07.02.08
How Does a Free Trade Agreement Work?
International Trade is again an issue in the Presidential campaign. John McCain was in Colombia this week and spoke out in favoring the Free Trade Agreement (FTA) with the country, calling Obama and the Democrats “protectionists”. The most famous FTA, the North American Free Trade Agreement (NAFTA) was a major issue in the 1992 campaign. H. Ross Perot pilloried NAFTA claiming there would be a “great sucking sound” as Mexico would siphon off jobs from the US to Mexico. That never occurred, and although there were never the major job gains that the George H.W. Bush promised, the US clearly has benefited from tremendous increase in bilateral trade.
How do FTAs work? The countries involved (this could be bilateral as in the case of Chile-US or multilateral as with Central America and the Dominican Republic –CAFTA-DR– with the US) negotiate on both tariff levels and codes of conduct. Most tariffs are reduced to zero, but inevitably some politically sensitive products are excluded (so most are “Almost Free Trade Areas”). On codes of conduct, the countries negotiate on issues like intellectual property, standards, financial services, etc. using the original NAFTA agreement and the WTO codes as a starting point. The resulting agreements have to be ratified by the respective legislative bodies. (In the US, under the negotiating authority, the House and Senate approve it on an up/down vote (no amendments allowed), as opposed to other international treaties which require a 2/3 vote of the Senate. Once the agreements are ratified the governments must pass implementing legislation to bring national law into conformity with the FTA. The FTAs also provide for consultations and dispute resolution mechanisms to ensure that both sides are living up the bargain.
For the US, the FTA is usually a great deal since the US has relatively low tariffs and already has strong laws that the codes cover. The pending agreement with Colombia is a case in point. Virtually all of Colombia’s exports enter the US duty free and Colombian companies already enjoy all of the protections in terms of intellectual property, investment guarantees etc. On the other hand, US exporters face considerable tariff and non-tariff barriers going into Colombia. Clearly the US has lots to gain from an agreement with our South American partner.
Why then is there such opposition from groups like unions and environmental groups? The unions may affected by job losses for union members who are protected from international competition. Frankly, with greater and greater trade, the marginal effect of an FTA with Colombia or South Korea on union jobs will be so small that it would be hard to detect by most statistical analyses. Nevertheless, manufacturing jobs are being outsourced (largely to countries with no FTAs, like China and India) and the unions are looking for scapegoats. On the environmental front, there is the concern that increased production will result in increased environmental damage. The FTA’s all contain environmental clauses, not as strong as some enviros would want, but considerably more that there are in the absence of FTAs (again China and India are prime examples.)
We are in an increasingly interconnected world and FTAs increase the interconnectedness. While there are some inevitable unintended results from FTAs, overall the global economy benefits.
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