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?

Barack Obama. Click image to expand.
President Obama at the recent G20 summit

On its face, trade policy may seem like pretty stodgy stuff, but don't be fooled. Since this administration hopes to reduce the deficit and increase employment by growing our exports, the policies that shape that flow of goods and services play a key role. Trade partnerships between countries, including bilateral trade agreements like the one President Barack Obama failed to sign with South Korea prior to the recent G20 summit in Seoul, South Korea, ignite more controversy than the Palin clan. For proof, look no further than NAFTA. More than 15 years after its passage, the landmark free-trade agreement that was supposed to bolster the economies of the United States, Canada, and Mexico still stirs strong emotion and heated discourse. NAFTA is at once credited for job creation and blamed for job loss, depending on who's counting.

Likewise, support for and resistance to bilateral FTAs, like the still-unrealized pact with Korea, is equally vehement. Pro-business interest groups like the Chamber of Commerce say that lower tariffs on American-made goods would pave the way for a boom in exports and, as a result, jobs. Left-wing think tanks like Foreign Policy in Focus exhort the administration to oppose all free-trade agreements.

Part of the reason American trade negotiators are having such a tough time coming to consensus is that the United States is demanding more parity in the market access it gets from partners. Until the end of the Cold War, America tended to trade access to its huge consumer market for political, not economic gain. For instance, a country might get reduced or waived tariffs on its imports to the United States if it agreed to buy military aircraft from America instead of from the Soviet Union. Now we're bargaining with fiscal, rather than political, goals in mind. Agriculture and state subsidization thereof, which tend to pit developed regions like the United States and the European Union against emerging, more rural economies like India and Brazil, is also often contentious.

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Deploying an FTA is like hammering a nail into a wall with a shoe. It'll get the job done, but it's not necessarily the best tool for the task at hand. Unfortunately, right now it's the best tool we have. Multilateral trade talks have broken down—the most recent round of WTO negotiations, the Doha Development Round, dissolved into an insurmountable deadlock back in 2008—so countries have been turning to bilateral FTAs to fill the vacuum. Unlike big multifaceted agreements, though, FTAs are designed to make trade partners winners, which makes other nations losers by default. "They basically distort trade as countries try to gain a preferential advantage over their competitors," says Barry Bosworth, senior fellow at the Brookings Institution.

However, the uncomfortable reality is that the United States doesn't have the luxury of waiting around until the Doha talks—or whatever new iteration is convened—are concluded. With other countries entering into FTAs at a faster rate than we've been willing to do so, there's a legitimate danger that U.S. commercial interests could be left behind.

It seems that the president realizes this, in spite of the ire he risks drawing from supporters (the United Auto Workers union, for example, has objected strenuously to the South Korea FTA) and members of his own party. Obama has danced around the issue of trade agreements since before the 2008 election. He started his campaign by pledging to renegotiate NAFTA, but he's since forgotten that promise (and even Mexico says it didn't really believe him). He's widely perceived as having dragged his feet on the completion of the three FTAs the Bush administration negotiated, in South Korea, Colombia, and Panama. He has put a stake in the ground with a stated goal of doubling exports in five years, but there's plenty of skepticism, especially on the right, that he's just paying lip service to the kind of trade policy that's needed to goose demand for American exports.

In fact, FTAs have less of an impact on trade than most people—or politicians—realize, according to Ed Gresser, president of the Democratic Leadership Council. Consider this: In 2000, the United States had three FTA partners: Canada, Mexico, and Israel. At the time, FTA trade accounted for 43 percent each of exports and imports. In 2008, we were up to 17 FTAs, but the overall volume of trade had diminished to 39 percent of exports and 37 percent of imports, due to increasing trade with non-FTA partners.

Tariffs make a good rallying point for drumming up FTA support or opposition, because they're an easy concept to grasp, but they're not as important as you'd think—and they're not the only component that goes into an FTA. In terms of imports, the United States took in around $21 billion in tariffs last year, on around $1.5 trillion worth of imported goods. When it comes to exports, other countries slapped around $35.6 billion worth of tariffs on $937 billion worth of U.S.-made goods in 2009, according to the World Bank.