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Part 2 in an occasional series
Previously: Assessing the Benefits of America’s FTAs
What are the benefits of America’s free trade agreement (FTAs)? With debate over the renewal of Trade Promotion Authority (TPA) now underway in Washington, the Chamber is publishing this series of blog posts examining the benefits of the trade agreements that TPA makes possible. Here is the full report on the benefits of America’s free trade agreement.
These benefits are most obvious in the booming trade we enjoy with the 20 countries with which we have entered into FTAs. While these countries represent just 10 percent of the world economy outside the United States, in recent years they have purchased nearly half of all U.S. exports, according to the U.S. Department of Commerce.
It should come as no surprise that eliminating tariffs and other trade barriers allows trade to expand. As the chart below indicates, U.S. exports to new FTA partner countries have grown roughly three times as rapidly on average in the five-year period following the agreement’s entry-into-force as the global rate of growth for U.S. exports.
Some FTAs have helped produce even more impressive results. U.S. exports to Chile and Morocco quadrupled in the five years after FTAs entered into force. This boost to U.S. export growth is especially pronounced with more recent FTAs, which are front-loaded to eliminate tariffs rapidly, open services markets, and eliminate non-tariff barriers more comprehensively than earlier FTAs.
The trade balance is a poor measure of the success of these agreements, but the trade deficit is often cited by trade skeptics as a principal reason why the United States should not negotiate additional FTAs. However, taken as a group, the United States ran a trade surplus with its FTA partner countries in 2012 and 2013, and this surplus likely has grown since then (see chart below).
In fact, the United States has recorded a trade surplus in manufactured goods with its FTA partner countries for each of the past five years, according to the U.S. Department of Commerce. This surplus reached $27 billion in 2009 and had expanded to $61 billion by 2013.
However, exports are just one side of the trade equation: Imports provide direct benefits to Americans as well. They mean lower prices for American families as they try to stretch their budgets—and for companies seeking raw materials and other inputs. In recent decades, lower tariffs have stimulated U.S. productivity through greater competition in the marketplace and brought greater product choices to U.S. producers and consumers. According to the Peterson Institute for International Economics, this has brought “a gain in annual income of about $10,000 per household.”
In fact, half a century of trade liberalization has made it less and less relevant to look at international commerce through a mercantilist lens focused solely on exports. North America offers a useful case study: After more than two decades of free trade, officials and business leaders in Canada, Mexico, and the United States point out with growing frequency that workers and firms across the continent increasingly “make things together,” employing “global value chains” that cross national borders.
This approach leads to efficiencies that have proven vital to the global competitiveness of North American industry. In the highly integrated auto sector, for example, it is common for cars assembled in the Great Lakes region to cross the U.S.-Canada border half a dozen times as they are assembled. In turn, American auto exports increased 82 percent between 2009 and 2012, according to the International Trade Commission, reaching an all-time high of approximately 2 million cars and trucks in 2013. A growing share is headed to Asia, the Middle East, and other locations: U.S.-built cars shipped to China have risen nearly sixfold since 2009.
One study found that “one-quarter of U.S. imports from Canada consist of value added from the United States itself, and a huge 40 percent of U.S. final good imports from Mexico consist of its own [U.S.] value added.” As Mexican officials have pointed out, “For every dollar that Mexico earns from exports, 50 cents are spent on American goods.”
North America’s mature global value chains reduce costs for businesses and enhance their global competitiveness, but there are other examples where U.S. firms are operating with a host of partners in other regions. For example, one recent study found that 70 percent of the final retail price of apparel assembled in Asia—and sold in the United States—is created by American innovators, designers, and retailers. Further, even though nearly all apparel and footwear sold in the United States is imported, these industries employ 4 million Americans.
The principal rationale for FTAs is to unleash new flows of mutually beneficial trade between Americans and the citizens of these 20 countries—and do so in a way that is fundamentally fair. On this score, these FTAs have been a dramatic success for the United States—as they have been for our FTA partners.
Next time: Trade Agreements and American Jobs