US Trade Agreements - Historically Beneficial, But Still A Challenge

US Trade Agreements – Historically Beneficial, But Still A Challenge

February 10, 2014
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The current buzz in Washington on the issue of Free Trade Agreements has Harry Reid, the Democratic Senator from Nevada (who is also the Senate Majority Leader) pitted against President Obama, with the Senator against adding new FTAs without the Congress having the right to amend them before the vote.
The United States presently has free trade agreements in place with 20 countries. Israel was the very first agreement of this type put in place by the US in 1985, under the leadership of former President Reagan. The other 19 countries include (a) Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras and Nicaragua as part of the DR-CAFTA framework, (b) Canada and Mexico as part of NAFTA, as well as (c) Australia, Bahrain,Chile, Columbia, Jordan, Korea, Morocco, Oman, Panama, Peru and Singapore.

And why are these important? Some statistics of interest: since the agreement with Australia went into force in January 2005, there has been a 170% increase in the US trade surplus with Australia. Between 2005 and 2011, U.S. exports to Bahrain grew by 246% to $1.21 billion. Since the Dominican Republic implemented CAFTA-DR in March 2007, the US trade surplus with the Dominican Republic has increased 282%. And for Israel, of course, the US has grown to become the country’s largest export destination primarily because of the existence of the FTA.

So there is no question about the long term benefits of these agreements. As has been noted previously, US GDPhovers around $15 trillion so a 1% increase is equivalent to $150 billion or about 2,000 additional jobs, which, in these economic times, is nothing to sneeze at.

The present disagreement centers on “fast track” authority, the shorthand term for legislation that prevents overseas trade agreements from being amended during the congressional approval process.

The President believes that this so-called “fast track” authority is essential to getting these agreements ratified, such as the recently proposed deals with the EU and the Asia-Pacific region. The US’s negotiating partners would likely be hesitant to commit to final agreements that could be unpopular in the US, without guarantees that US lawmakers would not be allowed to modify it.

While Obama believes that these agreements would stimulate hiring at small businesses and increase exports, many of his fellow Democrats are bowing to the protectionist demands of labor leaders who believe that these agreements allow US jobs to run away to low income countries abroad. Other opponents of these agreements, including Detroit’s automakers, want stronger safeguards against currency manipulation and unequal tariffs by the US’ trading partners — especially Japan.

While opening trade routes can cause selective turmoil in some industries, experience demonstrates that the overall outcome would be a net gain in employment and economic output. Perhaps the most notable example is the North American Free Trade Agreement (NAFTA), which was signed by President Bill Clinton despite opposition from his own party. As a result of NAFTA, the total volume of trade among the three NAFTA partners (US, Canada, Mexico) expanded from $289.3 billion in 1993 to $623.1 billion ten years later, while each of their economies grew by over 30%.

Obama will have to follow Clinton’s example if he hopes to get these two trade deals done. To do so, he will need to build a coalition of Republican and Democratic lawmakers. Although labor will likely never sign on to the merits of free trade, the president can start his push by working on easing the concerns of automakers and others that the pacts will give some countries, particularly Japan, an unfair advantage. While there are no easy answers as to how he should do that, he certainly can point to foreign companies such as Toyota, who actually manufacture many of their automobiles in the US itself, creating jobs for auto workers there.

All in all, free trade agreements are a serious issue which speaks to the challenge of growing an economy. Considering the potential benefits involved, it would be a shame for fast track authority to be defeated simply because of partisan politics or local employment concerns.