Introduction

Trade seems a simple enough topic.  Two countries, A and B, each produce a good, X and Y.  Country A has more X than it needs, but has no Y.  Similarly, country B has more Y than it needs, but has no X.  The solution? Countries A and B agree to an exchange rate for goods X and Y and engage in trade.

Unfortunately, in practice international trade is not nearly so straightforward.  The realities of international political economy facing nations include complicated dilemmas resulting from competing views and interests from different constituents.  Although all governments share the goals of avoiding trade deficits and expanding the volume of trade, their methods of achieving these can vary dramatically.  Countries confront four basic policy alternatives with regard to trade.  First, a nation can seek to increase exports by increasing the international competitiveness of its economy.  Second, the government can provide exports to certain industries to promote exports.  Third, the country can impose protectionist measures such as tariffs in order to reduce imports.  Fourth, the nation can attempt to increase exports by working to form international agreement to reduce trade barriers.[i]

The US, usually a champion of free trade, has typically advocated policies of the first and fourth type and has criticized those countries which employ “unfair” trade policies such as providing subsidies or imposing tariffs.  In order to ensure that free trade is protected, the US has participated in a recent trend involving the creation of regional free trade areas (FTAs).  Already a member of NAFTA along with Canada and Mexico, the US has made overtures indicating that it will pursue a trade policy favoring the creation of a Free Trade Area of the Americas (FTAA).

The FTAA would closely resemble NAFTA, except rather than including only the three countries of North America, it would include thirty-four democratic governments in the Western Hemisphere.  The hope for the FTAA is that, through the reduction of tariffs and other trade barriers, it would result in a closer integration of the economies of the Americas, increasing the welfare of all involved.  US businesses would reap benefits from better access to Latin American markets, while US consumers would be able to buy imports at cheaper prices.

However, not everyone sees the creation of the FTAA as positive. Specific interest groups in the US have intense concerns about the possible effects of such a free trade agreement.  These constituencies will work to include provisions in any agreement to protect their interests.

Due to the numerous conflicting opinions of interested parties in the US, the president must obtain Trade Promotion Authority (TPA), or “fast-track” authority, in order to successfully settle an agreement with foreign nations.  With such a tool, the administration can negotiate the details of the FTAA with other member countries, and present the document to Congress to either pass or deny.  Without such authority, members of Congress would seek to attach measures that would make it unacceptable to the cosigners.

This policy recommendation analyzes the probable impact of the FTAA by examining the effects of NAFTA on the US economy and by considering the important trade offs confronting the administration in crafting such an agreement.  In the interest of economic efficiency, the promotion of US values internationally, and the long-term gains for the United States, the Bush administration should seek “fast track” authority to create an FTAA to be implemented as soon as possible.

What Can We Expect?  A Look at the Effects of NAFTA

The US signed on to NAFTA in 1993 and it has been in effect since January of 1994.  Prior to entering NAFTA there was a great debate about the impact the agreement would have on the US economy.  Supporters of NAFTA claimed that it would improve the economy by providing a larger market for US goods.  Critics worried that NAFTA would result in the loss of many American jobs to cheaper Mexican labor.  In reality, supporters and detractors of NAFTA were both guilty of exaggeration.  The US has not gained the jobs or balance of trade surplus promised by NAFTA supporters, but at the same time, the US has not lost the millions of jobs predicted by some.[ii]

There is no doubt, however, that there has been an increased integration of the economies of the members of NAFTA.  Since 1993, Mexico has passed Japan to become the second most important trading partner to the US.  In 1993, the US exported $40.5 billion in merchandise to Mexico while importing $40 billion.  In 1999, those figures were $87 billion and $110 billion respectively, an increase of $116.5 billion in total trade.[iii]  Additionally, NAFTA has provided better financial stability to Mexico and has influenced the creation of environmental movements there.

The US could expect similar results from the formation of an FTAA.  Latin American is increasingly important as a source of trade and investment for the US.  Figures project Latin America and the Caribbean to comprise a market of approximately $2.4 trillion by 2005.[iv]  The US certainly has a stake in maintaining its influence in these markets, which already account for eighteen percent of exports and sixteen percent of imports.[v]

Trade-Offs

In the deliberations and negotiations leading up to the signing of the FTAA, the Bush administrations will have to take into account many considerations of widely varying viewpoints.  Depending on the communities to which certain citizens belong, their interests and beliefs regarding the FTAA will be different.  Not all constituencies can be satisfied, and the signing of the FTAA will result in difficult but necessary trade-offs between political and economic values, international and domestic interests, and short and long run payoffs.

Political vs. Economic

The debate between the political and economic interests of the US hinges on the question of trade policy.  A highly politicized view sees trade as a zero-sum game.  In this case, the goal of trade policy should be to maximize the gain for the US whether through protectionist policies or by providing subsidies for import-competing or exported goods.

Speaking in strictly political terms, the creation of an FTAA is not in the interests of the US.  The FTAA would hurt the US in three important areas. 

First, the US would lose the money generated by present tariffs.  In order to account for this reduction in the budget, the government would be forced to find other sources of revenue, cut federal spending, and/or raise taxes. 

Second, principles important to the US would be at risk.  The US has shown a commitment to high environmental and worker protection standards.  With an FTAA, manufacturers would be tempted to move to foreign countries with lower standards in order to escape the costly regulations. 

Third, and most importantly politically, the creation of an FTAA could have a negative impact on the lives of American workers.  Not only do the laborers face the threat of their companies moving production to foreign countries, but they also must face competition with cheaply produced imports.  Despite US superiority in terms of productivity and technology, other members of the FTAA would be able to undercut US production through their use of lower standards and cheaper factors of production.

From an economic standpoint, however, trade can be mutually beneficial instead of competitive, as envisioned by the political viewpoint. Basic economics demonstrates that free trade is the surest way to achieve the most efficient and equitable allocation of resources.  Different countries will specialize production in order to make use of their comparative advantage.  The US, with its superior technology and productivity will have a comparative advantage in the production of capital-intensive and skilled labor-intensive goods.  It will then be able to export such goods in exchange for cheaper foreign imports of unskilled labor-intensive goods. 

The FTAA would increase US access to markets in Latin America and, without the unnecessary costs of tariffs and other trade barriers, would be able to reap the rewards of the growing economic power of the Western Hemisphere.

Another advantage of trade agreements is that they prevent the conflicts that have plagued international economics in the past.  Mercantilist policies such as export promotion and protectionism have led to trade warfare in some cases.  When one country perceives that another trading partner has enacted “unfair” trade measures, that country has retaliated in kind.  Such tit-for-tat policies characteristic of zero-sum games reduce overall welfare and can be eliminated through the establishment of a consistent and thorough trade agreement.

One benefit specific to regional free trade areas is that they eliminate the need for multiple bilateral trade treaties.  Without an agreement that can be applied across many borders, the US would need to negotiate many separate trade arrangements.  This is unnecessarily complex and cleanly remedied by the formation of the FTAA.

The economic advantages of the FTAA will far outweigh the costs to society. Free trade improves overall welfare even though some jobs will be lost.  The US will best serve its interests by working with other interested parties to negotiate the FTAA.

Without fast track authority various political elements in Congress will try to add on provisions to an FTAA treaty.  However, in their quest to protect the environment or ensure that the same labor standards apply across borders, these actors will render the original trade treaty unrecognizable and therefore unsignable to other parties to the FTAA.  President Bush requires fast track authority in order to negotiate effectively with foreign trade officials.  Without it, the US will leave itself out of any regional trade alliance.

International vs. Domestic

Once again, the question of whether the FTAA should be created is subject to debate when viewed in terms of the international and domestic interests of the US.  Internationalist elements of the US would cheer the formation of the FTAA while those groups focused more on the domestic needs of the country would consider the matter with some disdain.

Most important for US foreign policy is the fact that an FTAA is consistent with past US promotion of free trade.  Since World War II, the United States has worked toward the liberalization of the world economy.  The FTAA would reduce tariff barriers in the Western Hemisphere, liberalizing a region that has at times been fraught with protectionism.  By signing on to the FTAA the US would be making a powerful statement with regard to its commitment to free trade.

An additional benefit of the FTAA would be the increased integration of the societies of the US and Latin America.  The opportunity for greater cultural exchange would enrich the lives of people of all countries involved.  The sharing of values would also hopefully lead to the adoption of some important US principles in Latin America with regard to democracy, human rights, and environmental policies.  The FTAA will force increased cooperation across borders, which will, in turn, lead to better understanding among the member populations.

However, the domestic interests of the US are not so well served by the FTAA.  Particularly upset are groups such as environmentalists and labor unions.  Environmentalists worry that corporations will take advantage of lax environmental protection measures in the developing countries of Latin America and harm the environment in order to produce a cheaper good.  Similarly, labor unions worry that the FTAA will cost US workers their jobs as manufacturers move their factories to countries with lower labor costs.  The only way that such interest groups would agree to the US joining the FTAA would be if the agreement included language creating high standards for the environment and for labor.

Another argument offered by those opposed to the FTAA is that it will not help those it is intended to help.  People of this opinion charge that other foreign countries outside of the region, such as Japan, will locate production facilities in member states of the FTAA in order to have better access to the lucrative US markets.  In short, such critics see the FTAA as a way for US competitors to further hurt the US economy.

Again, granting fast track authority to the Bush administration would alleviate some of these dilemmas.  Although in negotiating the FTAA Bush and his advisors would have to consider the inherent trade-offs and compromises, the Congress would not be able to alter the final form of the agreement.  This provides the US with a certain degree of credibility internationally—proof that it is committed to international trade. 

Short-term vs. Long-term

Another difficulty in assessing the FTAA is that its costs and benefits differ in the short run and the long run.  Critics of the FTAA will argue that the short run costs of implementing the trade agreement and the resulting harm to US production exceed any gains from the treaty.  Proponents of the FTAA, on the other hand, contend that in the long-term, the benefits of such a free trade area will make up for any losses in the short-term.

In the time immediately following the passage of the FTAA, the US economy will likely see a reduction of its trade surplus with Latin America to the point where it has a trade deficit.  This was the case with Mexico after the creation of NAFTA.  Those for whom maintaining a positive balance of payments is the most important goal of trade policy will object.  However, the administration must also weigh two key considerations working against this view.  One, the US is an enormous economy, and although Latin America is an increasingly important economic partner, US trade with the Western Hemisphere is a much smaller percentage of total US trade than is the ratio of Latin American trade with the US to total trade.  Two, even though the relative balance of trade may shift in the favor of Latin American nations, total trade will increase.

Some economists have argued that rather than serving as a form of trade creation, the FTAA will merely divert trade.  This implies that the creation of the FTAA would result in member countries substituting trade away from nonmember countries with a comparative advantage to member countries without such an advantage.  Trade of such a nature eliminates the intended gains from free trade.  Another problem of trade diversion is that countries of the FTAA may deal with the influx of new imports by targeting tariffs against other trading partners outside of the agreement.  This has the same result as above.  In order to avoid such problems of trade diversion, the FTAA should adopt a common external tariff that is equal to the lowest tariff previously applied to that good by any member of the FTAA.[vi]  The trade officials responsible for crafting the FTAA must implement such a policy at the start so that trade diversion is not a problem once the FTAA is in effect.

In the long run, the FTAA is undoubtedly in the interests of the US economy.  Latin American markets are growing—in 1996 Latin America and the Caribbean experienced GDP growth of 3.5% along with lower rates of inflation (22%).  At this time the expected numbers for 1997 were even better with GDP growth of 4.4% and inflation down to 12%.[vii]  As this growth continues, there will be an increase in demand for technological goods and other skilled labor-intensive goods in which the US has a comparative advantage.  By joining the FTAA, the US will have better access to these strengthening markets.

The cost to the US in the long run of not joining the FTAA will not be worth the jobs that it could save.  The US, while obviously the most important player in the hemisphere, is not the only actor.  With or without the US, thirty-four other nations are working to create the FTAA.  If the US does not sign on to the treaty, it will be left behind.  Similarly, the EU is making inroads into Latin America, negotiating with many of the potential partners of the FTAA.[viii]  The US must ensure that it does not sacrifice important future markets for the sake of appeasing specific interest groups domestically.

Policy Recommendations

The interests and opinions regarding the FTAA change greatly based on the perspective through which it is viewed.  Depending on the perceived goals of foreign policy and the policy alternatives favored, one can emerge in favor of the FTAA or in strong opposition.

Import competing industries and their workers view trade policy as the means to a positive balance of payments.  They favor trade policies of protectionism while opposing trade liberalization.  The reason for this is justified self-interest.  If worker A is not competitive internationally—through no fault of his own—then he will be hurt by free trade, so naturally he opposes it.  The problem is that by saving his job through tariffs or other such protectionist measures, the country as a whole is worse off.  For each job saved in the luggage industry, US consumers pay $933,628; for each job protected in the sugar industry, US consumers pay $600,177.[ix]  The high cost of protection exceeds the benefit gained from the employment.  The US could easily pay for retraining of the workers who lose their job after the move to free trade.

Consumers and exporting industries offer a competing understanding of trade policy.  For this segment of the population, the goal of international economic policy is to increase total exports to find cheaper goods, to increase the competitiveness of US industry to make US exports more attractive, and to liberalize trade to gain access to foreign markets.  Obviously, such actors favor trade policies that work toward free trade.  The FTAA is an example of such a trade policy that will achieve the goals set by such an outlook.

For the US officials responsible for negotiating the FTAA, it will be highly important to consider all the conflicting values and interests.  It is for that reason, that fast track authority is absolutely crucial to the success of the FTAA.  With multiple actors and decision makers in the US offering their input for the treaty and adding their own provisions, the treaty will never satisfy all interested parties, and the other members of the FTAA would leave the US out.  President Bush alone must have the ability to negotiate with foreign officials and then offer the treaty before Congress to be passed or rejected.  Considering the promotion of US international interests and the resulting economic efficiency and equity in the long run, the US should join the FTAA.  Without membership in such an important regional economic association, the US will be in the slow lane of the international economy.

PRIMA Home | Current Issue | Previous Issues

End Notes