Free Trade Agreements (FTAs) Archives - WITA

How Trade Agreements Have Enhanced the Freedom and Prosperity of Americans

Lilly Johns — Tue, 27 Aug 2024 20:42:26 +0000

An essential part of America’s turning away from protectionism since the Great Depression has been the signing of free trade agreements (FTAs) with other nations. Those agreements, while imperfect, have led to lower tariffs and other barriers to trade, in the United States and abroad. They also have provided incentives for compliance through dispute settlement while discouraging mutually damaging trade wars. Although the impact of trade agreements has often been exaggerated by both their advocates and opponents, decades of experience and economic analysis confirm that the benefits for most Americans have been positive. The United States today is a richer and freer nation, and the world is a more hospitable place for economic activity because of those trade agreements.

The most straightforward and preferable path to trade liberalization for any country is the unilateral reduction of trade barriers without regard for other countries’ trade policies. Unilateral liberalization allows a country to realize the gains from openness—mainly lower prices for consumers, lower-cost inputs for businesses, and a more favorable exchange rate for exporters—without the need for complicated negotiations with other countries. Many nations have followed this route with success, from Great Britain in the mid–19th century to China and India and other emerging economies since the 1980s. As discussed in a separate Defending Globalization essay, however, unilateral liberalization is politically difficult, so governments have turned to reciprocal trade agreements, which offer reduced trade barriers at home in exchange for similar liberalization among participating governments abroad. The best approach to trade agreement liberalization is multilateral—the lowering of barriers to goods, services, and investment in a nondiscriminatory way by almost all countries through such forums as the World Trade Organization (WTO). A next-best option is bilateral and regional FTAs among two or several governments, respectively.

The United States is a partner in bilateral and regional FTAs with 20 other nations, including such major trading partners as Canada, Mexico, South Korea, Singapore, and Australia. The United States was a founding member of the General Agreement on Tariffs and Trade after World War II and is a member of its successor institution, the WTO, a multilateral agreement with 165 other countries that covers 98 percent of world trade. The United States is also party to narrower bilateral investment treaties with about 40 other nations that protect American investment assets abroad.

The 20 bilateral and regional FTAs that the United States has signed have virtually eliminated tariffs on US exports to those countries. Those FTAs have achieved what even trade populists claim as a goal: reciprocal tariff rate reductions. By definition, FTAs set virtually all tariffs between the signatory nations at zero. The reductions, as well as liberalizing components (restrictions on nontariff barriers, services, and investment disciplines, for example), can be phased in over time, and a few politically sensitive sectors can be excluded, but substantially all trade under the 20 FTAs that the United States has signed occurs duty-free.

A Brief History of US Trade Agreements

To better understand why trade agreements have become so important to US trade policy, we need to step back to the early 1930s, to the passage of the Smoot–Hawley Tariff Act and the beginning of the Great Depression.

In response to low prices in the farm sector, Congress began drafting the Trade Act of 1930, better known as the Smoot–Hawley tariffs after its sponsors Rep. Willis C. Hawley and Sen. Reed Smoot. The bill quickly morphed from raising agricultural tariffs to hiking tariffs on thousands of other products—some of which were not even produced in the United States—as it moved through Congress. The result of this congressional logrolling was the largest tariff increase in US history, signed by President Herbert Hoover in June 1930.

The consequences of the unilateral tariff hike were a disaster. Instead of saving jobs and promoting industry, the tariffs accelerated the US economy’s slide into depression. Major US trading partners retaliated with tariffs of their own aimed at US exports. Global trade dropped dramatically. By 1933, real US gross domestic product had dropped by a third, and the unemployment rate hit 25 percent. Republicans lost the White House and control of Congress in 1932 as Franklin Roosevelt swept into office in a landslide.

Reciprocal Trade Agreements Act of 1934

America’s historic turn away from protectionism began with the passage of the Reciprocal Trade Agreements Act (RTAA) in 1934. The bill gave the administration authority to negotiate agreements with other nations to reduce tariffs by up to 50 percent. Tariff reductions negotiated with one country were automatically applied to imports from all other countries that treated US trade on a nondiscriminatory, or “most-favored nation,” basis. By 1940, the United States had effectively reversed the Smoot–Hawley tariffs through agreements done pursuant to the RTAA.

The General Agreement on Tariffs and Trade

At the end of World War II, the United States joined with noncommunist, “free world” trading partners to establish the General Agreement on Tariffs and Trade (GATT). Beginning in 1947 and under successive rounds, the US president under RTAA authority negotiated multilateral agreements with an expanding club of countries that significantly reduced tariffs in the United States and around the world. Global trade expanded sharply, as did the post-war economic expansion. The initial Geneva Round in the GATT committed its members to reciprocity, unconditional most-favored nation treatment, and opposition to quantitative restrictions on trade. The GATT also served a vital foreign-policy role by assisting Western Europe’s recovery after the devastation of World War II. It also knit NATO allies closer together economically during the Cold War in the face of the military threat from the Soviet Union.

The Carter administration negotiated the Tokyo Round Agreement in 1979, which resulted in average tariff reductions of 34 percent by the United States, the European Economic Community, and Japan. For the first time in the GATT, the round curbed the use (and abuse) of nontariff barriers in government procurement, technical barriers to trade, subsidies and countervailing duties, customs valuation, import licensing procedures, and anti-dumping.

The Uruguay Round and the WTO

The GATT process culminated in the Uruguay Round Agreement of 1994, which further reduced global tariffs and established the WTO to administer the agreement and resolve disputes. Like the Tokyo Round, the Uruguay Round reduced global tariffs by an average of one-third. It phased out the Multi-Fiber Arrangement, a system of rich-country quotas on imports of clothing and textiles dating back to 1974. “Voluntary” export-restraint agreements were banned, requiring nations to rely on existing anti-dumping and safeguard laws to address politically sensitive imports. Farm subsidies were reduced and constrained. For the first time, the round established rules governing the treatment of foreign investment, intellectual property, trade in services, and technical issues in trade (such as abusing sanitary and phytosanitary measures to restrict imports). The agreement also established a more robust dispute settlement mechanism to encourage better compliance, a key goal of US negotiators.

The Uruguay Round Agreement achieved major US objectives. It reduced global barriers to US exports of goods and services and established the “rule of law” in global trade and commerce. For the export-oriented sector of US agriculture, the agreement created a more open and market-friendly global market. For American consumers, the Multi-Fiber Arrangement’s abolition allowed for more trade in clothing, delivering lower prices to millions of American households, especially lower-income families, while helping to reduce poverty domestically as well as abroad.

NAFTA and Other Regional and Bilateral Agreements

Beginning in the 1980s, the US government signed a series of regional and bilateral trade agreements with specific trading partners. As noted, those agreements have eliminated virtually all tariffs on trade between these partners, liberalized trade in services, and created rules for intellectual property and direct investment that are more stringent than those in the WTO agreements. The agreements have been a bipartisan project, negotiated by Republican and Democratic presidents alike and approved with bipartisan majorities by Congress.

The most important and controversial of those FTAs has been the North American Free Trade Agreement (NAFTA) between the United States, Canada, and Mexico. The agreement first went into effect in 1994 and was renegotiated by the Trump administration and renamed the United States-Mexico-Canada Agreement (USMCA) in 2019. Although USMCA tightened the automotive rules of origin and beefed up the labor-enforcement provisions, it did preserve the core NAFTA benefit of zero tariffs on virtually all goods trade between the three North American neighbors. Since NAFTA, the United States has signed and implemented 12 agreements with 17 countries, using the basic NAFTA framework that subsequent administrations have updated and expanded

Beyond its economic impact, NAFTA proved to be a valuable foreign-policy initiative. It helped to institutionalize Mexico’s move away from a protected economy under one-party rule, thus improving US relations with its southern neighbor. As trade historian Douglas Irwin concluded, “NAFTA’s biggest impact may have been political: It contributed to the modernization drive that helped diminish the power of the Institutional Revolutionary Party (PRI) that had ruled the country for decades, and move the country towards multi-party democracy.”

In addition to FTAs approved by the United States, it’s also worth noting a major opportunity missed. Under President Barack Obama, US negotiators helped reach an agreement known as the Trans-Pacific Partnership (TPP) that would have expanded those reciprocal zero-tariff benefits to an even wider circle of nations. President Donald Trump, however, withdrew the United States from the TPP shortly after taking office in 2017. The remaining members went ahead and ratified the agreement without the United States. Now dubbed the Comprehensive and Progressive Trans-Pacific Partnership, the agreement includes six current US FTA partners—Canada, Mexico, Peru, Chile, Australia, and Singapore—plus Japan, Malaysia, Vietnam, Brunei, and New Zealand. The United Kingdom also negotiated entry into the agreement and will soon join as its 12th member. South Korea, China, and Taiwan have also applied to join CPTPP. Failure to join the agreement has placed US exporters at a competitive disadvantage and means an added burden for US businesses and consumers importing goods from CPTPP members with whom the United States does not have FTAs.

Why Does the United States Sign FTAs?

Supporters of free trade can raise the objection that trade agreements only complicate the goal of trade liberalization. Why engage in the protracted and sometimes arduous process of negotiating agreements with other countries when the United States could simply pursue free trade on its own by unilaterally liberalizing its own tariffs?

But there are practical as well as historical reasons why trade agreements have played a leading role in American trade policy for much of the past century. As Simon Lester explains, trade agreements make trade liberalization more attractive politically by enlisting US exporters on the side of liberalization. This allows trade liberalization to overcome the opposition of protected industries that would resist any decrease in US tariffs. And trade agreements magnify the benefits of domestic trade liberalization by combining it with trade liberalization abroad. Americans are better off when their government imposes fewer barriers on the freedom to trade—and they are even better off when other governments do the same.

The US International Trade Administration notes that US FTAs address a wide variety of foreign government actions that can affect US businesses, large and small. Besides reducing tariff rates on US exports, FTAs

enhance the ability of US exporters to participate in the development of product standards in the FTA partner country;
expand the ability of US companies to bid on certain government procurements in the FTA partner country;
open opportunities for US service suppliers to sell their services in the FTA partner country; and
guarantee that US investors are treated the same as the FTA partner country treats its own investors or those of any third country.

One of the most important advantages of trade agreements is that they lock in trade liberalization gains and prevent backsliding during times of economic stress and political tensions, whether abroad or here at home. In other words, agreements protect us against ourselves and against destructive trade wars that often result when trade barriers are raised unilaterally. During the Great Recession of 2008–2009, a web of trade agreements among advanced economies prevented governments from seeking the politically tempting but economically foolish option of raising trade barriers to “protect” domestic employment. Instead, barriers remained relatively low while governments sought to address the root causes of the downturn.

The Benefits and Downsides of FTAs

Negotiating, approving, and implementing FTAs have both costs and benefits for the United States—and all countries. The impact of these trade agreements on the US economy and employment has been positive, but that impact has also tended to be exaggerated by both sides in the trade debate.

Economic Benefits

Trade agreements’ fundamental purpose is to encourage people to engage in cross-border trade by lowering government barriers thereto, and this liberalization generates significant economic benefits. For example, American families and import-using producers can access a wider variety of imports at lower cost, while American exporters enjoy easier access to markets abroad. Because US trade barriers tend to be lower than most (but far from all!) other nations, the cumulative effect of the trade agreements that the United States has signed has been to lower foreign trade barriers more steeply than US barriers.

As a result, by 2023, 47 percent of US goods exports were bound for countries committed to accepting all exports from the United States duty-free. In return, 38 percent of goods imports to the United States in 2023 came from countries where the US government has committed to accepting their exports duty-free. This marks an important expansion of free trade, and even by the populists’ own logic, this should be the essence of “fair trade.” Almost all US exports to FTA countries are subject to exactly the same tariff rate—0 percent—as the imports we buy from those same countries. What could be more “fair” than that?

Historical experience also helps make the case for FTAs. Presidential candidate H. Ross Perot famously warned in the early 1990s that passage of NAFTA would unleash “a giant sucking sound” of jobs and investment flowing south to lower-wage Mexico. Nothing of the kind happened. In fact, in the five years immediately after the agreement went into effect (1994 through 1998), the US economy grew robustly, the unemployment rate fell to below 4 percent, and a net half a million new manufacturing jobs were created.

Studies by the US International Trade Commission (USITC) and the Peterson Institute for International Economics have found that the overall impact of NAFTA, like other trade agreements, has been modestly positive. While some proponents of the agreement may have overstated its positive impact on jobs, opponents such as Perot and the AFL-CIO were even guiltier of misstating feared negative impacts. According to the USITC, annual outflows of manufacturing foreign direct investment to Mexico during the period examined grew only slightly faster (11.7 percent) than outflows to the rest of the world (9.6 percent). In recent years, annual outflows of manufacturing foreign direct investment to Mexico have averaged less than 2 percent of total annual domestic investment in US manufacturing, and the United States has consistently been the top destination for foreign investment.

Unfortunately, proponents of FTAs have at times oversold their impact with unreasonably precise and optimistic projections of net job creation, export growth, and changes in bilateral trade balances. For example, export growth was disappointing after the signing of FTAs with Mexico and South Korea because of unrelated macroeconomic factors in the partner countries, such as recession. Proponents can also overstate the nontrade impact of agreements on the other country’s domestic political and economic reform. And they can ignore disruptions—lost jobs, for example—that inevitably arise from new foreign competition. It’s a simple fact that politicians are more inclined than professional economists to engage in exaggerated rhetoric to “sell” an agreement. That said, that an agreement may deliver benefits smaller than what proponents promise is not an argument against ratifying the agreement. The net benefits are still positive.

Numerous economic analyses have confirmed these benefits. In a comprehensive 2021 study of the economic impact of trade agreements, for example, the USITC concluded that trade agreements signed by the United States “have had a small, positive effect on the US economy.” The study weighed the economic impact of 16 bilateral and regional agreements with 20 other nations as well as the multilateral 1994 Uruguay Round Agreement that established the WTO.

The USITC analysis determined that the cumulative impact of those agreements has been to boost total US gross domestic product by $88 billion (0.5 percent), average real wages of US workers by 0.3 percent, and total employment by 485,000 full-time equivalent jobs (0.3 percent). Those gains are not spectacular, but they are real, and they refute the dire warnings that enactment of FTAs would lead to slower growth, fewer net jobs, and lower real wages. The opposite is true. The USITC said the gains were driven by economic efficiency gains, higher US employment, and growth in domestic investment, which expands the productive capital stock of the US economy.

The gains were not equally distributed across sectors or income groups, but they were widespread. College-educated workers enjoyed the biggest employment gains, but employment also grew for workers with only a high-school education. The service sector enjoyed most of the economic gains from trade agreements, but the manufacturing sector also grew by $3.5 billion compared to the baseline scenario of no trade agreements. Some manufacturing sectors, such as textiles, did lose jobs because of trade agreements, according to the USITC analysis, but that was caused by efficiency gains within manufacturing and not by an overall decline in output.

Many economists have also noted that the USITC’s methodology tends to understate the economic gains from trade agreements. The USITC analysis focuses on one-time “static gains” as resources shift from less-competitive US sectors to those that are more competitive. Understated are the “dynamic gains” from trade liberalization—such as the new products and production efficiencies stimulated by increased competition and the long-run (if modest) increases in productivity that compound over decades.

Geopolitical Benefits

Aside from more concrete economic benefits, FTAs provide less tangible but still important geopolitical benefits. The enhanced economic interdependence formed by FTAs helps foster stronger diplomatic ties and incentivizes other forms of cooperation among FTA member nations to tackle challenges that transcend political borders. Likewise, FTAs strengthen alliances with like-minded nations and can help counterbalance the geopolitical influence of rival countries such as China. Finally, FTAs are a tool of soft power to influence foreign countries to adopt American-style rules and norms—classic standard setting. For example, Phil Levy analyzed the US-Peru FTA and found that for Peru, the agreement was primarily about locking in the country’s economic liberalization in order to encourage investment, not about tariff reductions.

China’s Entry into the WTO

One of the most misunderstood “trade agreements” in recent US history is technically not a trade agreement at all: the granting of permanent normal trade relations (PNTR) and China’s entry into the WTO. As part of China’s WTO accession, the United States negotiated a bilateral agreement with China in 1999. However, all the obligations to liberalize were on China, and the bilateral agreement did not finalize China’s WTO accession (which entailed bilateral negotiations with several other governments, a multilateral “Working Party Report,” and final consent from all WTO members). In joining the WTO, China agreed to numerous domestic and trade policy reforms, including lowering tariffs on goods imported from all other WTO members—benefits the United States could only access by granting China PNTR. (Without PNTR, China would still enter the WTO but grant additional market access to all members except the United States.)

As a result of the accession and PNTR, Chinese tariffs on US exports were reduced from an average of 25 percent to 7 percent, and the Chinese government relaxed restrictions on US service exports and direct foreign investment while committing to additional protections for US intellectual property. Bilateral trade predictably increased thereafter. From 2001 to 2017 (before COVID-19 and the Trump trade wars), US exports of goods and service to China grew almost eight-fold, from $25 billion to $188 billion; sales by US-owned affiliates in China grew 10-fold, from $33 billion to $345 billion. China is now the top market for US agricultural exports. China’s membership in the WTO has allowed the US government to challenge China’s trade practices in more than 20 cases.

As Scott Lincicome and Arjun Anand detail in a separate essay for this project, PNTR likely did accelerate Chinese imports into the United States, and this heightened import competition likely did result in some US manufacturing job losses. However, economists strongly disagree about the magnitude of this so-called China Shock, which—by even the most severe of estimates—accounted for only about a fifth of the net reduction in manufacturing jobs and only about 5 percent of involuntary job losses between 2000 and 2007. Economists also generally agree that the China Shock produced small but significant economic benefits for American consumers and the US economy as a whole, that Chinese imports remain a small part of Americans’ overall consumption, and that, whatever the China Shock’s impact, it was a one-time, transitory event that will not (and cannot) be repeated.

China’s WTO accession and PNTR also helped to usher China into the system of global trade rules and allowed the US government to pursue several cases through the WTO’s dispute settlement mechanism that resulted in improved Chinese compliance. And opening China’s economy not only increased the sale of US goods and services there (through exports and affiliates) but also helped to lift tens of millions of Chinese people out of abject poverty. China’s WTO membership, especially its post-accession backsliding on protectionism and industrial policy, is certainly not without problems, but few if any of those would be solved by refusing PNTR in 2000 or repealing it today. Instead, China’s economy would have continued to grow, and Chinese goods would have still entered the US market (directly or indirectly), but US companies would have lacked access to China’s market, and the US government would have lacked multilateral mechanisms to negotiate or challenge Chinese economic malfeasance.

Downsides

As noted, even free traders acknowledge that trade agreements are imperfect. For example, the proliferation of FTA trading blocs and customs unions outside of the WTO creates inefficiencies and complications in the multilateral global trading system—setting back the cause of nondiscriminatory multilateral trade. By lowering tariffs on trading bloc members, FTAs can divert trade from a more efficient nonmember exporter to less efficient member exporters—what economists call “trade diversion.” This can concentrate production in a country with higher opportunity costs and lower comparative advantage. Such trade diversion imposes costs not only on the broader global economy but can also harm the importing country because the increased imports may be suboptimal due to price discrimination against a third country’s products.

Beyond tariffs, FTAs create additional rules and regulations, above and beyond what are required under baseline WTO rules.

As trade economist and evangelist for free trade Jagdish Bhagwati wrote in his 2008 book Termites in the Trading System: How Preferential Agreements Undermine Free Trade:

Crisscrossing [preferential trade agreements (PTAs)], where a nation has multiple PTAs with other nations, each of which then had its own PTAs with yet other nations, was inevitable. Indeed, if one only mapped the phenomenon, it would remind one of a child scrawling a number of chaotic lines on a sketch pad … [or a] spaghetti bowl.

This “spaghetti bowl” of rules and rules and regulations make the trading system more complicated to navigate for consumers and businesses.

Trade agreements can also reinforce mercantilist views of trade—exports are a benefit and imports a “concession”—or even lock in protectionism. For example, under the terms of the USMCA, 40 percent of the manufacturing labor incorporated into a passenger vehicle (45 percent for trucks) must have a base wage rate of $16 per hour for an auto to qualify for preferential tariff rates. Given that this rate is substantially above the average auto manufacturing wage in Mexico, it serves as a protectionist tool to ensure a larger share of production of automobiles takes place in the United States, which has higher wages. Other FTA “rules of origin” are similarly protectionist, reducing interparty trade instead of expanding it. In his essay, Lester cites several other examples of such measures, such as intellectual property.

Finally, there is the issue of opportunity cost. Negotiating FTAs is a technical and time-consuming matter, which can divert attention—and negotiators’ and diplomats’ time—away from unilateral liberalization or multilateral negotiations through the WTO system, which is a forum that is more likely to establish nondiscriminatory, near-universally accepted trade rules.

Given these risks, each FTA should not be rubberstamped but instead judged on its merits following a detailed review of its actual provisions (see, e.g., the Cato working paper “Should Free Traders Support the Trans- Pacific Partnership? An Assessment of America’s Largest Preferential Trade Agreement”). In general, however, US FTAs have each liberalized trade on net, and their benefits have substantially outweighed their downsides.

As the United States Dithers, the Rest of the World Is Moving Forward

It has been more than a decade since the United States entered into an FTA with new trading partners and is not currently negotiating any. In fact, the current US trade representative, Katherine Tai, has said that FTAs are “tools of the 20th century,” which is probably news to most of the rest of the world.

As mentioned, CPTPP went into effect without the United States. Today, American consumers pay higher prices for imports from CPTPP nations than they would otherwise; meanwhile, American exporters face higher barriers than competitors within the trading bloc. Though less ambitious than CPTPP, the Beijing-led Regional Comprehensive Economic Partnership was implemented in 2022. By sitting on the sidelines, the United States is ceding the ability to shape the rules and norms of international commerce in the Asia Pacific region to others, including China.

The African Continental Free Trade Area, which includes 47 African nations, went into effect in 2018. A more comprehensive deal, the East African Community expanded in 2022 to include the Democratic Republic of Congo and now covers about a quarter of Africa’s population.

The European Union (EU), likewise, has continued to move forward with FTAs with dozens in force, provisionally applied or in negotiation. Following the United Kingdom’s decision to leave the EU, it has entered into a number of FTAs and is negotiating more. The British government is taking the final steps necessary to enter the CPTPP.

India and China—two traditionally protectionist countries—are moving forward with liberalization. India has pursued a robust, liberalizing agreement with Australia and inked an FTA with Norway, Switzerland, Iceland, and Lichtenstein. India is also engaged in FTA talks with the EU. China is negotiating or implementing eight FTAs, on top of the Regional Comprehensive Economic Partnership and applying to join the CPTPP. In other words, even notoriously protectionist countries are moving forward with liberalization.

As of 2024, the WTO’s database shows there are nearly 370 regional FTAs in force worldwide. The rest of the world continues to move forward with liberalizing FTAs even if the United States does not. Over the long term, a nonexisting trade agenda is a recipe for economic stagnation and a loss of influence around the world. In short, it’s time for Washington to get its act together and get back in the FTA game.

Conclusion

Americans are broadly supportive of US efforts to expand trade with the rest of the world. In its annual polling of public attitudes toward trade, Gallup has found that a solid majority of Americans—more than 60 percent—see foreign trade more as an opportunity compared to 35 percent who view it more as a threat. While trade agreements are hotly debated in Congress, they are seldom a central issue in elections. Despite ever-present political pressure from protectionist interest, US politicians enjoy ample political space to do the right thing by negotiating and enacting further trade agreements.

The rest of the world is even keener on FTAs. The WTO has counted more than 300 FTAs in effect; this includes 100 negotiated in the past decade, while over the same period, the United States has signed none. US dawdling on the sidelines means that US exporters increasingly face discriminatory tariffs in those countries while their competitors in FTA countries enjoy duty-free access to those markets. US businesses that rely on imported inputs are similarly placed on the backfoot in a competitive global market. The United States and its most competitive producers are being left behind as the world moves ahead in lowering trade barriers.

Trade agreements have played an important and positive role in expanding the freedom of Americans to engage in commerce with the rest of the world. Those agreements have opened markets for hundreds of billions of dollars of US exports and foreign investment while lifting the standard of living for millions of American families through lower consumer prices and better jobs. Those agreements have brought the rule of law and equal treatment to global commerce while discouraging politicians from retreating into destructive trade wars during times of economic challenge.

To read the essay as it was published on the Cato Institute webpage, click here.

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Economic and Long-Term Impacts of Free Trade Agreements (FTAs) with the U.S.A.

Lucia Otten — Thu, 09 Mar 2023 21:14:23 +0000

In general, the evidence indicates that FTAs have benefited the American economy. They have contributed to lower prices for American consumers and have boosted growth and employment. Better policies ought to be implemented by political parties in order for these benefits to continue. Due to different views on trade agreements, this is still uncertain. As a result of trade negotiations and open trading agreements, member nations have seen economic, political, and production growth. By examining the overall effects of FTAs with the United States, this study contributes to the existing body of research on the topic. The United States of America and its allies have demonstrated economic and political expansion, as well as an increase in imports and commodities. The impact on a smaller business in the economy and the formation of a group of opponents are key outcomes here. We have observed that, in the grand scheme of things, free trade regulations benefit the majority of businesses, and smaller businesses can pivot or expand to maintain market relevance. Trade agreements are a crucial tool for nations seeking to promote prosperity and economic growth. To balance the interests of all parties, they must be properly developed.

By its participation in organizations such as the World Trade Organization and the North American Free Trade Agreement, the United States has been a pioneer in advocating free trade. It will be essential for nations to keep cooperating to develop trade policies that are advantageous to all parties as the global economy develops. Dealing with issues related to environmental and labor standards is one of the major difficulties in FTA negotiations. FTAs have the potential to enhance economy, but there is also a chance that they may lead to worsening labor conditions and environmental deterioration. To address these issues, there has been an increasing focus on including labor and environmental measures in recent years. For instance, the United States-Mexico-Canada Agreement (USMCA) has clauses that protect the environment and the rights of workers by, among other things, mandating Mexico to tighten its labor laws and undertake pollution control measures. By addressing social and environmental issues, these clauses can ensure that FTAs encourage sustainable and equitable growth.

FTAs have emerged as a popular mechanism for enhancing economic growth and fostering closer political ties between countries. While some of these agreements primarily focus on boosting trade and the economy, others are aimed at improving diplomatic relations between nations. Future research on this topic should examine the impact of such agreements both before and after their implementation, taking into account political changes that could affect their success. It is important to assess which industries stand to benefit the most from these agreements, to identify potential areas of growth and expansion. For example, the United States has recently shown an increased interest in executing trade agreements with smaller nations. Such agreements hold promise for the future of economic growth and closer political ties within the United States and its partners. However, the success of these agreements is often contingent upon the prevailing government’s political stance, making it imperative to consider the broader political context when evaluating their impact. To fully understand the effects of these agreements on economic growth and diplomatic relations, more research is necessary to assess their effectiveness in different regions and industries. Policymakers can use these insights to make informed decisions and ensure that free trade agreements promote sustainable economic growth and foster closer political ties between nations.

Naim Islam is a professional science master’s student, pursuing engineering management under the Department of Industrial and Manufacturing Engineering at Minnesota State University, Mankato.

Pawan Bhandari, Ph.D. is an Assistant Professor in the Department of Manufacturing Engineering Technology at Minnesota State University, Mankato, USA.

FTA PDF

To read the full paper, click here.

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Understanding the African Continental Free Trade Area and how the US can Promote its Success

sadams@wita.org — Tue, 17 May 2022 14:04:31 +0000

Thank you very much, Chair Karen Bass, Ranking Member Christopher Smith, and distinguished members of the subcommittee, for your extraordinary leadership on U.S.-Africa relations. I am incredibly honored by and grateful for the opportunity offered to me by the members of this committee to testify on “Understanding the African Continental Free Trade Area and How the U.S. Can Promote its Success.” I am Landry Signé, Managing Director and Professor at the Thunderbird School of Global Management, Senior Fellow at the Brookings Institution’s Africa Growth Initiative, Distinguished Fellow at Stanford University’s Center for African Studies, and a member of the World Economic Forum’s Regional Action Group on Africa, and the World Economic Forum’s Global Future Council on Agile Governance.

The African Continental Free Trade Area (AfCFTA) was signed in March 2018, ratified by the required number of countries by May 2019, and came into force in January 2021.

The significance of the AfCFTA cannot be overstated. It is the world’s largest new free trade area since the establishment of the World Trade Organization (WTO) in 1994. It promises to increase intra-African trade through deeper levels of trade liberalization and enhanced regulatory harmonization and coordination. Moreover, it is expected to improve the competitiveness of African industry and enterprises through increased market access, the exploitation of economies of scale, and more effective resource allocation.

My research has shown that the AfCFTA—and its accompanying increased market access—can significantly grow manufacturing and industrial development, tourism, intra-African cooperation, economic transformation, and the relationship between Africa and the rest of the world. In fact, under a successfully implemented AfCFTA, Africa will have a combined consumer and business spending of $6.7 trillion by 2030 and $16.12 trillion by 2050, creating a unique opportunity for people and businesses —and meaning the region can be the next big market for American goods and services.

UNECA has predicted that by 2040 implementation of the AfCFTA will raise intra-African trade by 15 to 25 percent, or $50 billion to $70 billion. The World Bank estimates that the AfCFTA will lift 30 million people out of extreme poverty and substantially increase the income of 68 million people who are just slightly above the poverty line. The International Monetary Fund (IMF) similarly projects that, under the AfCFTA, Africa’s expanded and more efficient goods and labor markets will significantly increase the continent’s overall ranking on the Global Competitiveness Index.

Although there is a great momentum behind the agreement, its successful implementation is dependent on smart choices and thoughtful policy options. The United States can and should play an extraordinary role in promoting the AfCFTA’s success to increase intracontinental and global trade, as well as achieve mutual African and U.S. prosperity.

In this testimony, I will first briefly examine a few challenges to trade in Africa and their consequences for the continent’s development. Second, I will explain why the AfCFTA can constitute a solution to these challenges. Finally, I will discuss how smart U.S. foreign policy and assistance (both financial and technical) can promote its success in increasing intracontinental and global trade.

Landry-Signe-Testimony-April-27-2022

To read the full testimony from Brookings, please click here.

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Mercantilist Reciprocity or Free trade: Globalization at a Crossroads

Jude Althagafi — Tue, 19 Oct 2021 16:27:59 +0000

The case for free trade has always been a tough sell. Trade is an economic endeavor, but trade policy is the product of politics, where perceptions often matter more than facts. Study after study has shown that countries that are more open to trade grow faster than those that are relatively closed. The benefits of trade come from imports, which deliver more competition, greater variety, lower prices, better quality, and innovation. But when it comes to trading across borders or when our individual transactions are aggregated at the national level, we seem to forget these basic principles. We assume that the goal of exchange is to achieve a trade surplus. This view reflects a fundamental misunderstanding of international economics and the purpose of trade.

Domestic politics, national security concerns, and geopolitics conspire against the economics and the prospects for resuscitating multilateralism. Our collective challenge is to remind ourselves – indeed, to internalize – that trade barriers are not assets to deploy at the negotiating table, but impediments to domestic businesses, workers, and consumers.

Mercantilist reciprocity or free trade - Hinrich Foundation - Dan Ikenson - October 2021

To read the full report from the Hinrich Foundation, please click here.

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Free Trade Agreements Have Limited Impact (Because Manufactured Goods are a Perfect Market)

Sebastian Petersen-Alven — Sat, 01 May 2021 17:54:17 +0000

Introduction

Free Trade Agreements between two or more countries or parties have been the centrepiece of international trade policy since the formation of the World Trade Organisation 25 years ago. Since 1995, no major round of multilateral trade liberalisation has been concluded, but there has been a sharp rise in the number of bilateral trade agreements. While some of these agreements have real consequences for trade in services and some administrative rules for trade, most of them do not because they focus mainly on tariffs on industrial and agricultural goods. Yet the economic gains from these reductions are now extremely limited. In fact, it is now difficult to improve the global market in goods by cutting tariffs.

Tariffs are low, particularly for non-agricultural goods

It is estimated that in 1947 the average global tariff for all goods was between 20 and 30%. By 1952, and the first rounds of the GATT, this had reduced to 14%. At this point there were still significant tariffs on swathes of agricultural and industrial goods, for example the average UK tariff on finished manufactured products was 21.4% at the end of the 1950s. By the time of the Uruguay round in the second half of the 1980s the average developed country tariff for all industrial goods was only 6.3%, reducing to 3.8% as a result. The impact can be seen in the chart below, notably showing average applied industrial tariffs of lower than 4% in the EU, US, and Japan.

NG-series-Paper-4-1

To read the full paper by the European Centre for International Political Economy, please click here.

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Free Trade Agreements Have Limited Impact (Because Manufactured Goods are a Perfect Market)

Diego A — Sat, 01 May 2021 15:46:44 +0000

NG-series-Paper-4-1

To view the original report from ECIPE, please click here.

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The EU-China CAI: An agreement whose time has passed?

Anne Allen Hodge — Tue, 13 Apr 2021 15:59:19 +0000

The EU-China Comprehensive Agreement on Investment (CAI) is perhaps a one-of-a-kind deal aimed at balancing the existing asymmetric investment relationship, where Chinese companies enjoy a far greater freedom to invest in Europe than EU companies do in China. But would it be able to achieve its stated goals?

The EU-China Comprehensive Agreement on Investment (CAI) was concluded in principle on 30 December 2020 after seven years of negotiation. The next step of ratification by the European Parliament will no doubt fuel a broader debate about the European Union’s place in the world; its relationship with the Chinese government whose approach is at odds with the espoused liberal values of the EU, and Europe’s relationship with the United States.

This essay by Stewart Paterson, Research Fellow at the Hinrich Foundation, explores the background to the CAI, the EU’s asymmetric economic relationship with China, and – in the context of China’s two decades of phenomenal growth – the relatively modest economic interaction between the two parties. By examining the prospect of CAI rebalancing and deepening EU-China trade relationship, Paterson poses the challenging question of whether deeper economic linkages with China are sustainable or compatible, given past economic interaction with the country and China’s recent geopolitical moves.

EU-China CAI Stewart Paterson

To read the original report by the Hinrich Foundation, please click here.

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The unappreciated trend toward unilateral trade liberalization

Sebastian Petersen-Alven — Wed, 31 Mar 2021 21:04:40 +0000

A frequently voiced complaint from the Trump administration was that US firms have faced a competitive disadvantage in exports because the US market is open and US tariffs are low but US trading partners protect their markets with high tariffs. The administration used this concern to justify raising US tariffs whenever it could. Lawrence argues that these claims should be more nuanced and account for the extensive unilateral liberalization by many countries over the past 30 years and that the grievances that motivated the Trump trade policies are increasingly misplaced. Many developing countries have reduced their tariffs unilaterally to rates that are far lower than they applied three decades ago and far less than the bound rates reflected in their World Trade Organization (WTO) obligations. Globally, on average, tariffs were not raised during the global financial crisis of 2008 and continued to decline through at least 2018. Even when shocks from imports resulted in serious injury to domestic industries, several developing countries temporarily provided safeguard protection but at levels that were lower than their WTO bound rates. This evidence of import liberalization also suggests that rising protectionism was not responsible for the slow growth in world trade that has been evident since 2011. It remains uncertain whether countries will now respond to disruptions to global supply chains since 2018 caused by Trump’s trade policies and the COVID-19 pandemic by reversing their tariff liberalization stance, but the sustained enthusiasm for new megaregional trade agreements suggests many countries will not.

pb21-6

To read the full policy brief by the Peterson Institute for International Economics, please click here.

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Agricultural Provisions of the U.S.-Mexico-Canada Agreement

Griffin Ursin — Fri, 20 Nov 2020 14:56:30 +0000

USMCA’s Potential Trade Effects Beyond NAFTA

Many stakeholders have credited NAFTA with facilitating agricultural trade in North America by reducing tariffs and other market access barriers and by providing a stable and improved trading environment in the region. Studies conducted to estimate the incremental effect of USMCA indicate modest increases to regional trade in North America. For example, a study commissioned by the Farm Foundation estimated that USMCA would generate a net increase in annual U.S. agricultural exports to Canada of $450 million—about 1% of U.S. agricultural exports under NAFTA in 2017. Similarly, the U.S. International Trade Commission (USITC) assessed that U.S. agricultural exports would likely increase 1.1% in year six of USMCA implementation compared to its 2017 baseline export levels. Another study, conducted by the International Monetary Fund, estimated small gains in regional trade from USMCA compared with NAFTA; with respect to agriculture, it found modest gains to the region, primarily benefiting Canada.

A study by economists at the University of Georgia says that USMCA may lead to losses for Georgia’s small fruit and vegetable producers because of subsidized imports from Mexico. The study was limited in scope and did not examine the broader impact of USMCA on other agricultural and nonagricultural sectors, other states, or the effects at the national level for the three USMCA signatories.

Issues for Congress

Congress has an interest in the implementation of USMCA because of its constitutional authority over foreign commerce and its long-standing involvement in U.S. farm policy.

Regarding market access, Congress may monitor Canada’s implementation of its commitments regarding U.S. dairy products, poultry products, and eggs. Some Members of Congress have raised concerns that Canada’s dairy TRQ allocation may not be consistent with its commitments under USMCA.

Congress may also monitor the implementation of the various nontariff provisions that the three countries agreed to under USMCA, such as assurances by Canada and Mexico that they will provide the same treatment to U.S. proprietary food formula and alcoholic beverages as they provide to their domestic products. Some Members of Congress have raised concerns that Mexico has not taken actions to fulfill its commitments regarding improving access for U.S. cheeses and agricultural biotechnology products46 and that Canada is making insufficient progress toward a protocol to allow the registration of U.S. wheat varieties in Canada.

Efforts by the USMCA signatories to establish a coordinated approach for greater harmonization of SPS rules, rules governing trade in products created with agricultural biotechnology, and rules pertaining to geographical indications may also be of interest for congressional oversight. This subject has drawn the attention of some Members of Congress, who have suggested that USTR and USDA use the GI provisions in USMCA as a model for other trade agreements.

USMCA has also expanded access for Canadian peanut butter, dairy, sugar, and sugar-containing products to the United States. Congress may monitor how this improved access to the U.S. market affects U.S. producers in these sectors and the U.S. rural economy more broadly.

Congress may also use its oversight and legislative authority to address the effects of COVID-19 pandemic on greater integration of the North American market. The COVID-19 pandemic has placed unexpected stresses on food supply chains, with bottlenecks in farm labor, processing, transport, and logistics, particularly in developing countries such as Mexico. According to a report by a market intelligence company, Mexico has faced logistics and transportation difficulties including shortages of shipping containers, which could affect Mexico’s ability to trade perishable and packaged food products with the United States.

To download the full report, please click here.

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Anita Regmi is a Specialist in Agricultural Policy for the Congressional Research Service.

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Reengaging the Asia-Pacific on Trade: A TPP Roadmap for the Next U.S. Administration

Griffin Ursin — Wed, 30 Sep 2020 14:31:51 +0000

IN THE AFTERMATH OF A PRESIDENTIAL ELECTION, it’s not unusual for an incoming administration to revisit policy choices made by the previous administration or, in the case of reelection, during the first term. One decision that strongly merits another look after November is the U.S. withdrawal from the Trans-Pacific Partnership (TPP), a regional trade agreement that the United States signed with 11 other countries in 2016. In addition to eliminating tariffs, the TPP established high-standard rules in areas critical to the global economy, such as e-commerce, intellectual property protection, state-owned enterprises, labor, and the environment, promoting an alternative economic model to state-led capitalism in the region.

In recent years, the case for U.S. participation in the TPP has only become more compelling as the political and economic importance of the Asia-Pacific region has grown and concerns about Beijing’s economic model have mounted. East Asia is bouncing back from the COVID-19 pandemic before the rest of the world, and deepening economic ties with the engines of global growth will be an even more valuable proposition in the midst of a deep recession. Moreover, the pandemic has revealed serious vulnerabilities in supply chain networks, and the common standards and rules of the TPP can serve as the basis for establishing trusted supply chains in the region. But is there a path for the United States to return to the TPP or to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which the 11 remaining countries finalized without the United States?

This report examines four options that the next administration would have for reengaging the CPTPP countries on trade: returning to the original TPP agreement, formally acceding to the CPTPP, seeking a broader renegotiation with the CPTPP as a baseline, or working on a narrower sectoral deal as an immediate, interim step. It then assesses the feasibility of each option based on domestic considerations and developments, as well as input from the CPTPP countries.

Domestically, a policy window may be opening for CPTPP reentry. Whereas trade was seen as toxic only four years ago, recent polls have found growing bipartisan public support for trade. At the same time, however, the views of the political parties on trade appear to be shifting. Some observers have gone so far as to suggest that the United States is on the precipice of a new trade order, with Republicans more protectionist and Democrats friendlier toward trade. This makes the domestic landscape and the outcome of a congressional trade vote uncertain. The strong bipartisan congressional vote in favor of the United States-Mexico-Canada Agreement (USMCA) led many to conclude that this agreement should be the new U.S. template for trade agreements. However, there may be factors unique to the USMCA that would not be in play in a negotiation with Asian countries. Another complicating factor is the fate of Trade Promotion Authority, set to expire in July 2021, which is a prerequisite for negotiations in the view of U.S. trading partners.

The prospect of CPTPP reentry also depends on the extent to which its members would be open to revisions proposed by the United States. To take the temperature of capitals in Asia, the Asia Society Policy Institute spoke with a dozen current and former trade officials from a diverse set of CPTPP countries. Those interviewed unanimously affirmed that they would welcome the United States back, but not at any cost. They are wary of being asked to make extensive revisions, having been scarred by the U.S. withdrawal after expending significant political capital during the TPP negotiations. Those countries were accustomed to the uncertainties of the congressional approval process, but they now also worry about the presidential election cycle.

With the foregoing considerations in mind, the report offers a road map for the next administration to reengage with the CPTPP countries. Recommended steps include the following:

Launch an interim sectoral agreement: As a first step, pursue a limited, sector-specific Asia-Pacific trade deal with the CPTPP members, and perhaps other countries, to set high standards, rebuild trust, and build momentum. Promising topics include:
- Digital trade, an area that represents more and more of overall trade, particularly now that the COVID-19 pandemic has accelerated the digitalization of the global economy.
- Trade in medical and other essential products, a sector in which COVID-19 has focused attention on trade restrictions and vulnerabilities in global supply chains.
- Trade and the environment/climate, which may be of particular interest to a Democratic White House.
Invest in competitiveness and adjustment at home: Build support for trade agreements generally and the CPTPP specifically at home by investing in competitiveness and adjustment policies and programs. Doing so would take the pressure off trade agreements to achieve goals they are not designed to tackle, such as ensuring more equitable income distribution.
Make the case for trade: Explain to the American public that deeper U.S. trade engagement with Asia-Pacific partners is integral to building an alternative economic model to Chinese state capitalism, diversifying U.S. trade beyond China and, ideally, promoting reforms within China.
Prioritize negotiating proposals: Develop and prioritize concrete proposals for U.S. reengagement with the CPTPP based on input from business, labor, and civil society groups throughout the country, as well as Congress.
Consult with trading partners: Consult with the CPTPP members to understand their limits, priorities, and concerns around U.S. reengagement.

These steps would pave the way for U.S. reentry into the CPTPP. Even then, CPTPP reengagement would be a heavy lift that would require flexibility and creativity from both the United States and the CPTPP countries. Returning to the original TPP by signing on to a five-year-old agreement that faced considerable opposition at home is not a realistic proposition in 2021. The approach with the best odds of success would likely fall between formal CPTPP accession and a more extensive renegotiation. For that to work, the United States would need to focus on the most important changes and modernizations needed, while the CPTPP countries would need to be more open to changes than during a typical accession.

Given the domestic and international challenges outlined in this report, it is understandable that many would question whether returning to the CPTPP is worth all the trouble. Despite those concerns, rejoining the CPTPP is one of the most impactful ways in which the United States can work with likeminded countries in the region to promote an alternative economic model to state-led capitalism and help shape the economic future of a region that is increasingly the engine of global growth and innovation.

A TPP Roadmap for the Next U.S. Administration

Wendy Cutler is the Vice President and Managing Director of Washington DC Office of the Asia Society Policy Institute and former Deputy USTR.

To download the full report, please click here.

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