Why the U.S. should promote and join free trade agreements

June 08, 1998|By Juliet Berger

THE MEETING last month of heads of state at the second Summit of the Americas in Santiago, Chile, was aimed at establishing a 34-nation Free Trade Area of the Americas by the year 2005. Regional and multilateral trade arrangements benefit participating nations whether they are advanced or newly industrialized. The United States should heed the arguments in favor of regulated free trade.

In 1994, more than 60 percent of world trade took place within free trade arrangements, indicating the effectiveness of such arrangements in encouraging economic activity. The United States must promote and join these arrangements or risk being left behind. Other countries are not waiting for U.S. leadership. Chile has made bilateral accords with Canada and Mexico, the United States' partners in NAFTA. Mercosur, a customs union of Brazil, Argentina, Uruguay and Paraguay, has entered into agreements with the European Union.

Free trade, generally speaking, involves lowering tariffs, quotas, industry subsidies and other barriers to trade.

Free Trade Areas (FTAs) such as NAFTA and the proposed Free Trade Area of the Americas (FTAA) are distinguished from customs unions such as the EU and Mercosur, in which members share a common external trade policy, including trade barriers.

Continued progress toward free trade will protect against recidivist protectionism and the unlikely but possible scenario of a world divided into exclusionary, hostile trading blocs.

Little to lose

The United States would lose little from increased openness, since its markets were fairly accessible even before the advent of NAFTA in 1993. (Exceptions are the textile and agricultural sectors, whose protections will be phased out gradually under NAFTA provisions.) With NAFTA, the United States lost $600 million in tariff revenue but stands to gain far more from new business and increased income resulting from expanded trade. For this country, the primary benefit of the FTAA is increased access for our exports in some of the world's fastest-developing markets.

The Clinton administration's emphasis on "big emerging markets" is not surprising, given the increasing magnitude of trade as a part of gross domestic product (up from 11 percent in 1970 to 23 percent in 1995). Exports were responsible for one-third of all economic growth in the United States in the past decade.

All Western hemisphere trade groupings -- Mercosur, the Andean Group, the Caribbean Community (CARICOM) and the Central American Common Market (CACM) -- do far more trade with the United States, in dollar terms, than in intragroup trade.

But evidence indicates the intragroup trade is growing at a faster rate than trade with the United States. After Mercosur nations began reducing their tariffs in 1991, intraregional trade grew an average of 27 percent per year through 1995; at the same time, trade with exterior nations grew at about 7.5 percent annually.

Overall trade in Latin America doubled between 1990 and 1996 to $493 billion, mostly within regional trade arrangements. The size of the Latin American markets (of which Brazil is by far the largest, with an economy larger than Russia's), combined with their successful currency stabilization policies, represent great potential demand for U.S. goods and services.

Increases in net exports would greatly help the U.S. economy. Export jobs pay roughly 15 percent more than the average manufacturing wage, and worker productivity at these firms is 20 to 40 percent higher.

The importance of exports

Increased U.S. exports resulting from FTAs could help reduce or eliminate the United States' current account deficit and help keep the budget balanced. In addition, trade dollars sent to Latin America will bounce and multiply throughout those economies, helping raise the standard of living, as trade usually does. Eventually, some of these monies will return to the United States as payment for more American exports.

Newly industrialized nations, though they might initially protect fledgling industries with subsidies and prohibitions on imports, eventually benefit from opening their markets, increasing their economies of scale in production and receiving capital inflows for investment. For the nations at the Santiago Summit, the FTAA represents assured and continuing access to the biggest consumer market in the world -- the United States.

For Mexico, there was the added benefit of encouraged confidence from investors worldwide. Membership in NAFTA has in no way limited Mexico to receiving investment only from within the trading group, as evidenced by a recent Wall Street Journal article profiling the successful Mexican operations of the French electronic firm, Thomson SA. This sort of investment creates good jobs and brings in advanced technologies.

FTAs reassure prospective investors of the future integrity of their investments. After all, many of the economies of Latin America were until recently governed by authoritarian regimes.

If they are structured carefully, FTAs can also encourage sustainable, humane development and stem corruption.

Despite the Clinton administration's current lack of fast-track negotiating authority, the United States should continue to participate actively in global negotiations on free trade and be a full party to the development of the Free Trade Area of the Americas. Otherwise, we risk missing out on a good thing.

Juliet Berger is a free-lance writer based in Boston.

Pub Date: 6/08/98

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