Free Trade Agreements
As the world becomes globalized and nations start selling most of their products on the international market while importing necessities, it becomes important to enter into trade agreements. These agreements not only safeguard a nation’s interests in international business but also assures a ready market for a nation’s produce. Free Trade Agreements have been a favorite of recent years with the US entering into numerous agreements internationally. While the benefits of free trade agreements are not questioned, the significance of FTAs to the US economy warrants a closer look into the negative and positive effects they have not only on business but other spheres of life. The paper begins by introducing what free trade agreements are before delving into the positive and negative effects on the US economy. The paper then explores the effect that FTAs have on international relationships before articulating the relationships that the US has with other nations it has signed FTAs with. The relationship between the US and other WTO nations is also explored.
What are Free Trade Agreements?
Trade agreements fall under two categories; regional trade agreements and preferential trade agreements, with the World Trade Organization taking part in negotiating these agreements, enforcing them once they are in place, and responding to complaints (Amadeo, 2016). As of June 2016, all WTO nations had a regional trade agreement in place, the majority of them being FTAs. The WTO defines the rules and standards governing the implementation of FTAs. Under the WTO guidelines, FTAs must eradicate tariffs and other constraints to trade in goods and services between member countries that include non-discrimination for the providers of services. All WTO members adhere to these rules and nations are reluctant to enter into negotiations with countries that negate them. As such, FTAS are geared at supporting global trade liberalization.
Essentially, FTAs are thus international treaties that eliminate barriers to trade and facilitate stronger commercial ties between nations and regions. Free Trade Agreements usually operate by removing trade quotas and tariffs which are the chief impediment to cross-border trading. Over time, however, average tariffs have been on a decline thus presenting little problems for businesses leading to nations focusing more on ‘behind the border’ measures in trade negotiations (Irwin, 2005).
These ‘behind the border’ measures have proven to be troublesome to businesses today and markets are measured by how they have managed to uphold policies defined as the ‘ease of doing business.’ Indicators in this index include a nation’s progress in upholding intellectual property rights, the competition policies in place, standards of doing business, and how the rule of law applies to businesses (O’Sullivan & Sheffrin, 2003). Registration requirements for companies, professional qualifications for prospective employees and government procurement standards and targets are also often negotiated in these free trade meetings. Once FTAs are put in place, other nations may join the trading bloc, and in this case, the FTA is said to be cascadable consisting of the old FTA and the new bloc.
Negotiating FTAs is usually treacherous and there are three approaches to forming them; unilateral free trade agreements, bilateral agreements, and multilateral agreements. Unilateral agreements arise when a nation decides to lower tariffs and quotas in its trade with another nation without reciprocal action from the other nation (Bhagwati, 2002). In bilateral agreements, both nations decide to lower tariffs between each other and in multilateral agreements numerous nations lower trade tariffs and quotas with one another. A free trade also differs from a customs union in that in a free trade agreement there are still restrictions to capital and labor and member countries retain the autonomy to dictate external tariffs with nations outside the Free Trade Area.
Effects on the US economy
To date, the US has entered into 14 FTAs with 20 nations. 12 of these are bilateral agreements between the US and another nation, one is a bilateral agreement consisting of the US, Canada, and Mexico, and the other is a multilateral agreement with Central American republics called CAFTA-DR. The US is also negotiating a regional FTA called the Trans-Pacific Partnership (TPP) as well as another with the European Union called the Transatlantic Trade and Investment Partnership (TIP) (ITA, 2015). These agreements have both benefits and drawbacks that will be explored in the next two sections.
Positive Effects
The first benefit of FTAs to the US is that it makes it easier for US companies to export their products and services and also broadens the market for goods and services. US goods which are of a higher quality get a new market where they are also competitive due to the elimination of tariffs. The benefit of increased openness has been seen in the proliferation of exports to FTA member countries which stood at 47% of all US exports in 2015. After the formation of CAFTA-DR, for example, exports to the six nations saw an 86 percent increase in a 10-year period, with the region now being the 13th largest U.S. export market (DoS, 2015). Exports to other nations such as Bahrain, Morocco, and Jordan have also grown by more than 100 percent and in all those nations, the US has experienced an increase in its trade surplus. As such, it can be said that FTAs have increased the market for US products and services leading to more business for US companies.
The second benefit of FTAs is the lowering of import prices which is beneficial to families and manufacturers. Competition from cheap imports has led to a lowering of total commodity prices which increases the incomes of US families by about $10,000 annually. Consumers also get access to a wide variety of goods that are of a higher quality. Additionally, 60% of all US imports are intermediate goods and raw materials, thus lowering the price of imports reduces costs for manufacturers while also allowing US companies to use their competitive advantage in manufacturing products. As a result of the elimination of import tariffs, US manufacturers have now engaged in value addition with companies in other nations. Under NAFTA, for example, a huge chunk of imports from Canada and Mexico consists of value added goods from the US itself (Koopman, Powers, Wang, & Wei, 2015). It is estimated that with continued liberalization and formation of FTAs, imports will expand by $ 11.5 billion.
It has also been found that FTAs have led to improved productivity as companies become more efficient. With increased openness of markets, companies find that they have a large untapped market for their products. These companies are also forced to innovate as competition increases leading to more efficiency (Grimson, 2014). The biggest contributor to efficiency and production, however, has been the result of companies being able to use their competitive advantages. Many companies are now able to focus on producing one item in which they have a comparable advantage in, leading to reduced costs. The service industry, especially, has benefited from this openness in trade as US service firms that enjoy a good reputation internationally have seen improved overseas business. Agriculture has also benefited as cheap imports of machinery coupled with competitive prices abroad have increased technological advancement and production of farm products. As FTAs grow, therefore, there will be more specialization leading to lower per unit costs and improved productivity.
Negative Effects
Despite these positive effects, FTAs can also be bad news for a nation and in America, they have had impacts that have caused many consumer groups opposing these FTAs. The first criticism of FTAs in America is that they lead to a loss of jobs. According to a poll by Politico Pro-Harvard, 65% of Americans believe that FTAs have led to a loss of jobs while only 13% believed that FTAs have resulted in more job opportunities (Manzullo, 2016). America has higher wages than most nations it has FTAs with thus many US companies move to these new locations. Outsourcing was particularly rampant after the signing of NAFTA with the US losing over 682,900 jobs to Mexico. Some sectors such as manufacturing that have high operating costs were the most affected as capital was taken to cheaper markets. There were also wage cuts in other sectors as workers faced with the choice of either taking lower wages or having production moved to another nation chose to keep their jobs but earn lower wages. FTAs also encourage illegal immigration as was exhibited in the US where the number of illegal immigrants from Mexico doubled between 1990 and 2000. These illegal immigrants produce cheap labor but are a threat to the employment of US citizens.
The FTAs are also a threat to local businesses who are faced with increased competition from cheap imports. The influx of cheap goods from low-cost nations has been a threat to local US companies who have had to reduce prices thus witnessing reduced profitability. Additionally, some of these companies have had to outsource their labor while others have been forced to purchase expensive machinery that will improve their efficiency hence reducing costs. The apparel industry, for example, was highly affected as on average apparel production is more expensive. As the local market for clothes shrunk as a result of intensified competition, these companies were forced to enter new markets and some to invest in new business processes.
Lastly, the FTAs have increased America’s vulnerabilities to external shocks. As the United States continues relying heavily on external markets, it becomes increasingly vulnerable to external shocks affecting FTA partners with recessions in one nation having a significant effect on the US. The US is also entirely dependent on some nations for the supply of some essential commodities it does not produce thus weakening its bargaining positioning. Additionally, America imports more than it exports to some nations it has FTAs with meaning that in such cases trade benefits those nations more than America (Morici, 2015). Opening up of the market to global businesses has also led to the increased threat of terrorism and stealing of intellectual property rights leading many to oppose free trade agreements in favor of fair trade.
Effect on International Relationships
In effect, FTAs are meant to reduce trade barriers between two nations or multiple trading nations, but besides this economic relationship they also have an influence on other links between nations. Firstly, as markets are opened and people interact more, there is an exchange of culture that leads to cultural adaptations between the trading nations. Consumers in one nation are exposed to the cultures and products of another leading to a merger of cultures. This cultural interchange may be positive or negative depending on the cultural progress of the two nations, and is of great significance to the way of life of citizens in the two nations.
FTA partners also benefit from increased cooperation in other spheres such as defense, healthcare, and education. It is not unusual for FTA members to trade in goods such as security equipment, healthcare material and information, and educational resources. While negotiating the FTAs, these countries may thus decide to make additional negotiations that foster cooperation against external threats. These nations are also united against common enemies as exhibited by the ability of partner nations to issue joint embargos against other members outside the bloc. Such nations thus share information on issues like external threats and ways of improving integration between the two nations. Additionally, FTA member states are usually at hand to help partner states in resolving disputes such as those arising from trade as shocks in one member nation have an effect on other partner states. There are also numerous legal requirements that must be satisfied while signing FTAs and these require the aligning of laws between two member states, with the result being increased legal cooperation.
FTAs have also been used as a means of enhancing foreign policy especially by larger states rather than for bilateral economic benefit. Usually, these large nations have a vested interest in the smaller nation and will disguise its intentions by engaging in FTAs. Throughout history, the spread of foreign policy themes such as communism, capitalism, fascism, and realism has come in the wake of economic integration. While in some cases this integration has been lauded, it has also been the cause of tensions that have required international intervention. Other issues to do with unfavorable labor conditions and flouting of environmental laws have also created tensions between FTA partners. FTAs can thus bring cooperation and integration between partnering states or lead to conflict and strife.
Relations between the USA and its FTA partners
Relationships between the US and FTA partner nations are based on numerous factors other than trade such as the proximity of the nation to the US, history between the two nations, as well as the nation’s importance to US interests. While the US tries to maintain good relationships with all nations, it has especially stronger relationships with its FTA member states due to an understanding on numerous economic and political fronts. Before an FTA is signed, the partnering nations enter into negotiations that last for years on how they will cooperate on numerous fronts (Wacziarg & Welch, 2003). These negotiations have ended in success and the US has close economic ties with the nations it has FTAs with. Cooperation between the US and its South American allies is particularly close due to close proximity. The US, however, has a vested political interest in these nations that have led to protests in these nations by some citizens who claim that the US is exploiting them. The trade agreements in place are also seen to benefit the US more leading to disputes. Close proximity to these South American states, however, means that despite these ideological conflicts cooperation is high.
Cooperation is not only economic, as the US cooperates with nations such as Canada and Israel on defense. These nations are not only allies on an international front but also share intelligence and are active partners in the war against terror. They also purchase military equipment from each other and have substantial investments in each other’s economies. These nations also pursue similar foreign, social, and immigration policies making the levels of cooperation high. Besides the FTA nations, the US also has close economic ties with the other members of the WTO due to its large economy and position in the international arena. The US has consulates in most of these nations and it is involved in making sure that the rule of law is upheld in these nations. US foreign policy is always geared at maintaining a close watch of its neighbors thus the US is heavily involved with these nations especially in WTO negotiations.
Despite having good relations with its FTA partners, the US is also involved in numerous trade disputes where it has acted as either the complainant, the defendant, or as a third party. In total, there are 111 cases with the WTO in which the US is a complainant, 127 in which it is the respondent, and 133 in which it is a third party. These disputes relate to trade especially the failure to implement certain measures included in the FTA treaties such as dumping and environmental policies. Besides the trade disputes, The US also differs with these nations on numerous other issues, most of which have resulted in armed conflict. Currently, the US is involved in wars in areas such as Libya, Somalia, and the Syrian region despite some of these nations being members of the WTO. The US is also involved in ideological conflicts with other chief WTO members such as the EU due to international issues such as spying and the Iran nuclear deal. It can thus be said that the US has close relationships with other FTA and WTO members but these relationships are sometimes strained leading to conflict.
In conclusion, free trade agreements are treaties between two nations or a group of nations where trade barriers such as quotas and tariffs are eliminated between the trading partners who reserve the right to dictate the rates they will charge other nations outside the bloc. The United States has 14 of these FTAs with 20 nations. These FTAs benefit the US by increasing the market for US exports, cheap imports for households and businesses, increased specialization and efficiency, as well as access to quality and diverse product offerings. These FTAs have, however, been cited as leading to loss of jobs in the US, a reduction in wages, and increased competition for fledgling business in addition to non-economic consequences such as illegal immigration and increased security threats. Overall, the US has maintained good relations with the nations it has FTAs with but conflicts still arise. The creation of FTAs can thus be said to have been beneficial to the US and the government should continue negotiating more while addressing any concerns that may arise.
References
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Bhagwati, J. (2002). Going Alone: The Case for Relaxed Reciprocity in Freeing Trade. Cambridge: MIT Press.
DoS. (2015). Benefits of U.S. Trade Agreements. Retrieved from state.gov: http://www.state.gov/e/eb/tpp/bta/fta/c26474.htm
Grimson, M. (2014, April 8). Free trade agreements: What is an FTA and what are the benefits? Retrieved from abc.net.au: http://www.abc.net.au/news/2014-04-07/free-trade-agreement-explained-bilateral-fta-tpp/5371314
Irwin, D. A. (2005). Free Trade Under Fire. Princeton: Princeton University Press.
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Manzullo, D. (2016, November 6). Why American Voters Have Difficulty with Free Trade Agreements. Retrieved from nationalinterest.org: http://nationalinterest.org/feature/why-american-voters-have-difficulty-free-trade-agreements-18305
Morici, P. (2015, February 17). Why Free Trade Agreements Actually Put U.S. at a Disadvantage. Retrieved from thestreet.com: https://www.thestreet.com/story/13047543/1/why-free-trade-agreements-actually-put-us-at-a-disadvantage.html
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Wacziarg, R. & Welch, K. H. (2003). Trade Liberalization and Growth: New Evidence. Cambridge: National Bureau of Economic Research.