.
Calderon-Rossell, J., & Horim, M. (2011). The Behavior of Foreign Exchange Rates. Journal of International Business Studies, 99-111.