INTRODUCTION
The modern economy is based on the liberal-economic model, shaped by Ricardian concepts of trade and competitive advantage. We learn that the volume of trade has increased gradually, both globally and regionally, and trade agreements have played a vital part in it. In fact, trade agreements have been the instruments that are used to implement trade designs and increase exports and imports. However, studies suggest that trade agreements have benefitted some countries more than the other, which have made free-trade and trade agreements controversial. In this paper I will discuss the nature of contemporary trade, its structure, and impact.
CONTEMPORARY ECONOMY
The modern or contemporary economy is classified as the liberal economy, which emphasizes trade to realize primary economic objectives, such sustainable economic growth, and high employment. In fact, for any economy, whether it is classical or Keynesian, the principal objectives are identical. However, different means are exploited to realize these objectives. As mentioned earlier, contemporary economies emphasize trade to expand the economy and to reduce both poverty and unemployment (Beladi 16).
The rationale, on which trade is based, is that when countries trade on their competitive advantage, they benefit from trade. Previously, Adam Smith’s concept of Absolute Advantage was associated with trade, which made countries apprehensive of trade and therefore, the economic systems, pre-Great Depression, were closed economic models, in which government did not interfere (no monetary instrument), and trade was discouraged.
However, the Ricardian concept of competitive advantage opened new avenues, and countries became more open towards trade, as it was asserted that there are no disadvantages of trade. However, the statistics reveal that trade is affected by various factors and it may benefit one country more than the other country. However, this is natural, as different economies have different economic structure and capacity, which allows them to produce a product and service more optimal (Berg 27).
Since the Great Recession, of 2007, economies or states are revising trade policies, which have again brought in discussion presumed advantages and disadvantages. However, this time around, economists have statistics to understand how economies are affected by trade and how they contribute to Gross Domestic Product Growth and Employment (Beladi 56).
TRADE A MAJOR COMPONENT OF ECONOMY
We have already established how major a component trade is, of contemporary economies. There are economies around the world, for which trade has strategic and economic significance, and their economies use trade to meet their short and long-term objectives. For instance, China uses trade as an instrument to increase the size of its GDP and to reduce unemployment and poverty. In fact, trade is also used to urbanize China, which a different economic-social strategy (Berg 44).
Ortiz-Ospina, Esteban.World trade over 5 centuries (1500-2011). Digital Image, Our World of Data. Our World in Data, 1 November 2017. Web. 27 November 2017. https://ourworldindata.org/international-trade.
It is apparent from the chart above that the size of world trade has increased drastically. There are several reasons for the steep increase in trade; however, the chief reason is that now countries acknowledge that trade is beneficial for the economy and by opening up both economy and markets, economies benefit in some ways. From the systematic study of trade, we also learn that it is the developing countries or labor-intensive economies, which are more eager to trade with developed countries, as they can sell their products, in the markets of developed countries, at a lower price, which gives them a competitive advantage. Similarly, developed countries benefit from increased consumption and an increase in real income. Also, they sell sophisticated or technology-based products and services to developing countries (Ortiz-Ospina).
MEXICO’S ECONOMY
The selected country is Mexico, which is being considered the emerging economy, because of the size of its GDP and the volume of Export. In the year 2015, the size of the Mexican economy, regarding GDP, was $2.2 trillion. The 2007 economic recession, which was Dubbed AS Great recession, jolted Mexican Economy entirely wrong; however, despite the jolts, it was able to recover at a phenomenal pace in the year 2015, the GDP grew at a 2.3% rate, which was slightly higher than the previous year, in which the Mexican economy grew at a 2.1% rate.It depicts that the Mexican economy is strong and stable, as many large economies are still trying to mitigate the ramifications of the 2007 economic recession, by employing fiscal and monetary strategies and policies(Amadeo).
We also learn, from the scrutiny of economic evidence, that the Mexican economy is an export economy, which implies that for the growth, it depends on trade. It also suggests that in this economy, trade is both the primary component of growth and an instrument of it. Statistics reveal that Mexico is the 12th largest export in the world and the destination, of around 80% of its exports in the United States. It is an exciting statistic, as we learn that Mexico and USA are trading partners and this trade is facilitated and validated by North Atlantic Free Trade Agreement. This agreement, which is only quite controversial because of its nature and the result it produced, allows North American countries, which are Canada, United States, and Mexico, to trade with one another without any economic impediments and bureaucratic burdens and hassles (Trading Economics).
NORTH ATLANTIC FREE TRADE AGREEMENT (NAFTA)
The North Atlantic Free Trade Agreement, which is also known as NAFTA, is between three countries: Mexico, Canada, and the United States. As per statistics, the trade agreement has an overall positive impact on the economies of countries. From the study of this trade agreement, we learn that initially, it was a bilateral trade agreement between Canada and United States; however, in 1993, Mexico was also made part of it this bilateral trade agreement evolved into NAFTA, which was put in force on 1st January 1994 (USTR).
The core objective, of this trade agreement was to eliminate tariffs and to facilitate free-flowing trade. It was assumed because of the elimination tariffs, and gradual elimination of duties would intensify industrial activity in the member states or trading countries. It was also assumed that because of increased economic activity, employment would generate an economy would expand at a faster rate. It must be acknowledged that countries presumed that they would trade on the Ricardian model or competitive advantage. However, we learn that Ricardian theory, about trade, is slightly flawed, as it undermines flight of capital and transfer of technology, which disturbs the balance developed by competitive advantage (USTR).
For instance, as it has become to invest in foreign economies, many of the manufacturing firms moved their operations to Mexico, as Mexico is a labor-intensive economy. It has resulted not only tilted exports in favor of Mexico but has also resulted in de-industrialization in the United States. It is one of the primary reasons, which is trading agreement, NAFTA, is severely criticized by anti-trade political parties in the United States.
TRADE SIZE
We have already learned that most of the trade is between the United States and Mexico. As per official statistics, Mexico and the United States trade goods and services worth $579.7 billion. Around $317.6 billion worth of goods and services were exported to the United States, by Mexican economy, in the year 2016. The volume of import, of goods and services, was around $262 billion, which tells that balance of trade is in favor of Mexico. We also learn that imports, from the United States, have reduced from the year 2015. The decrease in imports is around 25, which is estimated to be around $4.8 billion (Trading Economics).
From the statistics, we also learn that with the passage of time, the size of trade has increased drastically, which has primarily benefitted Mexico, as it has exported more goods and services to the United States. Though, this trade advantage is balanced out by other economic factors, such as increased market activity consumption in the United States, which is the most significant component of its economy. Also, because of the low prices, real income increases, and this forces United States’ firms to innovate (Bureau of Transportation Statistics).
The size, of trade between Mexico and the United States, is also significant and considerable; however, it is not as large as trade size between the United States and Mexico, as Mexico exports 80% of its goods and services to the United States.
TRADE AND INDUSTRIALIZATION
Even before the trade agreement, Mexican Economy was strongly tied to the economy of the United States. For instance, the booms and recessions, in the United States, affected both GDP growth and employment in Mexico. The study of the available evidence suggests that NAFTA was not only a trade agreement, but it also had a political significance. Since its signing, the confidence of investors has increased in the Mexican economy, which is why we witness a drastic increase in Foreign Direct Investment in Mexico (Villareal 126).
Trading Economics. Mexico Foreign Direct Investment. Digital Image. Trading Economics.Trading Economics, 27 November 2017. Web. 27 November 2017. https://tradingeconomics.com/mexico/foreign-direct-investment.
However, we also learn that the Foreign Direct Investment, in Mexico, did not increase drastically and immediately, but instead, it was a gradual process. We also know that Mexico is a manufacturing industry, which is why most of the Foreign Direct Investment landed in the manufacturing sector of the economy, which increased industrialization, private investment, and employment.
Statistics also reveal that it took around 9-10 years for the foreign companies and firms to invest in Mexico, as political instability severely affected the country. However, after that period, the size of foreign direct investment fluctuated, and that resulted in various kinds of challenges for the economy. It also affected industrial growth and employment in the country. As there were many other factors, other than NAFTA, which impacted Mexico’s economy; therefore, FDI did not much impact the economy (Trading Economics).
TRADE AND EMPLOYMENT
Unemployment is a serious concern for any government or economy, as it has not only economic ramifications but also political ramifications. Therefore, countries or economies take various measures to ensure employment remains high or unemployment remains at a natural rate. It is done by the economies in various manners. There are short and long-run strategies for it. The short-run strategies include the use of a financial instrument or expansionary fiscal policy, which increase government expenditure and thus employment. It increases both consumption and inflation, which is essential for increased investment. Another method is to employ an expansionary monetary policy, which increases inflation and investment by increasing the money supply and reducing interest rates. The contemporary method or strategy emphasizes trade or exports, which gradually increases employment in an economy, as per assertions (Amadeo).
Therefore, the emphasis of a developing economy is to trade with a developed economy, which increases the prospects of increased economic activity and high employment at a low economic cost.
The World Bank. Unemployment in Mexico. Digital Image. The World Bank. The World Bank, 27 November 2017. Web. 27 November 2017. https://data.worldbank.org/indicator/SL.UEM.TOTL.ZS?locations=MX.
From the chart, we learn that soon after entering a trade agreement, NAFTA, unemployment in Mexico increased drastically. However, at the time, this unemployment decreased, and it is now around 3.2%. As per various studies, this increase in unemployment was not because of NAFTA, but instead, it was because of political instability. As the political system became more stable and size of trade with the United States increased, the Foreign Direct Investment also increased which intensified economic activity and increased the level of employment in the economy (The World Bank).
TRADE AND GDP
In this discourse, we have revealed, on various occasions, that GDP and employment, which are also interconnected, are prime concerns. All the political-economic measures are taken to ensure that economic growth remains healthy and unemployment level remains close to the natural level of unemployment, which is usually around 3% (The World Bank).
Again, to ensure the economy grows at a particular rate and produce maximum employment, economies or governments take various kinds of measures. These measures are political economy, which suggests that in contemporary economies, government interferes quite boldly.
Mexican government entered the Free Trade Agreement with the objective to increase the size of its industry, exports, and GDP growth. However, soon after entering the agreement, the Mexican economy was severely jolted, which affected the growth pattern, even before that because of political instability, the Mexican economy fluctuated a lot, and it could not grow smoothly or consistently (The World Bank).
The 1995 economic upheaval was the result of political instability rather than NAFTA, which is why we cannot blame trade agreement for the economic instability post-NAFTA signing. However, as the political system started to stabilize, the economy also started to produce desired results, and NAFTA played an essential role in stabilizing the economy, as it attracted foreign investors, which desired to sell products and services in American markets, which are highly lucrative. As Foreign Direct Investment is considered an engine of growth; therefore, the increase in investment contributed positively to Mexican Economy (World Bank).
TRADE AND INVESTMENT
United States’ markets are considered of one the most lucrative markets. These markets offer high profits. Since the trade agreement, between Canada, Mexico, and the United States, many investors found Mexico an attracted investment destination. It is because Mexico is the labor-intensive economy, where the cost of production or manufacturing is comparatively low. Foreign investors are invested in Mexico, with the objective to produce in Mexico and to sell in American markets. This expanded industrial base and increased domestic investment too, induced investment. Also, it allowed Mexican industry to modernize, which was essential to compete with American firms.
Therefore, it can be said that trade agreement and size of trade positively impacted investment and facilitated Mexican economy to become the 12th largest exporter of the world (Trading Economics).
CRITICISM
Trade agreements facilitate developing countries in realizing their political-economic objectives in the short and long run. However, because of the increased criticism of these trade agreements, as they favor labor-intensive economies, countries are revisiting these trade agreements. It must be acknowledged that trade benefits and sustain when it is fair and benefits all parties almost equally. There is no doubt that trade agreement has improved economic condition of developing countries, such as Mexico; however, they have also created complications, such as oligarchy, because of Foreign Investment, in particular sectors of the economy (Villareal 72).
CONCLUSION
From the thorough discussion, we conclude that the Mexican economy has benefited from trade agreements, and it facilitates the Mexican economy in realizing its core objectives, such as high employment and stable economic growth. However, there are other factors too, which contributed immensely and played essentially more role than the trade agreement itself, political stability. Therefore, we infer, from this study, that trade agreements benefit developing economies; however, other economic factors are also as important as a trade agreement. For instance, without uninterrupted power supply, the industry would not grow, and it would affect the capacity of industry to produce.
Work Cited
Amadeo, Kimberly. “Mexico’s Economy: Facts, Opportunites, Challenges.” The Balance. The Balance, 25 October 2017. Web. 27 November 2017. https://www.thebalance.com/mexico-s-economy-facts-opportunites-challenges-3306351.
Beladi, Hamid. Contemporary and Emerging Issues in Trade Theory and Policy. Emerald Group Publishing, 2008.
Berg, Hendrik Van den. International Trade and Economic Growth. M.E. Sharpe, 2006.
Bureau Of Transportation Statistics. “U.S. Trade with Canada and Mexico.” Bureau Of Transportation Statistics. Bureau Of Transportation Statistics, 1 November 2017. Web. 26 November 2017. https://www.rita.dot.gov/bts/sites/rita.dot.gov.bts/files/publications/north_american_trade_and_travel_trends/html/trade_can_mex.html.
Ortiz-Ospina, Esteban. “International Trade.”Our World in Data. Our World in Data, 1 November 2017. Web. 27 November 2017. https://ourworldindata.org/international-trade.
The World Bank. “Unemployment in Mexico.” The World Bank. The World Bank, 27 November 2017. Web. 27 November 2017. https://data.worldbank.org/indicator/SL.UEM.TOTL.ZS?locations=MX.
Trading Economics. “Mexico Foreign Direct Investment. Trading Economics.” Trading Economics, 27 November 2017. Web. 27 November 2017. https://tradingeconomics.com/mexico/foreign-direct-investment.
USTR. “North American Free Trade Agreement (NAFTA).” USTR. USTR ,1 November 2017. Web. 27 November 2017. https://ustr.gov/trade-agreements/free-trade-agreements/north-american-free-trade-agreement-nafta#.
Villareal, M Angeles. U. S. -Mexico Economic Relations: Trends, Issues, and Implications. DIANE Publishing, 2011.
World Bank. “GDP growth (annual %).” The World Bank. The World Bank, 1 November 2017. Web. 27 November 2017. https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?locations=MX.
