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Why Free Trade Agreements Are Important
On: February 21, 2018 | By: David Noah | 5 min. read
If you’ve watched the news, read it online, or opened up a newspaper during the past several months, you’ve undoubtedly seen or read something about the current climate of free trade agreements—specifically President Trump’s renegotiation of NAFTA and whether he’ll withdraw from the deal completely.
Many of us involved in exporting are urging the president not to abandon this deal. Free trade agreements like NAFTA are imperative for a growing U.S. economy, and give our country an opportunity to lead in areas like worker rights and the environment. Read on to find out more about why free trade agreements exist and just how they benefit the United States.
Understanding Free Trade Agreements
A Free Trade Agreement (FTA) is an agreement between two or more countries that outlines certain obligations with respect to trade in goods and services and provides protections for investors and intellectual property rights. (Export.gov)
FTAs are similar to preferential trade agreements (PTA) with one huge exception: Whereas PTAs reduce tariffs, FTAs often eliminate tariffs completely. As an Integration Point Global Trade News blog post put it: “PTAs are the starting point of economic integration between the two countries—FTAs are the final goal.”
Both free and preferential trade agreements directly affect a country’s economy by altering its flows of trade and investment. Free trade agreements also indirectly affect other aspects of a country’s economy, such as level of productivity, output and employment.
Current U.S. Free Trade Agreements
The U.S. currently has 14 free trade agreements with the following 20 countries:
- DR-CAFTA: Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua
- USMCA: Canada and Mexico
Benefits for Exporters
For exporters, the obvious benefit of FTAs is the reduction or elimination of tariffs on items that qualify. Other opportunities frequently found in FTAs include:
- The ability for a U.S. company to bid on certain government procurements in the FTA partner country;
- The ability for a U.S. investor to get prompt, adequate and effective compensation if its investment in the FTA partner country is taken by the government (expropriated);
- The ability for U.S. service suppliers to supply their services in the FTA partner country;
- Protection and enforcement of American-owned intellectual property rights in the FTA partner country;
- The ability for U.S. exporters to participate in the development of product standards in the FTA partner country.
The Importance of Free Trade Agreements to the U.S. Economy
As I wrote in the article about the Trans-Pacific Partnership, globalization is no longer a “when it happens” issue; it’s already here. We’re living in a time when commerce and trade are more interconnected than ever.
As countries across the globe both compete and partner with one another, it’s crucial that the United States solidifies its leadership and actively fosters trade relationships. Moreover, it’s crucial that U.S. businesses—including small to midsize businesses—have clear paths to success in global trade.
Free trade agreements do just that. Here’s how:
They promote trade and can increase competition.
From the non-partisan Congressional Budget Office (CBO): Trade increases competition between foreign and domestic producers, which enables the most productive businesses and industries in the United States to expand to take advantage of opportunities to sell abroad and obtain cost savings from greater economies of scale.
It also causes the least productive U.S. businesses and industries to shrink either temporarily or permanently. This is a common concern of those opposed to free trade agreements. However, according to the CBO, “economic theory and historical evidence suggest that the diffuse and long-term benefits of international trade have outweighed the concentrated short-term costs. That conclusion has consistently received strong support from the economics profession.”
They lead to job creation and economic benefits for businesses of all sizes.
As a result of increased competition, resources are allocated more efficiently, and the average productivity of businesses and industries in the United States is raised. Increased productivity yields greater economic output and increased average wages. In addition, U.S. consumers and businesses benefit because trade lowers prices for some goods and services, and increases the variety of products available for purchase.
And if you think only huge corporations benefit from FTAs, think again. Recent data shows that small and medium-size enterprises (SME) exports to FTA countries totaled $192 billion and comprised 97% of exporters to FTA countries.
They help grow the U.S economy.
Some suggest that the effects of FTAs have been too small to matter; I beg to differ. It’s true that the effects of many of the trade agreements have been small. That's because many of the agreements are between the United States and countries with much smaller economies, and because tariffs and other trade barriers were generally low when the agreements took effect.
But the largest agreement, NAFTA, has had a larger impact. A report by the CBO estimated that NAFTA accounted for 34% of the U.S. trade growth with Canada and Mexico during the first seven years of the agreement. Overall, NAFTA accounted for 7% of the United States total trade growth during that same period.
In addition, FTAs have increased flows of foreign direct investment, mostly by encouraging additional U.S. investment in the economies of member countries. The result, according to the CBO, is indirect effects of FTAs on productivity, output and employment in the United States.
I believe we’re way past the point of the discussion of whether or not globalization is a good thing. Globalization is already happening. We are now at the point of determining who will set the rules of globalization and what those rules will be. Continued U.S. participation in and support of free trade agreements will help not only help businesses of all sizes, it will help protect worker rights and the environment in member countries.
About the Author: David Noah
David Noah is the founder and president of Shipping Solutions, a software company that develops and sells export documentation and compliance software targeted at U.S. companies that export. David is a frequent speaker on export documentation and compliance issues and has published several articles on the topic.