APEC 2010 SUMMIT

SUSTAINING ECONOMIC RECOVERY

THROUGH FREE TRADE AND INVESTMENT

INTRODUCTION TO THE
US ECONOMY

Before the meltdown of 2008, the historically powerful US economy was

characterized by low unemployment and inflation, steady economy growth, and rapid
technological advancements. In 2009, its nominal Gross Domestic Product (GDP)
exceeded USD$14.2 trillion, by far the largest economy of any single nation in the
world1. Ranked 2nd in the world by the Global Competitiveness Report 2009- 2010, it
clearly retains its international competitive edge despite a weakening market and
shaky post-crisis recovery. Here is a simple summary of the economy:

Descriptor The U.S. Economy Remarks

Type of Economy Free Market US is great proponent of free
trade; major reason in
reluctance to engage in
protectionism
Currency United States Dollar (USD) Currency in which most
foreign reserves are held; this
gives the US significant power
over those economies.
Milestones Great Depression (1930s) The most significant event in
9/ 11 (2001) recent years being the crisis
Iraq War (2003) of 2007 – 2010, where a
Oil prices hike (2005- 2008) domestic liquidity shortfall
Sub-prime mortgage crisis triggered a global economic
(2008) recession.
Financial stimulus package
(2009)
GDP USD$14.266 trillion (2009) Largest in the world; fuelled
by unsustainable borrowing
Consumer Price 216 Fears of inflation have proved
Index thus far unnecessary as
(where Years prices remain low.
1982-4 = 100)
Unemployment 9.7% (2010) A problem that must be solved
to cut spending on
unemployment benefits .
Largest Trading Canada (USD$39.6b) (2009) China is fast catching up, as
Partner we show in our analysis later.

KEY ECONOMIC INDICATORS

1
The countries within the European Union had a combined GDP of
$14.5 trillion.
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SUSTAINING ECONOMIC RECOVERY
THROUGH FREE TRADE AND INVESTMENT
GDP
In the last quarter of 2009, the economy posted a growth
in output of 5.6%, more than double that of the previous
quarter’s growth of 2.2%. This reflects the rise in exports
and business investment. However, consumer spending
and government spending declined and this partially
offset the growth.

FIGURE 1. US QUARTERLY GDP GROWTH

(BUREAU OF ECONOMIC ANALYSIS, MAR 2010)

Annual nominal GDP in 2009 ($14.2 trillion) was more than double that of Japan’s, the next
highest country on the IMF list with USD$5.05 trillion. In the same year, GDP by Purchasing
Power Parity (PPP) (USD$14.2 trillion) was much higher than that of the next highest nation
(China, USD$8.79 trillion).

CONSUMER PRICE INDEX

As of February 2010, the inflation rate was kept at 2.1%, kept constant from the previous
quarter, showing a decline in the energy index being overcompensated for by increases in the
indices of other items. Not including food and energy, prices of goods are growing at 1.3%, the
lowest in 6 years. This can be explained by the low market price that producers must grapple
with as a result of the excess capacity in the market.

UNEMPLOYMENT
Despite the recent creation of 162000 jobs in the labor market, unemployment stays at a high
9.7%, and is not likely to decrease soon owing to the severe impact the crisis had on
employment, when 8.4 million jobs were lost.

PUBLIC DEBT

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SUSTAINING ECONOMIC RECOVERY
THROUGH FREE TRADE AND INVESTMENT
Debt is expected to rise from 45% of GDP in 2008 to 85% in 2019, representing the greatest
public debt the US has faced in all its peacetime history. The healthcare reform is expected to
further fuel worries that in order to combat this debt, the US will try to inflate its way out of it
on top of current commitments to several other programs such as Social Security and Medicare.

FIGURE 2. US RECENT UNEMPLOYMENT RATE

(BUREAU OF LABOR STATISTICS, APR 2010)

CURRENT ACCOUNT
Currently standing at about US$115
billion, the current account deficit is
about 3.2% of GDP. It is up from $102
billion of the third quarter, or 2.9% of
GDP. Main contributing factors to this
deficit on international trade are good
imports increasing more than exports
(reflecting a continual tendency for
local consumers to demand goods
produced abroad rather than those by
local producers), services exports
increasing more than imports, and
income payments still posting a
surplus. The annual deficits stand at
$420 billion in 2009, down from $706 billion the year before 2.

Net financial inflows decreased from $85.7 billion in Q3 to $45.7 billion in Q4 3.

STRATEGIES TO SUSTAIN ECONOMIC RECOVERY

 Force China to appreciate

o Political pressure + trade war
 Bonds

The global economic recession has come and gone and now most countries have begun to
recover from its aftereffects; the United States is no exception. From our research above, we
know that the U.S. is the largest economy and that it was badly hit during the recession and
President Obama conceived of the stimulus package in order to help the nation and its citizens.
In this section, we will seek to identify the measures Obama has implemented as well as
propose new solutions before extrapolating them to see their effects on the U.S. economy.

2
However, this is projected to increase as the Obama administration plans its financial package.
3
Inflows (i.e. US assets from abroad) dropped from increasing $269 billion (Q3) to an increase $99 billion
in Q4. Outflows increased $145 billion this quarter after Q3’s increase of $343 billion.
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SUSTAINING ECONOMIC RECOVERY
THROUGH FREE TRADE AND INVESTMENT
First and foremost, it is known that Gross Domestic Product (GDP) is the summation of
households’ consumption, firms’ investment, government expenditure and net exports. The
most direct way to increase GDP is to increase aggregate demand which will bring about an
increase in real output. Therefore, the U.S. should stimulate domestic consumption for home-
produced goods and services instead of imports so as to ensure that there is no outflow of
currency, which would further upset the balance of payments. However since the recession,
households savings have increased because their level of income has dropped. A higher income
would definitely mean a higher income-induced consumption. To facilitate this, an expansionary
fiscal policy can be put into place by increasing government spending and reducing taxes,
ensuring a higher level of income in households. An expansionary monetary policy can also be
implemented to increase money supply and decrease interest rates, making credit easier to
obtain, in the same way that the Federal Reserve is planning to keep interest rates near zero for
an “extended period”4. In both cases, it will ultimately lead to an increase in consumption (when
coupled with the Keynesian Multiplier relationship) and subsequently, aggregate demand and
GDP.

As mentioned, it is important that the spare demand that would be created by the tax cuts and
low borrowing rates goes towards demanding local goods rather than foreign alternatives that
might be cheaper. One way the government could help increase the competitiveness of local
goods is to provide subsidies to local producers, ensuring they would be able to pass on the
price benefits to their consumers. Another alternative, albeit a vastly less popular one, is the
putting in place of protectionist measures to protect local producers who still may not bear up
against fierce competition from their foreign counterparts who benefit greatly from low costs of
production. By imposing steep tariffs and/or quotas on the import of goods, the government can
divert demand for foreign goods towards domestic substitutes. This would improve their vastly
deficient balance of trade, and also protect the jobs in the local producer firms.

Another related method of reducing demand for foreign goods (and Chinese goods in particular,
which in this poor economic climate may seem more attractive than ever due to lower prices) is
by forcing the yuan to appreciate. Currently, economists suspect that the yuan is undervalued,
which is how the Chinese have managed generate such huge surpluses—at the expense of the
US deficit. Pending a US Treasury report, China might be labeled a “currency manipulator”,
officially giving the US license to retaliate by imposing tariffs on Chinese goods that would
almost certainly cut demand for them. Because this protectionistic “trade war” would benefit no
party, it is hoped that last-ditch diplomatic talks will sway the Chinese government, although
this looks to be increasingly unlikely given Chinese insistence the yuan is not undervalued 5.

It is also important to note that currently unemployment rate is high in the U.S. (9.7%) and thus
the aggregate supply curve can be characterized by the Keynesian range where there is
abundance in idle resources and excess capacity. This type of cyclical unemployment, or
demand-deficient unemployment, can be solved by increasing aggregate demand, which within
this range can increase without putting pressure on prices to rise.

In the above, we have looked at several ways the GDP of the U.S. can increase by evaluating their
individual determinants, but we must also invoke potential growth in the economy for it to
4
U.S. Inflation Muted in February, Wall Street Journal, March 19 2010
<http://online.wsj.com/article/SB10001424052748704207504575129380925347378.html >
5
China quiet on U.S. currency report delay, Reuters, April 5 2010
<http://www.reuters.com/article/idUSTRE63214920100405>
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SUSTAINING ECONOMIC RECOVERY
THROUGH FREE TRADE AND INVESTMENT
sustain. Such can be achieved by investing in human capital and engaging in foreign trade and
investment. Regarded as the most fundamental source of economic growth, human capital is the
accumulated skill and knowledge of workers and can be acquired through education, training,
and work experience. Through this investment, the future productivity of workers will increase
and this can be similarly achieved if the pool of labor is not just competent, but healthy and
happy. Therefore, investing in health care and boosting the standard of living and if possible,
wages, would be the most efficient way to increase productivity in workers. Foreign trade and
investment pose as engines of growth, one of the many benefits trade offers.

The U.S. intends to center its economic recovery on exports and to propel this and with the help
of its comparative advantage, U.S. should sign free trade agreements (FTA) with other countries.
After each nation specializes according to their comparative advantage and trades with other
countries, the U.S. will be able to consume beyond their production possibility curve. The U.S.
can also stand to gain in terms of higher output, efficiency and lower costs due to efficient
allocation of resources and open new doors that provide opportunities for technology transfer
and rapid economic growth.

Perhaps a more indirect way to recovery is to engage in foreign direct investments. Although it
will result in a momentary deficit in financial account, however if the money is invested to a
potentially prospective country, such long-term investments will be able to reap its rewards in
due time. All these solution mentioned above, when coupled with the Multiplier effect, is certain
to rescue the U.S. from the debts and ensure growth in their economy.

As a way to generate more foreign reserves that it may use to defend its currency in the short
term, the US might also consider selling more treasury bonds. This would however compromise
the state of their long-term balance sheets further by increasing debt owed to the public.
Nevertheless should the US require quick money and be unable to borrow it, the sale of bonds
could be considered.

Sustaining economic recovery, in our opinion, is synonymous to the main government goals and
macroeconomic aims of a country which is to have a high and stable level of economic growth, a
low level of unemployment, a low inflation, a sustainable Balance of Payment and a stable
exchange rate. The strategies proposed above do indeed tackle the pertinent issues and seek to
achieve the goals listed above and it is believed that the U.S. can bounce back from the recession
very quickly with these solutions due to its former economic strength and that it is still
relatively stronger than almost any other country in the world even after the recession.

PROPOSAL FOR US-CHINA COOPERATION

REASONS
30 years of diplomatic relations between China and the US has developed into a mature working
relationship between the two economic powerhouses of the world. With the backdrop of the
rippling effects of the current international financial crisis, as well as increasingly outstanding
challenges (such as the Grecian crisis) worldwide, further improvement of China-US relations is
especially important. These are good reasons for China and the US to pull together in times of
trouble in order to coordinate their respective approaches for promoting the recovery of the
world economy.
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SUSTAINING ECONOMIC RECOVERY
THROUGH FREE TRADE AND INVESTMENT
As China is currently the fastest growing economy, and amongst the three largest in the world
(as seen in Figure 1 and 2 below), its rapidly developing industries are a favorable well-spring
for investors to make profitable investments in.

Countries with highest growth Real 2000 GDP ($billions)

Figure 1: Graph of countries with the highest growth rate.

Source: Data from USDA The International Macroeconomic Data Set http://www.ers.usda.gov/Data/Macroeconomics/

Countries with the largest economies in 2007 Real 2000 GDP ($billions)

Figure 2: Graph of countries with the largest economies.

Source: Data from USDA The International Macroeconomic Data Set http://www.ers.usda.gov/Data/Macroeconomics/

Additionally, amongst the four participant countries, China is the US’s largest export and import
partner as we can see from the table below.

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SUSTAINING ECONOMIC RECOVERY
THROUGH FREE TRADE AND INVESTMENT

Total in Total in
Billions Billions
Country Name of U.S. $ of U.S. $
(2009) (2010)
Canada 39.64 38.27
China 34.86 32.07
Mexico 28.82 27.62
Japan 14.47 13.02
Federal Republic of Germany 10.96 8.80
United Kingdom 7.69 7.00
Korea, South 6.20 5.80
France 5.19 4.78
Taiwan 4.64 4.57
Brazil 4.35 4.20

The values given are for Imports and Exports added together for the month of January 2010.
These Countries represent 65.48% of U.S. Imports, and 61.53% of U.S. Exports in goods.

Besides the socioeconomic benefits that both countries will enjoy from a successful partnership,
one can also examine the socio-cultural aspect of the matter and find that the peaceful
coexistence of these two countries will create new historical possibilities for human society. It
demonstrates that two powers with different political systems and ideologies and in different
stages of development do not necessarily have to overcome one another. The rise of an
emerging country does not necessitate the decline of an old powerful state. The two countries
also share a wide range of common interests and shoulder important responsibilities in major
issues that involve world peace and development. Whether these two great powers, China and
the US, can coexist peacefully will directly decide world peace in the 21st century. Without their
economic cooperation and policy coordination, it will be highly challenging to ensure that the
global economic recovery is not derailed by mismatch of economic policies. Moving forward
hand-in-hand, the two can provide a strong driving force for global prosperity.

REFERENCES

Bureau of Economic Analysis, United States of America Department of Commerce

http://www.bea.gov/

Bureau of Labor Statistics, United States of America Department of Labor

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SUSTAINING ECONOMIC RECOVERY
THROUGH FREE TRADE AND INVESTMENT
http://www.bls.gov/

Central Intelligence Agency

https://www.cia.gov/

China quiet on U.S. currency report delay, Reuters, 5 April 2010

http://www.reuters.com/article/idUSTRE63214920100405

Economy's Excess Capacity Reins In Prices, Wall Street Journal, 19 Mar 2010
http://online.wsj.com/article/SB10001424052748704207504575129380925347378.html

Federal Reserve Bank of New York, United States of America Federal Reserve System
http://www.ny.frb.org/education/

Foreign Trade Statistics, U.S. Census Bureau

http://www.census.gov/foreign-trade/top/dst/2009/12/balance.html

Treasury Direct, U.S. Department of the Treasury

http://www.treasurydirect.gov/govt/reports/pd/pd_debtposactrpt_0812.pdf

APPENDIX 1: DATA TABLE

This table, taken from the IMF website, shows the current standings of the countries in the
world now, adjusted for costs of living in each of the countries. The United States and its
proposed partner China stand at positions 2 and 3 respectively.

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SUSTAINING ECONOMIC RECOVERY
THROUGH FREE TRADE AND INVESTMENT

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