Behind the International Trade Eight Ball, That’s Where
This article by Leila Aridi Afas and Evelyn Suarez first appeared in Global Trade Magazine on September 12, 2017.
Where would the United States be without its Free Trade Agreements (FTAs)? The short answer is left behind. We will explain.
But first, let’s take a look at what these agreements are and where the US stands on them? FTAs are international agreements that reduce or eliminate entirely tariffs and non-tariff barriers to trade, such as quotas, technical barriers to trade, and unnecessary customs procedures that cause costly delays at borders. The US currently has trade agreements with 20 countries through a total of 14 FTAs. All of these agreements are bilateral, except for two, including the notorious North American Free Trade Agreement or NAFTA. To put this in perspective, Mexico has 10 FTAs with 45 countries.
During the 2016 presidential election, trade, typically a rather dull topic, was hotly debated. Then-candidate Trump promised to withdraw the US from a trade pact, called the Trans Pacific Partnership (TPP), a multilateral agreement with eleven other countries, which he did on his third day as President. He also promised to withdraw from NAFTA, which he called the “worst deal” ever, and almost did so in April but then relented in response to strong pressure from the business community, the US Congress, and members of his own cabinet. On May 18, 2017, the Administration officially notified Congress of its intent to renegotiate the maligned agreement, kicking off formal talks with Canada and Mexico in mid-August.
The three countries agreed to an ambitious negotiation schedule to wrap up by year’s end to avoid turning NAFTA into a political football during Mexico’s presidential election in July or the US mid-term elections next November. The ultimate goal though is to modernize NAFTA to make North America more competitive vis a vis the rest of the world, especially with regard to Asia.
Why Countries Bother With FTAs
Despite the start of formal talks, President Trump has reiterated his threats to withdraw from this important agreement for North American business via Twitter. He also threatened to withdraw from KORUS, the Korea-US FTA, which was met with immense opposition from Capitol Hill, national security officials, and the business community. The White House responded with assurances to lawmakers that for the time being, withdrawal from KORUS was off the table and KORUS was safe.
Putting the political rhetoric aside, let’s take a step back to examine why countries bother with FTAs. In particular, why are they important to US manufacturers and farmers? How do these agreements create US jobs? Are these agreements responsible for job losses in manufacturing? Or is there something else at work? What are trade deficits and if they are problematic can they be fixed by FTAs? Where does the rest of the world stands on FTAs and where would the US be without its own?
FTAs have opened up foreign markets to US exporters by creating more stable and transparent trading and investment environments. This has made it easier and cheaper for US manufacturers and farmers to sell their goods and agricultural products abroad. It has also enabled US companies to provide services in overseas markets. That means more jobs here in America.
The top three US exports to Canada include vehicles, machinery, and electronic equipment; the top three US exports to Mexico include machinery, electronic equipment, and vehicles; and the top three US exports to China are oil seeds, aircraft, and spacecraft, and electronic equipment. Mexico is the third largest agricultural market for the United States with leading categories in corn, soybeans, dairy products, pork and pork products, and poultry and eggs.
Modern-Day Value Chains
Modern-day trade is not just about shipping a finished good from one country to another. Trade has evolved into global supply chains with production in multiple countries that leads to a final product. This is one of the reasons looking at a trade deficit does not tell the whole story. Trade deficits have less to do with trade and more to do about US savings and spending habits. Take for example the automotive industry. US exports of cars and parts total about $100 billion. These are made using parts imported from many countries, but especially large amounts from Canada and Mexico. If you make it harder to import parts, you make it harder to export finished goods. That’s how modern-day value chains work. They make the most of each country’s comparative advantage.
Because of comparative advantages one country has over another, many labor-intensive production tasks have been off-shored from developed countries, like the United States, to developing countries where there is an abundance of low-skilled, low wage labor. Resulting jobs losses have frequently been concentrated in certain localities magnifying the pain for specific communities. We are hearing more and more each day that trade is not necessarily the culprit for these job losses. Rather, we hear that increased productivity and automation is playing a big role. But if you’ve lost your job, do you really care if it’s caused by robots or trade pacts?
The loss of American jobs has not received the urgent attention it deserves. This is a problem that must be addressed through safety nets, education, and training for twenty-first century jobs. Protectionist measures are not the solution. Closing our borders would only increase the harm to the very workers sought to be helped. It would invite retaliation by other countries to restrict our companies’ access to their markets. Raising barriers to trade would also raise the cost of goods working families need from clothing to fresh produce to consumer electronics and much more.
The Impact of the Protectionist Wave
Sensible and sustainable policy solutions take time, effort and compromise. Bold statements and promises are easy to make and readily embraced but as policies they also have real-world consequences. Mexico was the number-one buyer of US corn until they became increasingly wary of their dependence on the United States, given President Trump’s statements and tweets about building a wall along the southern border and ripping up NAFTA.
The impact of this protectionist wave has rippled beyond North America. NAFTA is the largest free trade agreement in the world. Canada and Mexico represent our second and third largest trade partners, respectively. As a result, the whole world is watching how the US conducts itself in this landmark renegotiation. Not just because they care about NAFTA, but because it is telling whether the US is entering a new age of trade policy. The world is wondering whether the US will be open or shut for business.
In the meantime, Canada and Mexico are not putting all their eggs in the NAFTA basket. They are negotiating free trade agreements right and left with other parts of the world. Mexico and the EU have agreed to accelerate their trade talks to update their existing FTA and Canada recently concluded the EU-Canada Comprehensive Economic and Trade Agreement (CETA).
Some like House Homeland Security Committee Chairman Michael McCaul (R-Texas) fear that President Trump’s antagonistic approach towards Mexico might turn Mexico towards China if relations with the US worsen. Mexican President Enrique Peña Nieto just concluded a trip to China to discuss trade and investment. Notably, the Mexicans struck a deal with the Chinese ecommerce company Alibaba to incorporate Mexican companies into Alibaba’s commercial operations.
If the United States is not open for business, there are other regions of the world for Mexico and Canada to sell their products and services. The US has a lot at stake with duty rates much lower than many countries, meaning US exports would face higher duties than imports to the United States would encounter. FTAs give US exporters of goods and services a level playing field to compete in the countries where we have FTAs. Where will the US be without its FTAs when the rest of the world has theirs?
Leila Aridi Afas serves as Toyota’s Director of International Public Policy, where she collaborates with the company’s external affairs and corporate strategy teams to develop and advocate positions on global issues. Prior to joining Toyota, Ms. Afas was appointed by President Obama to support the National Export Initiative’s goals of doubling U.S. exports in five years. You may follow her on Twitter @TheTradeLady
Evelyn Suarez is an experienced customs and international trade lawyer with a special focus on import regulation as well as on anti-corruption and trade policy issues. She assists international clients in these uncertain times with strategic planning and compliance requirements. She is also the immediate Past President and serves on the Board of the Association of Women in International Trade (WIIT). She can be reached via e-mail at firstname.lastname@example.org and at 202.552.0310.