Does Trade with Low-Wage Countries Cause a Trade Deficit in the High-Wage Country?
Since 1992, the trade deficit in U.S. has risen more or less progressively. The trade deficit relative to Gross Domestic Products in the second quarter of 2004 surpassed the 5% for the first time ever. Most economists considered “trade deficits” that were above 4% of (GDP) treacherously high. The fear may be that, unrelenting growth in the U.S. economy’s external imbalance would ultimately spook over-seas financiers (Christian, 2004). China and the U. S. share the most imbalanced bilateral-trade correlation in the world. Every year, the U. S. imports more goods from China compared to its exports to a tune of 202 billion dollars. In addition, China alone accounts for almost 26 percent of the United States' 725.8 billion dollars trade deficit. Progressively, this imbalance may be the topic of a key political backlash in the U.S. congress, where a number have charged that the U.S. may be destroying its industrial foundation to support the industrialization of a communist country.
I refute the statement that International imbalances may be caused by excessive imports that, consecutively, may be fueled by low-wages in other countries for some reasons. First, the foundation of international trade demonstrates that there are gains made through partaking in it. This was confirmed by David Ricardo, in the 19th century, after he introduced the idea of comparative advantage. David’s theory affirmed that a nation's "absolute advantage ought to be reflected in the differences in income, while comparative advantage is determined by the blueprint of international trade. A country may have a comparative advantage in a particular sector though it may be more ineffective than any other nation. This may be for the reason that comparative advantage is founded not on who may be the best, but relatively on where the margin of superiority of a country is superior, or its edge of inferiority is lesser. Provided that a poor country concentrates in sectors that may be least ineffective judged against a rich country in that case it will expand from trade.
Each nation has a comparative advantage in production of certain merchandise. Stipulated that a Third-World nation has a comparative advantage in some labor-intensive industries because of their low-wages, in that case America ought not to focus their exertions in these areas. It may be important to bring into account foreign workers productivity when analyzing trade deficit discrepancies among nations. The Ricardian model illustrates that there may be a correlation between comparative advantage and labor productivity. All nations have restricted resources that limit the quantity that they are able to produce.
The U.S. ought to specialize in the production of merchandise whose comparative price surpasses the foregone opportunity cost as a result of not producing the alternative merchandise. It may neither be economical nor efficient for the U.S. to strive and protect its industries that may be done comparatively less-expensively in low-wage countries. It may be cheaper for the U.S. relative to its labor-force to manufacture high-value merchandise and trade them at a higher value.
In conclusion, Trade among the High-wage and low-wage countries promotes most people in both countries, irrespective of their wage discrepancies. Trade deficit occurs because imports increase with incomes; hence, International trade may be a pathway to progress economically. However, irrational economic behavior repeatedly delays this growth, and one cannot refute that trade with low-wage countries has vital short-term economic and social effects in High-wage countries like the U.S.
Christian, E. (2004). “Underlying Causes of Trade Deficit Cast Doubt on Future Improvements”.
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