2019-2020 Essay Contest First Place Essay

Resiliency over Efficiency: Restoring Trade Balance and Insight into an Economy Overdependent on Imports
Sahana Mangipudi
Breck School
Golden Valley, MN

Free trade has resulted in considerable benefits to the U.S. government at federal, state, and local levels, U.S. corporations, and individual citizens in terms of an overall increase in domestic GDP, access to affordable goods and services, and an increased comparative advantage in the global market.^[1] However, when unrestrained, free trade can lead to near-term and long-term adverse consequences such as per capita income losses, a reduced market for agricultural production, increased foreign dependence, and significant national security concerns. Today, we are witness to the United States' over-dependence on foreign supply chains during the COVID-19 Pandemic. The U.S. government should accelerate its efforts to address the trade imbalance and focus on incentivizing domestic production to mitigate the adverse consequences of free trade.

Negotiating fairer bilateral trade agreements will restore income-related losses and increase economic output. The ongoing trade war with China has led to income-related losses and a reduced market for domestic farmers as Chinese importers have canceled certain contracts with the United States. For instance, soybeans are the largest export in the agricultural industry that contributes $1.053 trillion to the U.S. GDP.^[2] The 25% counter tariff on U.S. soybeans has resulted in China shifting their purchases to Brazil.^[3] A solution that could prevent further consequences of trade wars is a bilateral agreement with China similar to the agreement between the U.S. and South Korea and finding new partners within the ASEAN countries to rebalance Asian trade.^[4] Under a bilateral agreement with South Korea, 80% of tariffs were removed in 2012 and as a result, U.S. exports increased by $10 billion.^[5] There has been a significant improvement in the trade balance since the United States' involvement with ASEAN. There was a service trade surplus of $11.6 billion with ASEAN countries in 2018, a 150% increase from the recession in 2008.^[6]

The U.S. government policies can incentivize innovation through research and development and provide better protection to American intellectual property by providing tax credits to encourage technology investment. In the case of Germany following the Great Recession, corporations utilized a value tax system to invest in higher-value-added industries in the form of research and development and vocational training. This increased overall domestic production in emerging technologies while also retaining the current workforce.^[7] The U.S. government should take a similar approach that will maximize domestic production, protect intellectual property, and encourage corporations to invest in higher-value-added industries. The Solar Investment Tax Credit Act, for example, has led to more than 10,000% growth in the U.S. solar industry and 170,000 new jobs since its launch in 2006.^[8] Locally, here in Minnesota, the Angel Tax Credit provides a 25% credit to investors that make equity investments in startup companies specializing in emerging technology.^[9]

Increased foreign dependence on manufacturing and higher imports has led to the displacement of jobs in tradable sectors and lower wages for U.S. workers.^[10] The growth of U.S. imports from China between 2001 and 2011 displaced nearly 3.3 million U.S. jobs that paid on average $1,021.66 per week and as a result, approximately $2.9 billion per week was lost in national income.^[11] To restore jobs in tradable sectors, current account adjustments including an exchange rate depreciation system can be employed which will reduce the value of the U.S. dollar. This could promote exports to improve trade balance without impacting inflation.^[12]

America's reliance on low-cost overseas manufacturing and a just-in-time supply chain over the years has led to an immense shortage of personal protective gear, including face masks and gloves which are outsourced from countries such as China^[13] and Malaysia^[14]. The COVID-19 pandemic has exposed the United States' over-dependence on a foreign supply chain that optimizes the efficiency of scarce resources over the resiliency and pressing needs of the citizens.^[15] Given the scale of the current crisis, it is vital that the U.S. government take immediate action to rebuild the manufacturing and technology sectors that directly impact the health and well-being of citizens and our national security. Government-issued tax credits can support the domestic production of critical goods.

In conclusion, increasing domestic production through research and development, protecting intellectual property, issuing tax credits to certain sectors of the economy, and negotiating stronger bilateral trade agreements can drive investment back into the domestic economy, restore the loss in per-capita income for individuals and encourage exports. The United States should be focused on implementing a balanced trade system to avoid the potential consequences of a national security threat, including current and future situations that could resemble the COVID-19 pandemic.

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References and Endnotes

United States, Congress, Villarreal, M. Angeles, and Ian F. Fergusson. “The North American Free Trade Agreement (NAFTA).” The North American Free Trade Agreement (NAFTA), pp. 11–18.

Lepley, Sara. “9 Mind-Blowing Facts about the US Farming Industry | Markets Insider.” Business Insider, Business Insider, 30 May 2019, markets.businessinsider.com/news/stocks/farming-industry-facts-us-2019-5-1028242678#agriculture-s-1-053-trillion-contribution-to-the-us-economy-is-higher-than-the-gdp-of-indonesia1.

Fickling, David. “China Is Substituting Brazilian Soybeans for Barred Imports from America. The Rainforest May Become a Victim.” Bloomberg.com, Bloomberg, 24 Aug. 2019, www.bloomberg.com/opinion/articles/2019-08-25/china-s-soybean-demand-in-trade-war-could-fuel-amazon-fires.

“FACT SHEET: Unprecedented U.S.-ASEAN Relations.” National Archives and Records Administration, National Archives and Records Administration, 12 Feb. 2016, obamawhitehouse.archives.gov/the-press-office/2016/02/12/fact-sheet-unprecedented-us-asean-relations.

“U.S. - Korea Free Trade Agreement.” United States Trade Representative, ustr.gov/trade-agreements/free-trade-agreements/korus-fta.

“Association of Southeast Asian Nations (ASEAN).” United States Trade Representative, ustr.gov/countries-regions/southeast-asia-pacific/association-southeast-asian-nations-asean.

D’Aveni, Richard A. “When Consumers Win, Who Loses?” Harvard Business Review, 1 Aug. 2014, hbr.org/2012/09/when-consumers-win-who-loses.

“The Case for the Solar Investment Tax Credit (ITC).” SEIA, www.seia.org/case-solar-investment-tax-credit-itc.

“Angel Tax Credit.” Minnesota Department of Employment and Economic Development, 25 Feb. 2020, mn.gov/deed/business/financing-business/tax-credits/angel-tax-credit/.

“The Growing Trade Deficit with China Has Led to a Loss of 3.4 Million U.S. Jobs between 2001 and 2017.” Economic Policy Institute, 23 Oct. 2018, www.epi.org/press/the-growing-trade-deficit-with-china-has-led-to-a-loss-of-3-4-million-u-s-jobs-between-2001-and-2017/.

Scott, Robert E. “Unfair Trade Deals Lower the Wages of US Workers.” Economic Policy Institute, 13 Mar. 2015, www.epi.org/publication/unfair-trade-deals-lower-the-wages-of-u-s-workers/.

“Currency Devaluation and Revaluation.” Currency Devaluation and Revaluation - FEDERAL RESERVE BANK of NEW YORK, Sept. 2011, www.newyorkfed.org/aboutthefed/fedpoint/fed38.html.

Choi, Thomas Y., et al. “Coronavirus Is a Wake-Up Call for Supply Chain Management.” Harvard Business Review, 27 Mar. 2020, hbr.org/2020/03/coronavirus-is-a-wake-up-call-for-supply-chain-management.

Linderman, Juliet, and Martha Mendoza. “Coronavirus Healthcare Workers Need Medical Gloves but the World's Top Producers Have Cut Capacity.” Fortune, Fortune, 26 Mar. 2020, fortune.com/2020/03/24/coronavirus-healthcare-workers-medical-gloves/.

Hirschauer, John. “'Built to Optimize Efficiency'.” National Review, National Review, 27 Mar. 2020, www.nationalreview.com/corner/built-to-optimize-efficiency/.

[1] United States, Congress, Villarreal, M. Angeles, and Ian F. Fergusson. “The North American Free Trade Agreement (NAFTA).” The North American Free Trade Agreement (NAFTA), pp. 11–18.

[2] Lepley, Sara. “9 Mind-Blowing Facts about the US Farming Industry | Markets Insider.” Business Insider, Business Insider, 30 May 2019, markets.businessinsider.com/news/stocks/farming-industry-facts-us-2019-5-1028242678#agriculture-s-1-053-trillion-contribution-to-the-us-economy-is-higher-than-the-gdp-of-indonesia1.

[3] Fickling, David. “China Is Substituting Brazilian Soybeans for Barred Imports from America. The Rainforest May Become a Victim.” Bloomberg.com, Bloomberg, 24 Aug. 2019, www.bloomberg.com/opinion/articles/2019-08-25/china-s-soybean-demand-in-trade-war-could-fuel-amazon-fires.

[4] “FACT SHEET: Unprecedented U.S.-ASEAN Relations.” National Archives and Records Administration, National Archives and Records Administration, 12 Feb. 2016, obamawhitehouse.archives.gov/the-press-office/2016/02/12/fact-sheet-unprecedented-us-asean-relations.

[5] “U.S. - Korea Free Trade Agreement.” United States Trade Representative, ustr.gov/trade-agreements/free-trade-agreements/korus-fta.

[6] “Association of Southeast Asian Nations (ASEAN).” United States Trade Representative, ustr.gov/countries-regions/southeast-asia-pacific/association-southeast-asian-nations-asean.

[7] D’Aveni, Richard A. “When Consumers Win, Who Loses?” Harvard Business Review, 1 Aug. 2014, hbr.org/2012/09/when-consumers-win-who-loses.

[8] “The Case for the Solar Investment Tax Credit (ITC).” SEIA, www.seia.org/case-solar-investment-tax-credit-itc.

[9] “Angel Tax Credit.” Minnesota Department of Employment and Economic Development, 25 Feb. 2020, mn.gov/deed/business/financing-business/tax-credits/angel-tax-credit/.

[10] “The Growing Trade Deficit with China Has Led to a Loss of 3.4 Million U.S. Jobs between 2001 and 2017.” Economic Policy Institute, 23 Oct. 2018, www.epi.org/press/the-growing-trade-deficit-with-china-has-led-to-a-loss-of-3-4-million-u-s-jobs-between-2001-and-2017/.

[11] Scott, Robert E. “Unfair Trade Deals Lower the Wages of US Workers.” Economic Policy Institute, 13 Mar. 2015, www.epi.org/publication/unfair-trade-deals-lower-the-wages-of-u-s-workers/.