International Trade and Finance Speech: Good Afternoon

International Trade and Finance Speech:

Good afternoon ladies and gentlemen, I would like to share with you on the current state of the U.S. macro-economy, highlighting the internal and external factors that affect it. Macroeconomic analysis seeks to forecast economic conditions by monitoring and gauging the behavior of several broad areas including gross domestic product (GDP) - which is simply national output, the rate of unemployment, and the state of currency inflation.

According to the U.S. Department of Energy's Energy Information Administration (EIA), America tops the list of the world's largest oil consumers with a consumption rate of 18.8 million barrels per day (MBD). Concurrently, the U.S. ranks third in the worlds list of top oil producers at 9.1 MBD. The 9.7 MBD shortfall between U.S. oil production and consumption is the main contributor to country's trade deficit (Smith, 2011).

Foreign oil dependence means America's business and consumer trends are vulnerable to world oil prices. The U.S. economy depends heavily on freight transportation, which runs on gasoline, to link businesses, suppliers, and consumer markets throughout America and the world. An upward world oil price spike exerts a drag on the economy as the energy costs inherent in manufacturing and supply chain transportation rise proportionately. Higher product prices lead to lower consumer spending and negatively affect the economy.

International trade bears direct influence on America's GDP as economists consider the quantity of goods and services in imports and exports in their calculations. Since our imports generate income abroad, they are subtracted from the other categories of domestic spending to get a clearer picture of exactly how much the economy produces. Consequently, a trade surplus leads to a larger GDP, while a trade deficit leads to a contracted GDP. International trade brings a greater variety of products and services into the domestic market. This benefits American consumers by spurring greater quality in products and services at the best prices.

However, while America's goods trade deficit is huge, it enjoys a large service trade surplus. Approximately 47% of this service trade surplus is attributed to professional service businesses that make up the bulk of America's emergent knowledge-based economy. Such businesses offer professional services like advertising, computer software, financial services, medical and health care services, research and development services, recruitment services, software engineers, and web designers (White, 2010). To strengthen this knowledge-based economy the government offers incentives in the form of two tax credits, the lifetime learning credit and the American opportunity credit. This helps university and college students offset the costs of higher education by reducing their income tax.

While international trade opens up the domestic market to imported goods and services, it can also threaten local jobs and industries by delivering products at prices much cheaper than local companies can afford to deliver them at. In such instances, it's the role of the U.S. government to protect local industry by the judicious imposition of tariffs or quotas to specific goods or services. Tariffs come in the form of an extra tax levied according to the type of product being imported. Quotas are applied in the form of quantity restrictions applied to specific products. Such measures can strain relationships between the importing country and the country whose goods are affected most by the tariff or quota. A good example is the U.S. - China relationship, which usually gets strained any time America adopts a policy aimed at reducing the huge trade deficit between them.

Another key factor that determines the balance of international trade is foreign exchange rates. Currency exchange rates can be floating in which case they are determined by the market forces of supply and demand. For example, a sudden increased demand for U.S. dollars by Europeans would strengthen the U.S. dollar against the Euro with other geopolitical factors can also affecting floating exchanges. China uses a pegged exchange rate as they have attached their renminbi (RMB) to the U.S. dollar. Since pegged currency rates are usually set and maintained artificially by their government, regulating changes in supply and demand is by holding large reserves of the currency to which a currency is pegged.

For example, as of May 2011, the Department of the Treasury reported that China's U.S. Treasury securities holdings stood at approximately $1,174 billion (Wayne, 2011). Such holdings enable China's policy of intervening in exchange rate markets and effectively limiting the appreciation of RMB against the U.S. dollar and facilitate the huge U.S.-China trade deficit. This is obviously because a stronger U.S. dollar means Chinese products and labor are cheaper to Americans, while American products and labor remain more expensive to the Chinese.