The American Enterprise Institute Presents ... Free Trade Foreign Policy; How Trade Myths Impede a Key US Policy Tool

Article excerpt

For at least tour years, bilateral free trade agreements (FTAs) have been a battleground over which US trade skeptics and trade proponents have skirmished. While three such agreements--with South Korea, Colombia, and Panama--were condemned to a policy purgatory, the accord with Peru came into force in early 2009. That deal thus offers the best and most recent opportunity to separate the growing myths about FTAs from the more realistic benefits that such deals can offer to the United States. The Peru deal did not cast low-wage US workers into the streets, nor did it play any role in undermining the shaky global trading system. Instead, it helped solidify economic reforms that Peru had undertaken already, paved the way for Peru's formal integration into the world economy, drew investment into that country at a difficult time, and promised to cushion the blow when a one-time US antagonist ascended to the country's presidency. While Peru is not necessarily representative of all US FTA partners, these benefits are fairly common among developing countries, the most controversial partners. By projecting its economic insecurities onto these FTAs, the US polity has needlessly denied the country a vital foreign policy tool.

Part of the problem in discussing the impact of trade agreements on the United States is that discourse is dominated by an antiquated view of what a trade agreement does. In this conception, we imagine a pair of countries who hitherto have used tariffs and quotas to shield domestic industries from imports. The trade agreement promises to tear down these barriers and let low-cost goods flow-back and forth. As it has for centuries, this prospect of liberalization stokes fears: how can a high-wage economy compete with a low-wage one? Will this spur a race-to-the bottom for labor or environmental standards? Will we be rewarding the partner country for practices we find objectionable?

These are all fine questions, but the premise is badly flawed. The US economy is already broadly open to goods and services from other countries. That has been one of the secrets of our success. Furthermore, the US economy has been particularly open to exports from certain developing countries, whose prosperity we particularly care about. For example, the US government was eager to provide legitimate and viable market access to Peru as an alternative to the lucrative, but highly problematic, marker for narcotics. Thus, the United States adopted a set of trade preferences for Andean nations that reduced trade barriers below already-low levels. The upshot was that in 2006, the year the US-Peru Trade Promotion Agreement was signed, 98 percent of Peruvian exports to the United States entered without any tariff costs. This was years before any provisions of the new agreement came into effect, .so the trade agreement hardly constituted a closed door reluctantly swinging open.

Peru was not unique in this regard. Colombia has had access through the same programs. Panama and the countries in the contentious Central American Free Trade Agreement enjoyed similar access through the Caribbean Basin Initiative. This pervasive gap between perceived and actual liberalization of the US market through these FTAs resulted in a jarring disconnect between alarmist rhetoric and the more sober analysis of the non-partisan US International Trade Commission (ITC). The TIC is required to present Congress with an analysis of proposed trade agreements, including an estimate of their likely effects on the US economy. For the agreement with Peru, the ITC estimated that two US sectors would bear the brunt of the liberalization impact. Metals, not elsewhere classified, would see an employment drop of 0.16 percent; paddy (unprocessed) rice would see a fall of 0.12 percent. These were the only two sectors where employment drops were predicted to exceed 0.10 percent.

On balance, the ITC predicted that the Peru agreement would have a small, positive effect on the US economy. …


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