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Consequences of U.S. Trade Inaction

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The delay in passing the Colombia and Panama free trade agreements undermines US exports and jobs.


BY JOHN MURPHY

When President Barack Obama delivered his State of the Union address in January, the
U.S. business community welcomed his call for a national goal to double U.S. exports within five years. With nearly 10 percent of the U.S. workforce unemployed, trade expansion represents one the best avenues to stimulate growth and create badly needed jobs.


The importance of trade to
America’s economic recovery is enhanced by the dearth of alternatives. The United States cannot rely on domestic consumption to generate more demand because the U.S. consumer is busy deleveraging and trying to save more. Similarly, the federal government faces an unsustainable budget deficit equivalent to roughly 10 percent of U.S. GDP this year.

Moreover, overseas markets represent 73 percent of the world’s purchasing power, 87 percent of its economic growth, and 95 percent of its consumers. If the United States fails to embrace a forward-leaning trade policy, U.S. workers and businesses will miss out on the huge opportunities  afforded by these booming foreign markets. The U.S. standard of living and its standing in the world will suffer.

BARRIERS TO TRADE EXPANSION

Standing in the way of President Obama’s goal of doubling U.S. exports, however, is a complex array of foreign barriers to U.S. exports. These barriers pose a major competitive challenge to
U.S. industry and agriculture and the millions of U.S. workers whose jobs depend on exports.

Casting light on this challenge, the World Economic Forum issues an annual Global Enabling Trade report, which ranks countries according to their competitiveness in the trade arena. One of the report’s several rankings gauges the tariffs that a country’s exporters face. Leading the pack as the country whose exporters face the lowest tariffs globally is Chile, with its massive network of free trade agreements (FTAs) with more than 50 countries around the globe.

While the report found the United States did well in a number of areas, the United States ranked a disastrous 114th out of 121 economies in terms of “tariffs faced” by its exports overseas. In other words, U.S. exporters face higher tariffs abroad than nearly all their trade competitors. It is also worth noting that tariffs are just part of the problem, as they are often found alongside a wide variety of non-tariff barriers that shut U.S. goods and services out of foreign markets.

OPENING MARKETS ABROAD


Historically, the only way the
U.S. government has ever enticed a foreign government to open its market to U.S. exports is by negotiating agreements to eliminate trade barriers on a reciprocal basis. This is done in bilateral FTAs, such as those pending with Colombia, Panama and South Korea, or in regional agreements such as the Trans-Pacific Partnership, which is under negotiation. In addition, reciprocal market openings can be accomplished multilaterally, as in the Doha Round, the global trade agreement currently being negotiated under the World Trade Organization (WTO) by the United States and 152 other countries.

If the United States is to double exports within five years, the proven export-boosting record of these reciprocal trade agreements will be indispensable. In 2003-2008, for example, U.S. exports nearly doubled, rising 79 percent, their fastest growth in nearly two decades. It is no coincidence that this period also saw the United States implement FTAs with 10 countries and saw earlier agreements, such as the North American Free Trade Agreement (NAFTA), attain their full implementation with the elimination of all tariffs.

To gauge how these FTAs have benefitted U.S. workers and companies, the U.S. Chamber in May released a study entitled Opening Markets, Creating Jobs: Estimated U.S. Employment Effects of Trade with FTA Partners. The study examined U.S. FTAs implemented over the past 25 years with a total of 14 countries. It excluded three other countries where FTAs have only recently been implemented. The study employed a widely used general equilibrium economic model, which is also used by the U.S. International Trade Commission, the WTO and the World Bank.

The results of this comprehensive study are impressive: 17.7 million U.S. jobs depend on trade with these 14 countries. Of this total, 5.4 million U.S. jobs are supported by the increase in trade generated by the FTAs.

No other budget-neutral initiative undertaken by the U.S. government has generated jobs on a scale comparable to these FTAs, with the exception of the multilateral trade liberalization begun in 1947. The study also shows that U.S. merchandise exports to its FTA partners grew nearly three times as rapidly as did U.S. exports to the rest of the world from 1998 to 2008.

The trade balance is a poor measure of the success of these agreements, but deficits are often cited by trade skeptics as a reason why the United States should not negotiate free trade agreements. However, taken as a group, the United States is now running a trade surplus in manufactured goods with its 17 FTA partner countries, according to the U.S. Department of Commerce (on top of the U.S. global trade surpluses in services and agricultural products).

AMERICA STANDS STILL


The success of reciprocal trade agreements has led to their proliferation. Countries are rushing to negotiate new trade accords — but the
United States is being locked out and left behind. According to the WTO, there are 262 free trade agreements in force around the globe today, but the United States has FTAs with just 17 countries.5 There are more than 100 bilateral and regional trade agreements currently under negotiation around the world. Unfortunately, the United States is participating in just one of these (the Trans- Pacific Partnership).

The United States is standing on the sidelines while other nations clinch new trade deals. This is painfully evident in the case of Colombia, Panama and South Korea. The pending U.S. agreements with those countries would create good U.S. jobs, bolster important allies and confirm that the United States is unwilling to cede its global leadership role in trade.

But while these U.S. agreements languish, other nations are moving forward. On May 19, the European Union signed FTAs with Colombia (along with Peru) and Panama (also including its five Central American neighbors). The European Union (EU) concluded negotiations for an FTA with South Korea in November 2009. The Canada-Panama FTA was signed on May 14, and Canada’s House of Commons gave final approval to its FTA with Colombia on June 14. This last agreement could enter into force within weeks, and the others could do so within the next 12 months; many more are in various stages of development.

If
Washington delays further, U.S. exporters will be put at a marked competitive disadvantage in Colombia, Panama and South Korea. Canadian wheat farmers will be able to undercut the prices offered by their U.S. competitors in the Colombian and Panamanian markets, and European manufacturers will easily undercut their U.S. competitors in the South Korean market.

The cost of these delays will be high. In September 2009, the U.S. Chamber released a study that found that the United States could suffer a net loss of more than 380,000 jobs and $40 billion in lost export sales if it fails to implement its pending trade agreements with Colombia and South Korea while the European Union and Canada move ahead with their own agreements with the two countries.

Unfortunately, this scenario is already unfolding. Following implementation of a new trade accord between Colombia and Mercosur, the U.S. share of Colombia’s market for soybean meal, yellow corn and wheat dropped by 67 percent, 53 percent, and 37 percent respectively in 2008-2009.

THE PATH FORWARD

 

For the U.S. business community, the agenda is clear. The United States cannot afford to sit on the sidelines while others design a new architecture for the world economy and world trade. The path forward should include these steps:

The United States must begin with a laser-like focus on opening foreign markets. This  means approving the pending trade accords and negotiating more of them, including the Trans Pacific Partnership and an ambitious Doha Round agreement. To this end, Congress should renew the traditional trade negotiating authority that every president since Franklin D. Roosevelt has enjoyed. The United States must also revive its bilateral investment treaty (BIT) program to protect U.S. companies from discrimination when they invest abroad. Moreover, the United States needs to prioritize enforcement of its existing trade and investment agreements.

The United States must resist economic isolationism at home. Measures such as “Buy American” rules delay infrastructure projects, add to costs and elicit retaliation from foreign trading partners. U.S. failure to comply with its own obligations under trade agreements endangers U.S. jobs and restricts access to lucrative export markets, as witnessed in the case of the U.S.-Mexico cross-border trucking dispute.

The United States needs to do a better job promoting exports. More than 280,000 U.S. small- and medium-sized companies export. They account for nearly a third of U.S. merchandise exports,8 but that is just one of every 100 companies. In a good first step, the National Export Initiative unveiled by Commerce Secretary Gary Locke includes commitments to step up the efforts of the U.S. Commercial Service, the U.S. Export-Import Bank and other agencies to help small businesses tap foreign markets.

 

Finally, the United States must get its own house in order to compete globally. Fiscal discipline is critical: runaway entitlement spending may be the biggest challenge — domestic or international — that the United States faces. Poor K-12 education systems, inadequate infrastructure, the threat to end deferral of taxes on foreign-earned income and high U.S. corporate tax rates all erode the global competitiveness of U.S. companies.


Conclusion

Nero fiddled while Rome burned. Today, Washington appears content to relive the trade debates of past decades while U.S. jobs — good jobs that are in scarce supply — go up in flames.

Organized labor is playing the key blocking role, even though
U.S. workers have the most to lose if the United States is shut out of new trade arrangements. In the realm of rhetoric, the White House has indicated repeatedly that it hopes to secure congressional approval of the pending trade agreements with Colombia, Panama and South Korea; but in practice, the inaction advised by organized labor has carried the day.


If we stand still on trade, we fall behind. At stake are hundreds of thousands of existing jobs and, according to President Obama, millions more that could be created if the
United States doubles exports. Also at stake is the standing of the United States as one of the world’s leading powers, its ability to exert positive influence around the world, and its best hopes for escaping high unemployment, massive deficits and exploding entitlements.


The
United States has been sitting on the sidelines for too long. It is time to get back into the game.

 

 

John Murphy is vice president of international affairs at the U.S. Chamber of Commerce. He is responsible for representing the Chamber before the administration, Congress, and foreign officials as he directs advocacy efforts to open international markets for U.S. exports and investment. His work relates to such business priorities as protection of intellectual property, global regulatory cooperation, trade facilitation and the World Trade Organization’s Doha Development Agenda negotiations.

This column is based on the Perspectives on the Americas series from the University of Miami’s Center for Hemispheric Policy. Republished with permission of the center.

 

 

 

 

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