Relationship Between Macroeconomics And Trade Policy

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Economists today think that factor endowments matter, but that there are also other new yet important influences on trade patterns. The balance of payments includes the payments made for net exports as well as financial transfers. A trade deficit must be balanced with foreign investments, declines in reserves, or increased debt; likewise, a trade surplus will be balanced out with financial outflows or increased reserves. However, a country may not be able to take full advantage of its external economic opportunities unless its internal domestic economic organization is strengthened and improved. William Cline talks about the relationship between macroeconomics and trade policy, pointing out that the 1930s “provided a classic case of mutually reinforcing interaction between economic downturn and protection” (123). One alternative to US external adjustment would be the import surcharge in 1971, but it would let foreign countries immediately retaliate with their own special protection against US goods. Similarly, during the recession in 1980s, “loose fiscal and tight monetary mismatch and failure to recognize the importance of avoiding sharp dollar appreciation” were the central mistakes, which lead to huge trade deficit (126). In the absence of forceful correction of US fiscal deficits and some additional decline in the dollar, external deficits would widen even more. Therefore, proper fiscal, exchange rate, and international coordination policies are needed to help avoid
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