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The Rise in Bilateral Free Trade Agreements

Author: Robert McMahon, Editor
June 13, 2006

Introduction

In the absence of a breakthrough in multilateral talks, the Bush administration has pressed ahead with smaller bilateral free trade agreements to secure preferential deals as well as cement ties with strategically important countries in the Middle East, the Pacific Rim, and Latin America. The administration, taking advantage of special authority that allows it to negotiate trade deals without interference from Congress, has secured congressional approval for nearly a dozen such deals, with several others pending. Advocates say the agreements, known as FTAs, help developing state partners lock in reforms and improve their ability to bargain in regional and global talks. They also cite improved trade flows. But critics say such deals undermine attempts to universally reduce trade barriers, and distract the United States and other country negotiators from more important world trade talks, which have greater potential to boost economic growth.

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What is a Free Trade Agreement?

Free trade agreements, many of which are bilateral, are arrangements in which countries give each other preferential treatment in trade, such as eliminating tariffs and other barriers on goods. Each country continues its trade policies, such as tariffs with countries outside the FTA. For example, in the U.S.-Australian FTA, which took effect in 2005, Australia lowered tariffs on most U.S. agricultural and manufactured goods, and the United States lowered tariffs on Australian beef, dairy and other items. Some U.S. regional free trade agreements, such as the Central America Free Trade Agreement, are essentially a series of bilateral deals between the United States and member countries.

How many FTAs has the United States signed?

Since completing its first FTA with Israel in 1985, the United States has completed ten such agreements, with Canada, the North America Free Trade Agreement (NAFTA), Jordan, Chile, Singapore, Australia, Morocco, El Salvador, Nicaragua, and Honduras. Four others approved by Congress have yet to enter force—with Bahrain, Guatemala, the Dominican Republic, and Costa Rica. Three additional FTAs are under congressional consideration—Oman, Peru and Colombia. The United States has held talks with eleven other countries for free trade agreements either bilaterally, as part of regional deals, or as members of a customs union. The United States also wants to negotiate a thirty-four-nation Free Trade Agreement of the Americas (FTAA), a process currently stalled. The Bush administration has expressed interest in bilateral trade agreements with all ten members of the Association of Southeast Asian Nations (ASEAN), including Vietnam, with which it recently signed a pact that will ease its entry into the WTO.

Why is the United States increasing the number of these deals?

U.S. trade officials say they want to pursue trade liberalization on multilateral, regional, and bilateral fronts. Experts agree the biggest benefits to the United States come from a more universal deal such as the World Trade Organization's Doha round talks, currently stalled over disagreements on agriculture concessions. But some point to the following reasons for securing smaller trade deals:

Economic: In the absence of a broader agreement, some experts say smaller FTAs accomplish the goal of liberalization and the expansion of markets for U.S. goods. Europe has embraced such deals since the 1950s but the United States only signed its first deal in 1985. There are more than 200 such deals worldwide.

On the domestic front, an increasing number of free trade agreements lower the price for consumer goods in the United States as well as the costs U.S. businesses pay for imported materials. Experts say more competition in local markets, while unsettling to some businesses, also spurs innovation and increases labor productivity. Bilateral deals also open up foreign markets to U.S. goods, increasing employment in those export sectors. Such deals usually provide a better climate for U.S. investors.

Political: Jeffrey Schott, senior fellow on international trade policy at the Institute for International Economics says free trade agreements play an important role in spurring improvements in developing and emerging market countries. "These deals are essentially about provoking domestic reform in the partner countries which will make it easier for them to pursue further liberalization at the multilateral level if they introduce more market-oriented reforms in their domestic policy," says Schott. Completed deals with Morocco, Jordan, and Bahrain, as well as a pending deal with Oman, are seen by some experts as strengthening the U.S. strategic position in the Middle East and helping to economically bolster partners. Douglas Holtz-Eakin, who directs the Maurice R. Greenberg Center for Geoeconomic Studies at CFR, says the same idea applies to U.S. moves to expand trade ties with some of China's neighbors. "If you surround [U.S. competitors] with FTAs, the U.S. gets broad strategic gains," he says.

Have FTAs benefited the United States?

Experts say because the majority of the bilateral deals are with small states, the gains are modest for the huge U.S. economy. A report from the Heritage Foundation says four months after the U.S.-Australia FTA went into effect, the U.S. trade surplus with Australia had risen by 32 percent to more than $2 billion. The same report cited a $4 billion rise in U.S. exports to Chile and Singapore after FTAs with these countries were implemented. A recent report from the Congressional Research Service cites a model that projects a free trade agreement with South Korea, currently under discussion, would result in trade benefits of $30 billion for the U.S. economy.

The economies of the United States, Mexico, and Canada grew at significant rates in the first 10 years of NAFTA. But many economists say it is difficult to specify how the deal has improved growth and efficiency in the three countries. The nonpartisan Congressional Budget Office, in a 2003 report, said the expanded trade resulting from NAFTA raised U.S. gross domestic product "very slightly."

Have the U.S. deals benefited other states?

Schott says in the agreements that have been negotiated so far "the general appraisal is that there is net trade creation." But economists sometimes use different criteria to measure the results from expanded bilateral trade. The impact of NAFTA on Mexico has provided a great deal of grist for debate on free trade agreements. A CFR task force last year said in its first decade NAFTA had "transformed Mexico, but it has also deepened and made much more visible the divisions that exist in the country." The task force said northern Mexico, with its population's higher level of education and better connections to U.S. and Canadian markets, grew much faster than the center and the south of Mexico. Schott faults Mexican officials for failing to carry out policy reforms that could generate infrastructure investments and fund programs to deal with the income disparities between north and south.

In general, some economists say there is large potential for such deals to help the smaller U.S. partners because of the access they provide to the enormous U.S. market. The Heritage Foundation/Wall Street Journal 2006 Index of Economic Freedom says countries with freer trade policies have higher per-capita growth than those that keep barriers to trade.

Are there negative repercussions to such deals?

Critics like Jagdish Bhagwati, CFR's senior fellow in international economics, say the United States is using such deals to bully smaller states, which want access to the large American market. They say Washington is able to insist on tough labor standards and intellectual property rules far in excess of requirements of the World Trade Organization. Arvind Panagariya, an economics professor at Columbia University, says some deals are clearly detrimental to the smaller partners. In the case of the recent FTA the United States signed with Chile: "We forbid them from using capital controls [restrictions on the trade of assets across borders]," Panagariya said. "If ever there's a crisis you probably need a little bit of flexibility in using capital controls." Critics also say the energy, time and resources the United States and other trading powers are devoting to FTAs means less time spent on the Doha round, which was intended to provide a huge boost to the developing world.

Latin America, in particular, has seen a backlash against economic reforms pressed by the West, giving rise to a series of populist, leftist leaders and politicians in recent years. Their ascension is in part linked to resentment about the impact of privatization and other market reforms pushed by Washington, and rising inequality and poverty. But CFR's Holtz-Eakin says it is wrong for the region to target free trade. "The failure is not in the ability to conduct international transactions effectively," he says. "The failure is in competent governance."

What impact have FTAs had on the WTO’s Doha trade round?

A core principle of the World Trade Organization is the most-favored nation clause, meaning every member faces the lowest tariffs any other member has. Bhagwati and others say the proliferation of FTAs destroys this principle. "The [world trading] system is already fragmented," says Columbia's Panagariya. But Schott says, on balance, the FTAs have had a positive effect on the Doha round "both in terms of the impact on domestic economic policy in the partner countries and in sort of the political relationships that have been built that make it easier to engage in the type of coalitional politics that make it necessary to build consensus for agreements in the WTO."

The Doha round is widely seen as failing if a deal is not made by the time Bush's fast-track trade promotion authority expires in the middle of next year, at which time the administration will also lose its ability to negotiate bilateral deals. Bhagwati and others say for this reason, the administration may seek an extension of trade promotion authority that could throw a lifeline to Doha. "If we don't renew the fast-track we will be the loser in the race for bilaterals which is going on right now," says Bhagwati.

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