In recent weeks a great deal has been made of the impact that globalization, international trade and free trade agreements in particular have had on the U.S. economy. In 1994, NAFTA, the North American Free Trade Agreement came into effect. It was originally sold as “creating one of the world’s largest free trade zones and laying the foundations for strong economic growth and rising prosperity for Canada, the United States, and Mexico.” (NAFTANOW.ORG)
Most people may not be aware, but NAFTA was not the first free trade agreement the U.S. signed with another country. In 1985 the Israel — United States Free Trade Agreement (including the Palestinian Authority) was signed into law. The IUSFT is a trade pact that lowered barriers to trade in some goods while reducing or eliminating duties on merchandise exported to U.S. from Israel, Gaza Strip and the West Bank. Notice that no reduction in duties to U.S. goods exported to this region was included in the pact.
Since then and after the NAFTA agreement was finalized the U.S. has entered into a total of twelve separate agreements with a host of individual countries and one region. In the meantime, the U.S. is negotiating or has signed bilateral and multilateral free trade agreements with three regions and thirteen individual countries. See below for details on existing and proposed free trade agreements.
It is interesting to note that both President Raegan and President Clinton were responsible for the ratification of one free trade agreement each, while President George W. Bush and President Obama are responsible for the ratification or proposal of all other agreements. President George W. Bush concentrated more on bilateral agreements, having ratified one relatively small region (CAFTA).
President Obama on the other hand, has taken a much more aggressive or at least different approach by not only proposing bilateral agreements with 13 individual countries, but also proposing or continue the proposal process of multilateral agreements covering all of the Americas, all of the European Union, and a large portion of the Pacific Rim. Below is a breakdown of the agreements that are in effect today.
FTAA — Free Trade Areas of the Americas
All countries in the Americas
with the exception of Cuba
Purpose: Eliminate or reduce trade barriers
MEFTA — Middle East Free Trade Agreement
Israel, Jordan, Morocco, Bahrain,
Egypt, Lebanon, Tunisia, Saudi Arabia,
Oman, Kuwait, UAE, Yemen, Qatar,
Syria, Iraq, Libya, Iran
Purpose: To create a Middle East free trade area and assist Middle Eastern countries in
implementing domestic reform, instituting the rule of law, protection of private property,
creating a foundation for openness, economic growth and prosperity.
TAFTA — Transatlantic Free Trade Area
All countries in the European Union
Purpose: Create a free trade area between Europe and North America. Could be combined with NAFTA in order to cover a large portion of both continents
TTIP — Transatlantic Trade and Investment Partnership
European Union and the USA
Purpose: Promote trade and multilateral economic growth. It is a companion agreement to TAFTA
TISA — Trade in Services Agreement
European Union and the U.S.
Purpose: Liberalize worldwide trade of services such as banking, health and transport. Covers 70% of global services economy
In spite of all the information I provided above, trade agreements are not the entire story. Currently the U.S. deficit for 2015 stands at $736 billion. However, the contribution to the U.S. deficit from the free trade agreements we currently have in the books is small in comparison to the trade deficit we have with China. To go further if we add the top five countries shown in the list below, that total represents 81% of the total U.S trade deficit. With the exception of Mexico, the U.S. does not have a trade agreement with China, Germany, Japan, or Vietnam.
U.S. Trade Deficits — top 5 Countries 2015
China -$365.7 billion
Germany -$74.1 billion
Japan -$68.6 billion
Mexico -$58.3 billion
Vietnam -$30.9 billion
Total for top 5 -$597.6
Total U.S. trade balance: -$736 billion
Why so many free trade agreements?
Two basic reasons for creating free trade agreements. Economic and political/security
Economically speaking by eliminating tariffs and some non-tariff barriers, FTAs permit the products of FTA partner’s easier access to one another’s markets. Trading allows for cheaper products to enter the U.S. holding down inflation benefiting the poor and the middle class. It also allows the U.S. to sell its products and services abroad. There are three additional economic reasons for the creation of FTA’s:
- Increased efficiency of production as producers face increased competition with the removal of trade barrier
- Economies of scale, that is, decreased unit costs of production as producers can have larger production runs since the markets for their goods have been enlarged;
- Increased foreign investment from outside the FTA as firms seek to locate operations within the borders of the FTA to take advantage of the preferential trade arrangements. (Free Trade Agreements: Impact on U.S. Trade and Implications for U.S. Trade Policy. William H. Cooper 2014)
Political and Security Reasons
Political and security considerations are also motivation to form FTAs. The United States formed FTAs with Israel and with Jordan to reaffirm American support of those countries and to strengthen relations with them. Arguably one of the reasons the Obama administration singed the Trans-Pacific Partnership is for the U.S. to reassert its influence in the Pacific Rim over increasing Chinese influence and pressure. In many cases FTA’s are primarily used to reward or shore up allies. It can be argued that the agreements with Australia, Chile and Singapore were aimed at increasing existing security ties.
The same goes for other countries. Take for instance Mexico. “Since the early 1990s, Mexico has had a growing commitment to trade liberalization and has a trade policy that is among the most open in the world. Mexico has actively pursued free trade agreements with other countries to help promote economic growth, but also to reduce its economic dependence on the United States”. (Mexico’s Free Trade Agreements M. Angeles Villarreal — 2012)
Australia’s FTA’s have also been reported to fulfill certain political needs. Australia’s most recent trade agreements can be viewed as deepening both political and economic ties. Australia’s motivations for a Japan FTA seem to be more geo-political and strategic than economic or commercial. The FTA forms part of a recent trend to strengthen Australia-Japan relations, particularly around security and defense.
A key example of this is Japan’s role as a strong candidate to build Australia’s new submarine fleet. Selecting Japanese subs in what has been dubbed “Option J” offers a number of strategic advantages, notably a ‘deepening of the Australia–Japan defense relationship at a time of shifting major-power relations in the Asia–Pacific region’. (Australian Institute of International Trade. Heath Pickering — 2015)
It seems that upon closer analysis FTA’s are a bit more complicated than what some politicians have made them out to be. From a commercial or economic perspective, it can be argued that some agreements do not deliver the benefits promoted by their proponents.
Certainly there is a “concentration of harm” noticed when a factory, such as Carrier in Indianapolis is moved to Mexico. Hundreds of people lose their jobs. The community is also harmed as these jobs fuel other jobs in restaurants, movies, groceries, and community colleges. However, there is an opposite effect of “diffusion of benefits” not easily observable.
Buying merchandise from countries that have more efficient manufacturing brings prices down in our economy. Lower prices benefit the poor and the middle class as they are able to afford products they would normally not be able to buy. This allows them to spend money on other items, eventually benefiting the economy.
Comments made by some politicians of imposing 35% duties on products coming in from Mexico are not realistic. Firstly, NAFTA is law. In order to impose any duties on Mexican products not covered by the NAFTA agreement, would plainly break the law. NAFTA would have to be dissolved, which arguably will not happen overnight. The effect on the economy would be negative as inflationary pressures would be felt.
The same goes with imposing 100% duties on China. In this case we would be initiating a trade war which nobody wants. Besides, the type of outsourcing that has taken place in the decade has caused companies to get rid of their manufacturing plants. How could these companies get back to manufacturing overnight? No matter what, a shift in trade policy of that magnitude would take decades to implement.
In order to truly understand FTA’s we need to understand Free Trade and the other trade theories such as mercantilism, absolute advantage, comparative advantage and new trade. In my next posting I will delve into those theories as well as a description of globalization. See you then.