05.10

Reviving Free Trade Agreements

By George F. McClure

Free trade agreements (FTAs) have proven to have an advantage in increasing exports from the United States.  Today, the United States has FTAs with 14 countries. In 2006, new FTAs were implemented with six countries: Bahrain, El Salvador, Guatemala, Honduras, Morocco and Nicaragua. Last year, trade with countries with which the United States has FTAs was significantly greater than their relative share of the global economy.

Free trade agreements pending during the last presidential election included those with Colombia, Korea and Panama.

Fast-Track Authority

In 1974, Congress granted the President the authority to negotiate U.S. trade agreements that the Congress could either  approve or deny, but could neither amend nor filibuster.  President Clinton used this fast-track trade power to promote NAFTA. This provision expired in 1994, giving Congress more powers.  President Bush pushed hard to get fast-track powers.  He got it in 2002, for five years.  This helped him seal ten new free trade pacts with other countries. ^[1]

Fast-track trade authority expired in December 2007. ^[2]

NAFTA

The North American FTA, a trilateral agreement between the United States, Canada and Mexico, was intended to eliminate trade barriers, facilitate cross-border movement of goods and services, increase investment opportunities, promote fair competition, and enforce intellectual property rights in each party's territory.  It went into effect 1 January 1994.  ^[3] 

Most favored nation (MFN) status was used as a tool for bilateral trade agreements.  The practice began with the Jay Treaty in 1794, recognizing Britain as a trading partner.  In 1998, Congress replaced MFN status with permanent Normal Trade Relations (NTR).  All members of the World Trade Organization (WTO) are eligible for NTR.  In 2000, China was admitted to the WTO and shortly thereafter became a favored trading partner through permanent NTR.  This reduced tariffs for U.S. agricultural products entering China.

CAFTA-DR

One of the most controversial FTAs was the last one agreed to by a narrow House vote — CAFTA-DR — covering the Caribbean Basin. It includes seven signatories: the United States, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras and Nicaragua.  Implementation was phased between 2005 and 2009.  CAFTA-DR created the third-largest U.S. export market in Latin America, behind only Mexico and Brazil, and the 14th-largest U.S. export market in the world (or the 10th-largest if the European Union is considered a single destination). ^[4]  

FTAs Have a Downside

Libertarian-leaning Congressman Ron Paul of Texas calls free-trade deals "a threat to our independence as a nation." ^[5] 

In 1993, Ross Perot predicted a “giant sucking sound” from jobs moving to Mexico, if NAFTA was approved.  U.S. white goods manufacture largely shifted to Mexico after NAFTA.  It was even cheaper to make them in China, but high transportation costs negated that advantage.  Maytag moved three refrigerator factories from the United States to Mexico.  In 2005, Electrolux opened a refrigerator factory in Ciudad Juarez capable of producing one million refrigerators per year, to be sold under Electrolux and Frigidaire labels.  Employment of 3,000 was planned. ^[6]  This factory replaced one in Greenville, Michigan, which employed 2,700.  At about the same time, Johnson Controls’ Automotive Group announced transfer of visor production from Holland, Michigan, to Ciudad Juarez, moving 885 jobs to Mexico. ^[7]  

In 2007, Electrolux shifted all its North American laundry products production to Mexico, eliminating 850 jobs in Iowa.  The average pay is $2.50 per hour in Mexico, compared to an average union wage of $16.50 per hour for the same work in Iowa. ^[8] 

Whirlpool is moving all refrigerator production to Mexico, closing a plant in Indiana employing 1,100.  In Mexico, with nonexistent labor and environmental laws, Whirlpool will be able to produce for a fraction of the cost in the United States. ^[9]

Since the implementation of NAFTA, well-known American companies such as Coca Cola, Ford, RCA, General Motors, General Electric and Nokia have all opened up assembly plants in Mexico. In fact, GE employs 30,000 Mexicans in 35 factories in the country.

With low wages in developing nations, workers are not consumers on the scale of U.S.  consumers.  This contributes to our current account deficit — we buy more from those countries than we sell to them.  Between 1997 and 2003 alone, rising trade deficits displaced roughly 3 million American jobs.

Since 1993, when NAFTA was signed, manufacturing employment in the United States has decreased from 16.8 million to 13.9 million in 2007, as the trade agreement put American workers in direct competition with Mexican workers.  According to a 2006 Economic Policy Institute report, between 1993 and 2006 NAFTA resulted in nearly 50,000 jobs lost in Indiana. ^[10]  However, another research group takes issue with the methodology used. ^[11] 

Union leaders consider that the most egregious part of Whirlpool’s decision to outsource manufacturing from Indiana to Mexico is the fact that the company took stimulus money through the American Recovery and Reinvestment Act.  Roughly $19 million in stimulus money, to be exact, according to the AFL-CIO.  Stimulus funds came with a “Buy American” clause, with an exception being made to extend to countries where there is a FTA.

NAFTA included a provision for Mexican trucks to carry freight from Mexico to destinations in the United States.  A pilot program operated from September 2007 to March 2009 until funds were cut off.  Currently, Mexican trucks are limited to travel 50 miles north of the border.  Mexico has retaliated with tariffs on $2.4 billion in U.S. goods destined for Mexico. ^[12] 

Renegotiating NAFTA

For the United States, the main issue is jobs. Senator Sherrod Brown, an Ohio Democrat, cites a loss of 200,000 manufacturing jobs due to NAFTA for his state alone. The nation has lost 3.1 million manufacturing jobs since 1994, and its trade deficit with Mexico and Canada has risen to $138.5 billion in 2007 from $9.1 billion in 1993. The opposition to NAFTA within the United States goes well beyond organized labor. While job loss and insecurity under globalization were major constituency-builders in blue-collar states during the elections, polls taken before the election revealed that a national majority opposes free trade and particularly NAFTA, and that opinion increased during the campaign. A June 2008 Rasmussen nationwide poll showed 56 percent in favor of renegotiating NAFTA. Many people feel that NAFTA has given companies incentives to move production to where labor is cheaper, exporting jobs and eroding working conditions. ^[13] 

Sen. Brown favors fair trade, rather than free trade.  He and Senator Byron Dorgan (author of Take This Job and Ship It) held a hearing on the problems with NAFTA.  Visiting two workers for General Electric in Reynosa, Mexico, three miles south of the U.S. border and the site of a GE plant, Brown found that both made about 90 cents an hour, both worked roughly 60 hours a week — 10 hours a day, six days a week. They lived in a home approximately 20 feet by 15 feet, no running water, no electricity, dirt floors. Brown recalled that, "When it rained hard, the floors turned to mud … Outside, there was a ditch behind their house, maybe four feet wide, two by fours across the ditch, waste went along the ditch, human waste and who knows what went through. The American Medical Association said the Mexican-U.S. border is the most toxic place in the western hemisphere and these children are playing in whatever this human and industrial waste is in this neighborhood."

Colombia FTA

The pending FTA with Colombia may be the easiest to assess.  Proponents say that Colombia will not flood the United States with cheap goods, but is a good trading partner ready and willing to buy more U.S. exports if tariffs are reduced.

The Colombia FTA is a comprehensive free trade agreement.  When (if) the Colombia FTA enters into force, Colombia will immediately eliminate most of its tariffs on U.S. exports, with all remaining tariffs phased out over defined time periods.

The Colombia FTA also includes important disciplines relating to customs administration and trade facilitation, technical barriers to trade, government procurement, investment, telecommunications, electronic commerce, intellectual property rights, and labor and environmental protection.

U.S. firms will have better access to Colombia's services sector than other WTO Members have under the General Agreement on Tariffs and Trade.  All service sectors are covered under the Colombia FTA except where Colombia has made specific exceptions. ^[14] 

South Korea FTA

If approved, the KORUS Agreement would be the United States' most commercially significant FTA in more than 16 years.

The U.S. International Trade Commission estimates that the reduction of Korean tariffs and tariff-rate quotas on goods alone would add $10 billion to $12 billion to annual U.S. Gross Domestic Product and around $10 billion to annual merchandise exports to Korea.

Under the FTA, nearly 95 percent of bilateral trade in consumer and industrial products would become duty free within three years of the date the FTA enters into force, and most remaining tariffs would be eliminated within 10 years.

For agricultural products, the FTA would immediately eliminate or phase out tariffs and quotas on a broad range of products, with almost two-thirds (by value) of Korea's agriculture imports from the United States becoming duty free upon entry into force.

For services, the FTA would provide meaningful market access commitments that extend across virtually all major service sectors, including greater and more secure access for international delivery services and the opening up of the Korean market for foreign legal consulting services.

In the area of financial services, the FTA would increase access to the Korean market and ensure greater transparency and fair treatment for U.S. suppliers of financial services. The FTA would address non-tariff barriers in a wide range of sectors and includes strong provisions on competition policy, labor and environment, and transparency and regulatory due process. ^[15] 

One sticking point is the uneven treatment for automobile imports. In June 2007, the Boston Globe reported that in 2006, "South Korea exported 700,000 cars to the United States, while U.S. carmakers sold 6,000 in South Korea, [Senator] Clinton said, attributing more than 80 percent of a $13 billion U.S. trade deficit with South Korea... "

And yet, the proposed new agreement with South Korea would not eliminate the "barriers that severely restrict the sale of American vehicles" said Sen. Hillary Clinton. ^[16] 

The KORUS FTA, signed 30 June 2007, still awaits Congressional approval.

Panama FTA

The pending U.S.-Panama FTA is a comprehensive free trade agreement that can result in significant liberalization of trade in goods and services, including financial services. It also includes important disciplines relating to customs administration and trade facilitation, technical barriers to trade, government procurement, investment, telecommunications, electronic commerce, intellectual property rights, and labor and environmental protection.

U.S. firms will have better access to Panama's services sector than it provides to other WTO Members under the General Agreement on Tariffs in Services. All services sectors are covered under the agreement except where Panama has made specific exceptions. Moreover, Panama agreed to become a full participant in the WTO Information Technology Agreement.

Panama has also entered into a bilateral agreement with the United States resolving a number of regulatory barriers to trade in agricultural goods ranging from meat and poultry to processed products, including dairy and rice. USTR is currently working to address outstanding issues regarding the Panama FTA, including labor and tax policies. ^[17] 

Outlook

No movement on these three FTAs is expected this year.

The United States risks losing significant export sales to the European Union, Canada and other countries unless it approves three long-delayed free trade agreements with South Korea, Panama and Colombia, Boeing Chief Executive James McNerney said on 22 April.

"Action on these FTAs (free trade agreements), and some others coming down the line, is absolutely imperative in my view for our nation," said McNerney, who was recently picked by President Barack Obama to chair his Export Council.

"I'd get going right now" on the pacts, he added. ^[18] 

The agreements have been blocked by Democrats' demands that Panama revamp its labor regime and tax haven laws, Colombia do more to reduce violence against trade unionists, and South Korea make additional concessions to open its auto and manufactured goods markets to U.S. exports.

In his first visit to Canada after his inauguration, President Obama told Prime Minister Stephen Harper that his campaign promise to renegotiate NAFTA on behalf of unions and environmentalists must wait; we must be careful to avoid protectionism, he said. ^[19]

Other resources

1. Alan Tonelson, The Race to the Bottom, Westview Press, paperback, 2002

2. The Race to the Bottom Speeds Up - American Economic Alert, http://www.americaneconomicalert.org/view_art.asp?Prod_ID=403

3. Exporting Jobs While Importing an Underclass, pp. 97 -128: Jerome R. Corsi, America for Sale, Simon & Schuster’s Threshold Editions, 2009

4. Office of the U.S. Trade Representative - http://www.ustr.gov/

References

[1] http://usliberals.about.com/od/theeconomyjobs/i/FreeTradeAgmts_2.htm

[2] http://en.wikipedia.org/wiki/Fast_track_%28trade%29

[3] http://support.lexisnexis.com/lexiscom/record.asp?ArticleID=lexiscom_nafta

[4] http://www.export.gov/FTA/cafta-dr/index.asp

[5] http://www.globalexchange.org/update/5024.html

[6] http://www.electrolux.com/node35.aspx?id=59407

[7] http://www.siteselection.com/ssinsider/pwatch/pw040419.htm

[8] http://m.dmregister.com/news.jsp?key=544973

[9] http://economyincrisis.net/content/whirlpool-moving-jobs-mexico

[10] http://www.epi.org/publications/entry/bp173/

[11] http://www.factcheck.org/elections-2008/more_nafta_nonsense.html

[12] http://www.huffingtonpost.com/steve-parker/should-mexican-trucks-be_b_277142.html

[13] http://www.commondreams.org/view/2009/01/10-8

[14] http://www.ustr.gov/trade-agreements/free-trade-agreements/colombia-fta

[15] http://www.ustr.gov/trade-agreements/free-trade-agreements/korus-fta

[16] http://usliberals.about.com/od/theeconomyjobs/i/FreeTradeAgmts_2.htm

[17] http://www.ustr.gov/trade-agreements/free-trade-agreements/panama-tpa

[18] http://www.reuters.com/article/idUSN229059520100422?type=marketsNews

[19] http://www.washingtonpost.com/wp-dyn/content/story/2009/02/19/ST2009021903268.html

George F. McClure is Technology Policy editor for IEEE-USA Today’s Engineer and the IEEE Vehicular Technology Society's representative to IEEE-USA's Committee on Transportation and Aerospace policy.

Comments may be submitted to todaysengineer@ieee.org.