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Economic Shocks within American Foreign Trade

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Economic Shocks within American Foreign Trade

Category: Essay

Subcategory: Economics

Level: College

Pages: 6

Words: 1650

Economic Shocks within American Foreign Trade
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AREAS OF NORTH AMERICA FREE TRADE AGREEMENT (NAFTA) THAT HAVE ROOM FOR IMPROVEMENT
One of the areas of NAFTA that that has room for improvement is: BORDER SECURITY. As a free trade area, NAFTA involves an unrestricted movement of goods, people and services across the borders between, Mexico, Canada and The United States. The proponents of NAFTA include positive economic outcomes for the three partners. However, the dependence on the outcomes on these open borders to bring with it greater opportunities for narcotrafficking and performance of criminal activities. According to (Ackleson, 2003), border security in the past will mainly revolve on applied screening for any terrorist incursions into the United States through air and also land borders.
The management of the free flow of people, goods and services and the prevention of illegal flow of goods, workers and capital is the greatest dilemma that faces NAFTA on the war on drugs. There is smooth cooperation along the Northern Border between Canada and U.S but a lack of cooperation along the Mexico- U.S border. Thus, a greater emphasis on controlling the NAFTA borders is a significant policy issue. The second area that has room for improvement is:
ENERGY SECURITY.
NAFTA countries are mainly energy interdependent and there is a substantial cross-border flow of natural gas, electricity and petroleum. Canada is the most secure and also the largest in the supply of natural gas and oil in the U.S. However, increasing global competition for crude oil will affect energy security in eastern Canada, (Hughes, 2010). Electricity grids are integrated between Canada and U.S, but not between the United States and Mexico. NAFTA removed quantitative restrictions on energy trade between Canada and United States; however, these rules did not apply to Mexico. The investment in Mexico’s energy sector and its constitution was not covered by NAFTA’s obligations. Mexico requires huge investments to exploit its offshore reserves and in the distribution networks for natural gas and electricity. NAFTA does not ensure energy security at higher levels and this also needs room for improvement.
METHODS IN WHICH NAFTA CAN UTILIZE THE TWO AREAS
One of the methods that NAFTA can use to utilize Border securities is having Travel and immigration controls. United States have been upfront by ensuring that NAFTA is in a position to keep up with the security issue in the borders. United States legislation enhances security by scanning containers, sophisticated tracking of trucks, cargo planes and ships. Ottawa, Mexico City and Washington also need to forge biometric standards and common visa for non-NAFTA immigrants and visitors. A policy to improve the life chances of the illegal Mexican immigrants in The United States has gained political funding and traction from the United States. In addition, just as the U.S-Canada smart border accord contains has useful elements like biometric identifiers and pre-clearance programs like CANPASS in the land borders and INSPASS at airports, the system can be extended to Mexico.
For Energy security, there is a need to expand energy production. Mexico is an energy rich country, but with shortage of energy. Policies have been put to impede the development of Mexican gas and oil resources and also the need to prevent adequate investment on distribution and power generation. The Mexican government has a role to play in exploiting the offshore reserves and the foreclosure of foreign investment in distribution and power generation.
ELEMENTS SPECIFIC TO NATURE AND OPERATION OF CURRENCY ARBITRAGE
In exchange rate arbitrage; the main advantage is taken of the differentials in price of a currency in the different markets.
2 POINT ARBITRAGE
3 POINT ARBITRAGE
2 POINT ARBITRAGE
This mainly concerns two currencies which are in 2 geographically separated areas with separated markets. It involves exchange being bought and sold for immediate delivery. Thus, the spreads of the two currencies are mainly exploited.
Traders practice the 3 currency arbitrage which is mainly a complex strategy.
TRIANGULAR ARBITRAGE (-3 POINT ARBITRAGE)
This involves exchange rates, which are externally consistent, but are internally inconsistent. Thus, the exchange rates among the different currencies, which are mainly inconsistent mutual. It involves 3 trades where there is the exchanging of initial currency for a second currency and the second currency for the third currency and then the third currency for the initial currency. Triangular arbitrage involves the exploitation of arbitrage opportunity and results from a pricing discrepancy among the three main currencies in the foreign exchange market. The triangular arbitrage involves determining whether an arbitrage opportunity exists among the currencies with the three exchange rates. The major complicating factor involved is the bid rate and the ask rate.
IMPORTANCE OF THE ELEMENTS IN RELATION TO CURRENCY ARBITRAGE
Triangular arbitrage involves opportunities which are mainly for riskless profit and normally arise when currency exchange rates don’t match up. Triangular arbitrage opportunities do not happen often, but when they do, they will last for only a short time.
Most of the traders who take advantage of the arbitrage opportunity will have advanced programs to make the process automated and also advanced computer equipment.
There is an arbitrage opportunity if for example: With $ 1 million and the exchange rates are:
EUR/USD= 0.863, EUR/GDB=1.4600,USD/GDP=1.6939
With the exchange rates, there is an arbitrage opportunity:
Sell dollars for Euros: $ 1million * 0.8631=863,100 Euros
Sell dollars for pounds: 863100/1.4600=591,164.40 pounds
Sell pounds for dollars: 591,164.40*1.6939=$1,001,373 dollars
$1,001,373-$1,000,000= $1.373
It can be seen that the transactions receive an arbitrage profit of $1.373.
IMPORTANT TRENDS RELATED TO THE U.S BALANCE OF PAYMENTS
The United States has been a “net debtor” nation for a long period of time. She has had a continual trade deficit (-CA) with the rest of the world (ROW) and annual capital surpluses (+KA) in equal amounts, (Habeler, 2014).
The US CURRENT ACCOUNT DEFICIT is caused by a net income that is paid to the foreign owners of the US assets. It is basically a huge loan that is made by foreign investors with the inclusion of the U.S Treasury notes to pay for trade deficit for a country. The US current account deficit occurs when the citizens, the government and also the businesses borrow more money from foreign counterparts than they lend. In 2006, the US current account deficit hit a record of $803 billion and this was an increase from the $120 billion that had hit in 1996.The deficit meant that the United States imported more services and goods than it exported. However, during the great recession, the current account deficit disappeared and financing and trade dried up. In addition to this, in 2013, the Current Account deficit was $360.7 which had been the worst in the world and had dropped from a $473.4 billion deficit in 2011.
The ANNUAL CAPITAL SURPLUSES (+KA)
The surplus means that the foreign investors purchase more U.S assets than the U.S investors purchase in the foreign assets, thus, investing more in the United States than the United States invested abroad. The U.S current account deficit was also matched with the capital account surplus of $ 668 billion in net discrepancies that are within the current account. This mainly ensures that the accounts will sum up to zero. Since the foreigners invest more in the U.S than how the U.S invested abroad, thus the U.S will receive financial inflows and net foreign capital.
OUTCOMES THAT RELATE TO THE TRENDS IN THE UNITED STATES
The United States run current account deficits and capital account surpluses and thus in the long run experience net foreign capital outflows.
Between the years 1980 and 2004, the U.S ran a current account deficit and a capital account surplus in all but 3 years. In recent years, the net capital inflows have seemed to increase in the country. The main causes of the net capital inflows are mainly due to domestic savings. The U.S capital inflows mainly result from the excess of the imports in the U.S as compared to the exports.
The persistence and the size of the U.S net capital inflows mainly shows some of the U.S strengths which are economic such as the globally competitive economy, the high growth rate and the low rate of national savings. The increase in the U.S net capital inflows that was between the years 2002 and 2004 reflects the economic conditions such as the increase in the crude oil price. Thus, there is dire need for the U.S to raise the domestic saving rate.
REASONS WHY A MULTINATIONAL ENTERPRISE IS A SOURCE OF CONFLICT FOR SOURCE AND HOST COUNTRIES
Multinational enterprises also called Multinational corporations and the host countries have an interactive working relationship which is also dynamic. The investment policies of the Multinational enterprises are mainly affected by industrial conditions and also international trade. In addition to this, the host country is shaped by market forces and political forces. One of the reasons why a multinational enterprise is a source of conflict for source and host countries is:
MONOPOLISIC TENDENCIES:
The enterprises are mainly large corporations that can dominate local markets. It is usually worse when the firms produce or even supply products like oil which are essential. The multinational enterprises have been accused by the host countries due to the exploitation of the locals by charging very high prices for their products which are essential for the consumers. However, to shield the companies from a bad public image, the multinational enterprises seek to have ties with the host country so as to eliminate accusations.
CHANGE OF HOST GOVERNMENT POLICIES
The change in the host country policy also renders the multinational enterprises illegal. The enterprises have been accused of illegal activities such as money laundering. Thus, the management of the enterprises must remain at the top of the government proposals and policies so as to avoid any conflict of interest and any losses.
REFERENCES
Ackleson, J. (2003). Directions in border security research. The Social Science Journal, 40(4), 573-581.
Hughes, L. (2010). Eastern Canadian crude oil supply and its implications for regional energy security. Energy Policy, 38(6), 2692-2699.Haberler, G. (2014). US balance of payments policies and international monetary reform. Books.

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