Assessing the Record of America’s Trade Agreements

Monday, November 16, 2015 - 3:15pm

By John Murphy

What is the record of America’s free-trade agreements (FTAs)? This question is the subject of a hearing today at the U.S. International Trade Commission (USITC). The hearing kicks off an investigation into the economic impact of these agreements mandated by the Bipartisan Congressional Trade Priorities and Accountability Act of 2015, which renewed Trade Promotion Authority.

The Chamber has been a vocal champion of the benefits of America’s FTAs, which today cover our trade with 20 countries around the globe. We’ve examined these issues at length in Chamber-published reports, including The Open Door of Trade: The Impressive Benefits of America’s Free Trade Agreements (March 2015), NAFTA Triumphant: Assessing Two Decades of Gains in Trade, Growth and Jobs (updated October 2015), and Opening Markets, Creating Jobs: Estimated U.S. Employment Effects of Trade with FTA Partners (March 2010).

The rationale for these agreements is simple. While the United States receives substantial benefits from trade, the international playing field is sometimes tilted unfairly against American workers. The U.S. market is largely open to imports from around the world, but many other countries continue to raise steep tariffs and other barriers against U.S. exports.

U.S. goods arriving in foreign markets face an average tariff of 5.9%, according to a report from the World Economic Forum (WEF). That’s more than four times the U.S. level, but tariffs slapped on key U.S. manufactured and agricultural exports often average in the double digits in key emerging markets.

One of the WEF’s rankings gauges the level of tariffs that a country’s exporters face. Leading the pack as the country whose exporters face the lowest tariffs globally is Chile, with its extensive global network of FTAs. By contrast, while the United States scored well in a number of areas, it ranked a disastrous 130th out of 138 economies in terms of the “tariffs faced” by our exports overseas.

In other words, American exporters face higher tariffs abroad than nearly all our trade competitors. Nontariff barriers add substantially to these challenges.

Compounding the problem is the reality that so many other countries have negotiated FTAs with one another. According to information from the World Trade Organization (WTO), 406 bilateral or plurilateral FTAs are in force around the globe today, and another 100 are in the works. This means U.S. exporters are often among a minority paying tariffs to sell their wares in key markets.

No one wants to go into a basketball game down by a dozen points from the tip-off—but that’s exactly what American exporters do every day.

None of this diminishes the benefits of imports. Access to imports boosts the purchasing power of the average American household by about $10,000 annually. Companies’ imports of intermediate goods, raw materials, and capital goods account for more than 60% of all U.S. goods imports—lowering costs for businesses and helping them hone their competitive edge.

The U.S. Chamber believes that trade policy must take into account the needs of Americans as both consumers and producers. Fairness should be our watchword: American workers, farmers, and companies must be allowed to operate on a level playing field when it comes to trade.

This is the principal rationale for FTAs—to generate economic growth, new exports, and good jobs through the mutual elimination of trade barriers and do so in a way that is fundamentally fair.

Trade

While our FTA partners represent just 6% of the world’s population 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 enables trade to expand—often turning small economies into major export markets.

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, as Chamber research shows. 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 nontariff 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 each of the past three years.

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 $56 billion by 2014.

However, 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 exports of motor vehicles nearly doubled over the past five years, topping 2 million cars and trucks for the first time in 2014. This increasingly competitive North American industry is sending a growing share of its production to Asia, the Middle East, and elsewhere: U.S.-made cars shipped to China have risen sevenfold 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% of U.S. final good imports from Mexico consist of its own [U.S.] value added.”

Jobs

And what about jobs? Most economists believe the principal effect of freer trade on the U.S. job market—particularly in a period of low unemployment—is to alter gradually the mix of jobs available by creating more high-skill, high-wage jobs and fewer low-skill, low-wage jobs.

According to Commerce Department research, manufacturing jobs tied to exports pay wages that average 18% higher than those that are not. Something similar holds for services jobs.

The substantial increase in foreign investment in the United States that has followed new trade agreements has also fostered the creation of high-skill, high-wage jobs. According to research by the Organization for International Investment, U.S. affiliates of foreign-headquartered companies pay wages that average one-third higher than the U.S. average.

To provide a serious economic analysis of the relationship between FTAs and job creation, the U.S. Chamber of Commerce commissioned a study in 2010 entitled Opening Markets, Creating Jobs: Estimated U.S. Employment Effects of Trade with FTA Partners.

The study employed a computable general equilibrium economic model used by economists worldwide known as the Global Trade Analysis Project (GTAP), which is also used by the USITC.

The results are impressive. The increased trade brought about by these FTAs boosted U.S. output by more than $300 billion — enough to support 5.4 million U.S. jobs. This is a remarkable record.

Small Business

FTAs are especially important to small business exporters. More than 98% of the nearly 300,000 American companies that export are small and medium-sized enterprises (SMEs). They account for one-third of U.S. merchandise exports.

It comes as no surprise that FTA markets are top export destinations for small business exporters. By value, approximately 40% of all merchandise exports by American SMEs go to FTA markets. More SMEs export to Canada than to any other market; by value, American SMEs export more to Mexico than to any other country (data).

While some critics argue that FTAs only benefit large multinationals, the truth could hardly be more different. Many countries where the United States does not have an FTA in place have already implemented FTAs with other countries. In this context, a multinational corporation may be able to serve a market that levies steep tariffs on goods from the United States by sourcing from an affiliate in a third country.

America’s small businesses have no such luxury. Nontariff barriers are especially harmful to smaller companies because they add disproportionally to their fixed costs of doing business. A $10,000 permit may be a nuisance for large firms, but they can usually absorb the added expense with relative ease; it can be a showstopper for small businesses.

Manufacturing

U.S. manufacturers have been among the principal beneficiaries of FTAs. Again, context is important. According to data from the Federal Reserve Bank of St. Louis, U.S. real manufacturing output has risen by approximately 80% over the past 25 years.

In recent years, U.S. manufacturers have enjoyed steady growth, aided by the expansion in U.S. exports to FTA partner markets. Consumers and businesses in those 20 countries purchased $675 billion of U.S. manufactured goods in 2014—a sum representing 48% of all the exports produced by the 12 million Americans employed in manufacturing.

Do the math, and you’ll find that FTA markets generate export revenue of $56,000 for each American factory worker. Compare this with the average annual earnings—including pay and benefits—of an American manufacturing worker: $77,500.

How could manufacturers make their payrolls without the revenues they earn by exporting to FTA markets? The short answer is, they couldn’t.

Agriculture

For American farmers and ranchers, America’s FTAs have been a bonanza. To give a couple of examples, under U.S. FTAs, U.S. agricultural exports to Chile have grown by 525%, and farm sales to Australia and Peru have grown by more than 230%.

The North American success story deserves special attention. U.S. farms and ranches supply approximately 60% of Canadian agricultural imports.

But NAFTA did even more to open the Mexican market for U.S. farmers and ranchers. According to research by USDA, “Mexico does not produce enough grains and oilseeds to meet internal demand, so the country’s food and livestock producers [need to] import sizable volumes of these commodities.”

U.S. agricultural exports to Mexico have quintupled since NAFTA entered into force even as Mexican agriculture has enjoyed steady growth. In general, the United States sends grains, oilseeds, and meat southward, while Mexico sends northward food products more easily produced in its climate.

Services

America’s FTAs have brought significant benefits to U.S. services industries, which generate about 80% of U.S. economic output and 80% of U.S. private sector employment.

The United States is by far the world’s largest exporter of services. Contrary to popular misconception, many jobs in services pay well. For instance, approximately 18 million Americans are employed in business services — which tend to be tradeable.

This includes software, architectural services, engineering and project management services, and insurance—all of which generate billions of dollars in exports. Wages in these sectors are 20% higher on average than those in manufacturing, which employs only two-thirds as many American workers.

In this context, America’s FTAs have provided significant gains for U.S. service providers. These agreements have expanded access to foreign markets for cross-border sales of services and barred discrimination against services providers on the basis of their nationality. They have also opened services sectors that had previously been closed to foreign investment and ushered in greater transparency in the regulations that set the rules of the road for services markets.

Conclusion

The record of success of America’s FTAs is impressive. FTAs have generated new opportunities for commerce, boosted economic growth, raised productivity, and improved conditions for the creation of good jobs. Securing these benefits for future generations should be a bipartisan priority for the years ahead.

John Murphy is Senior Vice President for International Policy.