What's in those free-trade agreements—and do they really boost exports?

What's in those free-trade agreements—and do they really boost exports?

What's in those free-trade agreements—and do they really boost exports?

Trade and job creation
Dec. 2 2010 12:54 PM

Trade Policy 101

What's in those free-trade agreements—and do they really boost exports?

(Continued from Page 1)

The other—really intriguing—stuff addressed by FTAs tends to get lumped together under the heading of "nontariff barriers." This phrase contains a multitude of little-understood conditions and regulations that can cause major unintended consequences. How major? Nontariff barriers are said to play a significant role in U.S. and South Korean negotiators' inability to come to an accord.

One of two major sticking points was Korea's resistance to accept shipments of U.S. beef from livestock more than 30 months old. This age restriction was put in place as a protective measure against mad cow disease, which had led Korea to ban all U.S. beef imports from 2003 to 2008. In a world of increasingly multinational agricultural supply chains, this is a problem that's likely to persist. If one country has a rule against genetically modified grain, for instance, can they legally bar importation if the produce is allowed by the country of origin's environmental regulators? Or should the country with the no-GM policy be forced to accept genetically modified agricultural products from a trade partner? Who gets to decide whose rules are better? Should the more cautious of the two win out? American agribusiness interests wouldn't be thrilled with that.

The other nontariff point on which the United States and South Korea disagreed relates to regulations on American cars. The complexity of safety regulations demanded by Korea would have forced U.S. automakers to retool their production lines specifically for the Korean market, an expensive and impractical prospect. In theory, we want to sell safe cars overseas, but who gets the final say on whose regulations should be used? The U.S. auto industry's other gripe was that Korea requires citizens to document purchase of an American car on their taxes, and that purchase can often trigger an audit of the buyer's taxes by Korea's version of the IRS.


Some trade analysts have pointed out that South Korea could be using both the auto and the beef safety concerns as a negotiating ploy, since there is a tariff dispute on the table, too. Right now, Korean cars sold in the United States are subject to a 2.5 percent tariff, while American cars sold in Korea are assessed a 8 percent tariff. U.S. interests want to level the playing field by eliminating the car tariffs—although they'd like to keep the 25 percent truck tariff on foreign-made pickup trucks.

There are several other tricky nontariff barriers for trade negotiators. One category pertaining to so-called "rules of origin" can be so restrictive as to make FTAs practically unworkable, says the DLC's Gresser. The details can vary, but the gist of the rules stipulate that both the finished product and the raw materials must come from the country in order for preferential tariff treatment (a reduction or a waiver) to be applied. This is particularly problematic with clothing, since many of the countries that manufacture things like T-shirts and sweaters import the cotton fabric or yarn. In this case, the effectiveness of an FTA would be greatly reduced.

Those distrustful of FTAs and other trade agreements also charge that they contain few or no regulations that protect workers or the environment. Emerging countries—China is generally the first name on analysts' lips when they discuss this issue—with lax human rights or environmental laws can almost always produce things more cheaply; some argue that trade policies need to implement minimum safety and pollution standards for participating countries, since the status quo rewards those who run roughshod over their people or land to crank out cheaper goods.

One specific nontariff issue that's crept into FTAs and causes alarm for environmentalists is something called "investor state dispute settlement." This basically lets a corporation sue for lost profits if a country in which said company does business makes laws that reduce the corporation's ability to make money. In the past, this kind of legal action was available to governments, but Chapter 11 of NAFTA gave corporations the key to the clubhouse. The problem, says Eileen Appelbaum, senior economist at the Center for Economic and Policy Research, is that this clause doesn't offer any comparable legal option for consumers or watchdog groups to challenge corporate practices that they believe violate environmental, human rights, or other regulations. "They're written in such a way that they protect capital investments over any claims of worker rights or community concerns," she says. "It's not that we shouldn't have trade agreements, but we need to think about what's in them."

Unfortunately, what's in FTAs isn't necessarily great news for the domestic job market. "U.S. trade negotiators became captured by the industry interests that had no interest in exporting," says Brookings' Bosworth. "None of those industries involve any jobs for Americans, but it's very profitable for them." American financial and insurance companies, for instance, are eager to enter foreign markets, but that expansion of their business—and the protections conferred by FTAs that facilitate that growth—don't yield many, if any, jobs in the United States.

The jobs question is one that has long vexed trade policy analysts. NAFTA supporters point to the economic growth and low unemployment the United States saw through most of the '90s; detractors point to the drop in manufacturing jobs from the time of the agreement's implementation to today. Both arguments weaken when taken in context. Yes, America's economy expanded in the 1990s, but recent re-evaluations of the numbers indicate that the growth might have been overstated, weakening the argument that NAFTA was as much of a game-changer as its champions claim. Conversely, our manufacturing sector has been shedding jobs since the mid-'70s, when the number of Americans working in that sector peaked at around 18 million; laying blame at the feet of an agreement that came along two decades after the peak points the finger at the wrong culprit.