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.

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.

Several socioeconomic changes in emerging economies were far more responsible for chipping away at the United States' manufacturing sector. Emerging economies have been building roads and ports at a rapid rate, investments that make shipping goods cheaper and quicker, says Gresser. Container shipping has boomed, multiplying the impact of all that new infrastructure, while telecommunications costs have dropped. Smaller producers and manufacturers in far-flung locations can play a role in the global economy.

There's no doubt that the nature of American manufacturing is shifting. For better or for worse, we're moving away from the unskilled type of production work that let a less-educated workforce attain middle-class status. Today, our manufacturing sector stands out in the creation of complex items like airplanes and machinery. In reality, though, even the implementation of tariffs haven't stemmed the exodus of lower-end manufacturing jobs. Low-end apparel and footwear are among the most heavily-tariffed imported goods sold in the United States, and yet most of the T-shirts and sneakers we buy in this country are made abroad.

In addition, we've built up a much bigger service sector in the past two decades or so. Generally, when the term service economy is used, it's as a pejorative; the image is one of a fast-food fry cook or big-box retail cashier. But some of the biggest growth in services—and exports—is in engineering, professional services like accounting and finance, software development, and the like.

Unfortunately, today's trade agreements don't do a good job of addressing the service sector. "The world of services trade policy is pretty young," says Gresser. There are very few negotiators who specialize in it; plus, the jargon is dense and often confusing, even for experts. Issues surrounding copyright protection, consumer privacy, and other issues all need to be worked out more or less from scratch. Figuring out how to structure trade agreements with other countries for services exports is a good role for FTAs in the near term, Gresser suggests. The negotiations can operate as a sort of test lab for the policies we're going to need in the coming decades, with the idea that we'll be better prepared to uphold the interests of American workers in future global trade forums.

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Martha C. White is a freelance writer in New York.