One, Two, Three Free Trade Agreements: Finally, a New Era for Global Trade?Published: January 27, 2012 in Knowledge@Wharton
Nearly five years after the Bush administration first negotiated free trade agreements (FTAs) with South Korea, Colombia and Panama, revised versions of those pacts were finally approved by the U.S. Congress last fall and will be implemented during 2012.
Although global companies reacted with an anti-climactic sense of relief, trade analysts welcomed the new opportunities that the pacts will open for U.S. exporters in 2012. Like other U.S. free trade agreements, the new pacts won't just eliminate tariffs that raise the prices on many U.S. exports to those countries; they will also gradually eliminate non-tariff barriers that make U.S. products harder, or more expensive, to export. Equally important, the pacts will expand trade opportunities for U.S. exporters by requiring stricter protection of their intellectual property in those foreign markets.
Like other trade pacts, the provisions will be a two-way street -- opening markets and lowering costs for exports from those countries to the U.S.
Some optimists in the U.S. trade community argue that 2011 could one day be viewed as a turnaround year for U.S. trade policy. Although it took several years for the Obama team to push through the Bush administration's three orphan FTAs, Stephen Lande -- president of Manchester Trade, a Washington, D.C.-based consultancy -- says that Obama "deserves credit" for securing Congressional approval of the pacts by sending U.S. Trade Representative Ron Kirk to address the concerns of U.S. labor unions and automakers regarding these agreements. The FTAs "passed the Congress in the right way," says Lande. "The political system operated correctly, and you did not have the backlash that you had after NAFTA [the North American Free Trade Agreement]."
Although NAFTA wound up creating many export-related jobs in the U.S., a high number of other jobs were lost to Mexico. Critics in the U.S. became convinced that NAFTA also depressed U.S. wages intentionally so that U.S. manufacturers could compete against cheap Mexican labor. In addition, they say, NAFTA failed to deliver on the promise of some supporters that it would reduce the flow of illegal immigration and drugs from Mexico.
Yet Rob Mulligan, senior vice president at the U.S. Council for International Business, suggests that the U.S. political environment is more favorable for future trade agreements than any time during the past few years. The Central American Free Trade Agreement (CAFTA), which was negotiated between the U.S. as well as five Central American countries (Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua) and the Dominican Republic in 2006, passed by only two votes, notes Mulligan, "but these three trade agreements passed by a lot more." For example, the vote on the treaty with South Korea on October 12, 2011, was passed by a margin of 83 to 15 in the Senate and 278 to 151 in the House.
Obama and Kirk not only modified the agreements with South Korea and Colombia to address serious concerns raised by U.S. labor unions, but also made a strong case to the public that these pacts could help meet the official goal of this administration's National Export Initiative -- to double exports from 2010 to 2014 -- as well as create a significant number of new jobs.
The optimists argue that one of the most lasting legacies of the Obama administration could turn out to be a broader political consensus that free trade is part of the solution to slower economic growth, not part of the problem. If so, support for further free trade agreements could survive into the next U.S. administration regardless of whether Obama is re-elected. Although Obama was critical of NAFTA during his 2008 presidential campaign and was slow to push through the three new treaties, Wharton management professor Felipe Monteiro agrees that the President has become "very pragmatic" about trade issues. "I don't think there will be an ideological interpretation" when it comes to the issue of trade, he states, adding that he expects the U.S. to keep moving forward with its renewed trade agenda.
Exporting More, Investing More
However, not everyone is convinced that the opponents of free trade have been won over to the President's arguments. Brian A. Pomper, a Washington, D.C.-based partner at the international law firm of Akin Gump Strauss Hauer & Feld, points out that support for the three new pacts among Republicans was the key to their victory -- not support by Democrats. Despite all the arm-twisting by the President and Kirk, "the Democratic votes were pretty disappointing," says Pomper, a pro-trade Democrat.
Less than one-third of House Democrats -- a total of 59 -- voted in favor of the pact with Korea, versus 130 Democrats who voted against it, he notes. Despite all the changes to the Colombia pact, which made its labor rights provisions directly enforceable by law, only 31 House Democrats voted in favor of it, compared with 158 Democrats who voted against it. That vote shows that U.S. trade unions were "implacable" in their opposition to the Colombia pact, says Pomper.
The vote aside, Mulligan argues that the three new agreements were "a big accomplishment" that will have an important impact on U.S. exporters across several sectors. For example, thanks to the U.S. pact with South Korea, nearly 95% of bilateral trade in consumer and industrial products will become duty-free within five years, and most of the remaining tariffs will be eliminated within 10 years. The Koreans purchased $34 billion of U.S. goods in 2010, the sixth-highest total in the world. From January through September 2011, the U.S. exported $32.5 billion of goods to Korea, up from $28.8 billion a year earlier.
Colombia, which imported $11 billion of goods from the U.S., and Panama, which imported $6 billion, lag well behind Korea in size and economic importance, but they are also growing markets with a positive financial outlook. "Overall, U.S. companies will export more and invest more money in those markets" as a result of these agreements, says Mulligan.
In the best case scenario, many U.S. exporters could quickly make up some of the ground they lost last year when Canada and the European Union (EU) implemented their own FTAs with Korea and Colombia while the U.S. stood idly by. Since the EU enacted its FTA with South Korea in July 2011, EU exports to South Korea have been increasing much faster than U.S. exports.
A key reason, notes Doug Goudie, director of international trade policy at the National Association of Manufacturers, is that U.S. exporters were operating at a disadvantage against their European competitors: South Korean buyers of European goods were enjoying a 10% discount compared with buyers of U.S.-made goods, thanks to the absence of tariffs on imports from Europe. "If you can get a 10% discount, you take it," says Goudie. "We are sort of playing catch-up," adds Shaun Donnelly, vice president for investment and financial services at the United States Council for International Business. "I am afraid that there is a price to pay for this time out. We did lose the potential to get in [South Korea] earlier."
Likewise, some U.S. exporters to Colombia have fallen behind against competitors from Canada, which enacted its own free trade agreement with Colombia in August 2011.
Spanning the Pacific
Longer-term, the three new U.S. pacts may wind up being dwarfed by a much more ambitious new initiative known as the Trans-Pacific Partnership. According to U.S. officials, the goals of the TPP -- which will take years to negotiate and win approval by member-governments -- will involve "enhancing trade and investment" among its nine Pacific Rim members, including the U.S.; "promoting innovation, economic growth and development," and supporting job creation and retention.
Unveiled in November 2011, the TPP will bring together under one giant umbrella several countries with which the U.S. already has enacted bilateral free-trade agreements -- Australia, Chile, Peru and Singapore -- as well as such countries as Brunei, Malaysia, New Zealand and Vietnam, which have not previously negotiated FTAs with the U.S. Collectively, these countries purchased $84.2 billion in U.S. exports in 2010. The TPP will vastly transcend in scope not only previous U.S. bilateral pacts, but also previous regional agreements, such as NAFTA and CAFTA. For the moment, at least, the TPP will not include South Korea.
According to Mulligan, "The TPP picked up momentum partially because other countries realized that the U.S. is serious about trade" after Congress approved the three FTAs. Adds Wharton management professor Mauro Guillén, director of the Lauder Institute of Management and International Studies: "The U.S. prefers tonegotiateeither multilateral or bilateral agreements. It prefers not to negotiate [agreements between the U.S and] blocs of countries" such as Mercosur -- composed of Argentina, Brazil, Paraguay and Uruguay. Because the TPP will make it easier for exporters in Chile, Colombia and Peru to access markets in the fast-growing Asia/Pacific region, the TPP will be "a big deal" for exporters there, says Guillén, adding that"all the countries in the agreements have a lot to gain from trade with the U.S."
The Obama administration's commitment to the multilateral TPP reflects growing interest in the fast-growing Pacific region among U.S. policy makers at a time when the financial condition of the slow-growing European Union is at risk. Although two of the three most recent U.S. trade pacts involve Latin American countries -- Colombia and Panama -- the pact with South Korea is by far the largest in terms of economic impact, representing the largest bilateral U.S. trade agreement since NAFTA was enacted on January 1, 1994.
Again, the U.S. seems to be playing catch-up. According to a recent report by the Brookings Institution, the number of free trade agreements (FTAs) involving Asian countries increased from just three pacts in 2000 to 54 pacts in 2009, yet only two of those agreements involved the U.S. as a partner. Prior to Congressional approval of the U.S.-Korea pact last fall, the U.S. had not concluded any FTAs in Asia since its bilateral pact with Singapore in 2003.
Impeded by the lack of new trade pacts with Asia, Asian imports from the U.S. declined as a percentage of those countries' total imports over the past decade. One example: For Indonesia, U.S. imports fell from 10.1% of that country's total imports in 2000 to 7.3% in 2009; for the Philippines, from 19% to 12% over the same period, and for South Korea, from 18.2% to just 9%.
For U.S. exporters, the TPP is expected to open new market opportunities in some countries that previously stopped short of making the full range of commitments required for forging a free trade agreement with the U.S. For example, Malaysia still imposes fairly high tariffs on imports from the U.S. During the administration of President George W. Bush, the U.S. attempted to negotiate an FTA with Malaysia, but the negotiations faltered when the Malaysian government was "unwilling to make some commitments" regarding eliminating non-tariff barriers that would expand the access of U.S. companies, says Goudie. By signaling its willingness to join the TPP, Malaysia "now apparently is willing to make" those specific commitments, he adds.
How deep and wide will the TPP eventually become? The governments of Canada, Japan and Mexico have already announced that they, too, would like to participate at some point in the future. Whether there will be a formalsecond stage in the membership process that eases their entry into the TPP is still "unclear," notes Goudie.
Looming over the future of the TPP will be the role of China, which could eventually be asked to join, according to some analysts. Brazil could also wind up forging some sort of relationship with the TPP, despite the fact that it lacks access to the Pacific. Although China has recently become the largest market for Brazilian exports, Brazil also wants to strengthen its trade ties with Peru and Chile, both future members of the TPP, says Monteiro. By associating itself in some capacity with the TPP, Brazil could use its relationship with South America's Pacific nations to enhance Brazilian companies' access to such Asia-Pacific markets as Australia, Malaysia, New Zealand and Japan. "Brazil doesn't want to become totally dependent on China," he notes.
If an agreement as sweeping and multilateral as the TPP becomes a success, will that mean that the long moribund Word Trade Organization-sponsored Doha Round of multilateral negotiations will finally be declared officially "dead?" Not necessarily so, according to Frank Vargo, vice president for international economic affairs at the National Association of Manufacturers. "No one wants to declare the Doha Round dead," he adds, suggesting instead that the Round be called by its original name, the Doha Development Agenda. "The WTO should have its agendas as well," rather than viewing the Doha agenda as its only major initiative, Vargo says. "It is time that we admit that it is not a Round," something that he defined as a "huge caldron into which you throw all interests and negotiations, and where someone wins and someone loses."