The effects of the free trade regime on the United States

¶ … free trade regime on the U.S.

The Effects of the Free Trade Regime on the United States

By the term "free trade" economists refer to an idealized market model, where countries trade their goods or services without being limited and inhibited by tariffs and taxes imposed by governments and non-tariff barriers (Wikipedia, 2007). Some say that in order to have real free trade, perfect competition is required, while others say that the absence of inhibitory taxes is enough for the free trade to take place.

Although free trade is considered by some economists to have important advantages, that surpass the eventual disadvantages, free trade has its share of opponents, like some of the nationalists, communists, agricultural and manufacturing interests, and anti-globalization and some labor campaigners.

Free trade requires certain criteria to be encompassed: in the international trade the goods must not have any tariffs, like taxes on imports, or other trade barriers; the same must apply for services in the international trade; domestic firms, households or factors of production must not be favored over foreign ones through trade-distorting policies, like taxes, subsidies, regulations and laws; there must be free access to markets; also, free access to market information is necessary; monopoly or oligopoly power should not exist so that certain companies cannot distort markets with such power.

The evolution of Free Trade

Free trade's evolution started with that of the international trade in general. Since countries all over the world have been engaged in trade activities since Ancient times, it was time for developing a theoretical rationalization related to the free trade policy's beneficial effects on any nation involved.

The world's greatest economists, like Adam Smith and David Ricardo, have emphasized in their theories the positive effects that free trade has on the involved countries' economies. Therefore, they considered free trade to be responsible for economic development and prosperity of certain countries. For example, the Mediterranean area (especially Egypt, Greece and Rome) and also Bengal and China, owe their flourishing economies to the increased trading. Also, after declaring Free Trade and Freedom of Thought, the Netherlands started their economic prosperity period.

However, free trade had its battles against other policies, like: mercantilism, protectionism, isolationism, communism, and others. Protectionism policies have been used by all developed countries at some point, but reduced it due to gaining more wealth.

After the World War II, the United States have become one of the most fervent proponents of reduced tariff barriers and free trade in general (Wikipedia, 2007). The United States played an important role in establishing the General Agreement on Tariffs and Trade (GATT), the World Trade Organization (WTO), numerous free trade agreements, like: the North American Free Trade Agreement (NAFTA), the Dominican Republic-Central America Free Trade Agreement (CAFTA), and several bilateral agreements.

The General Agreement on Tariffs and Trade

The General Agreement on Tariffs and Trade (GATT) was created after World War II as part of a plan for economic recovery from the disastrous effects the war had left behind (Wikipedia, 2007). GATT was created mainly for reducing barriers in the international trade in order to facilitate the goods and services exchange between nations. Aside with the reduction of tariff barriers, quantitative restrictions and subsidies on trade have been reduced.

Although the intention was to create a full international organization called the International Trade Organization (ITO), the project was not ratified, leaving GATT as just an international agreement, very much similar to a treaty. Further more, the United States law classifies it as a congressional-executive agreement. Because the agreement was based on the "unconditional most favored nation principle" the International Trade Organization has faced strong opposition in the United States, and it was not even submitted to the Congress by the president.

The North American Free Trade Agreement and its effects

The North American Free Trade Agreement (NAFTA) was signed between the United States (represented by President George H.W. Bush), Canada (represented by the Canadian Prime Minister Brian Mulroney), and Mexico (represented by the Mexican President Carlos Salinas de Gortari) on 17 December 1992 (Wikipedia, 2007).

However, the agreement had to face strong opposition from all three countries, but in the United States President Bill Clinton managed to influence its ratification, making its passage an important legislative initiative in 1993, although he considered the agreement to be inadequate. On 1 January 1994 the North American Free Trade Area that was created by NAFTA as a trade bloc between the United States, Canada and Mexico, came into effect.

NAFTA's effects started immediately. Duties on most of tariffs between products that were traded among the three countries forming the agreement have been eliminated, while other tariffs have been gradually phased out during the past 14 years. These tariff eliminations were applied to the most important categories of goods, like motor vehicles, automotive parts, computers, textiles, and agriculture. The agreement was extended to protect intellectual property right also, especially patents, copyrights, and trademarks. Also, investment restrictions between the United States, Canada and Mexico have been removed.

NAFTA's impact on the United States is definitely considered to be a positive one, and is set as an example for other countries to follow. However, some economists state that it failed to reduce poverty rates in a significant manner. The trade between the three countries involved in NAFTA has significantly increased. Between 1993-2004 the total trade between the United States and the other two countries in NAFTA increased up to 129.3%, 110.1% with Canada and 100.9% with Mexico (Wikipedia, 2007). Another effect was integrated the Mexican auto industries into the existing market between the United States and Canada. As a consequence, the auto and auto parts trade between NAFTA members became the most important sector within it, covering 20% of intra-NAFTA trade. Another effect on the United States caused by NAFTA is the significant increase in the bilingual and trilingual (in English, French and Spanish) labeling on products so that they can be distributed through retailers in the United States, Canada and Mexico.

Regarding the agriculture sector, the effects of the Mexico-United States agricultural agreement divides economists into two opposite sides. Some of them consider this agreement's effects to be extremely negative for peasants Others state that the effects were positive for Mexico mostly, while for the United States it did not seem to have any significant effects.

NAFTA did not have a very significant impact on the United States, but it managed to exceed some of its opponents' negative expectations. For example, some expected that the U.S. manufacturing sector would suffer from some devastating effects, caused by the possible movement of U.S. companies to Mexico, in search of cheaper labor. Their negative expectations did not come true, since the U.S. employment has increased since NAFTA came into effect, the unemployment rates have slightly diminished, and the domestic manufacturing output has significantly increased. In addition to this, the investment in the U.S. manufacturing sector was 100 times bigger than the investment in the Mexican manufacturing sector.

Another NAFTA effect was caused by the limited restrictions at the borders of the three member countries of NAFTA for their citizens. This measure is responsible for the increase in tourism and cross-border shopping. The freedom of mobility has been significantly increased due to NAFTA. However, after the September 11, 2001 events, the security on the United States borders was significantly increased. These events also put an end to negotiations between the U.S. President George W. Bush and Mexican President Vicente Fox regarding the idea of free flow of people between the United States and Mexico.

However, the Office of the United States Trade Representative considers NAFTA to be "a strong record of success" (2006). It is a fact that for the past 12 years the trade among the NAFTA nations increased up to 173%, from $297 billion to $810 billion. For the United States, Canada and Mexico represent their first and second largest markets, covering about 36% of the United States' export growth to the world in 2005.

United States' increasing agricultural sector exports is due to Canada and Mexico exports that cover 55% of the increase in the U.S. since 1993. Since 1993 to 2005 the United States GDP increased by 48% due to NAFTA's effects. NAFTA also determined the growth in real compensation for manufacturing workers that significantly increased. Also during that period of time, the United States business sector productivity rose by 2.6% each year, reaching 36.2% over the full period. The investments increased by 104% during that period.

The free trade advantages on the United States

According to the Office of the United States Trade Representative, "the United States is the world's largest economy and largest exporter and importer" (2006). The United States' economic and social prosperity relies mostly on trade. Trade, especially free trade, is responsible for the economic growth, the support of good jobs, the continuously raising living standards, and the great supply of affordable goods and services. In addition to this, the Office of the United States Trade Representative stated that free trade led to a raise in the GDP up to 40%, and created over 16 million jobs in the United States over the past ten years.

Future reductions in trade barriers across the world grant the American farmers, ranchers, manufacturers, and service providers a better access to the 95% of the world's customers. This would obviously lead to an even greater economic growth determined entirely by free trade. The United States economic growth is generated by the healthy export activity. The U.S. goods and services exports covered 10.45 of the GDP and 20% of overall growth of the U.S. economy in 2005. The manufacturing sector exports have increased up to 82% over the pat decade. Also, the services exports have doubled since 1994, $381 billion of total exports, with a $66 billion surplus in 2005. The agriculture sector is also flourishing due to exports, since one third of the U.S. acres is planted for export (Office of the United States Trade Representative, 2006).

Along with influencing the economic growth, free trade also created more and better jobs. The economic growth determined by free trade and economic gains from trade led directly to more, better, and higher paid jobs for the United States citizens. The job increase for each economy sector is directly proportional to that sector's individual growth. As a consequence, in the manufacturing sector the manufacturing exports support one sixth of all manufacturing jobs, reaching approximately 5.2 million jobs in the United States. In the agriculture sector the agriculture exports support approximately 926,000 jobs in the United States. Also, 80% of the total jobs in the United States are supported by services exports. However, the highest paid jobs in the United States seem to be the jobs supported by goods exports, an estimated 13% to 18% more than the U.S. national average. In California, over 700,000 jobs have been generated by the manufactured goods exports. 25% of all manufacturing jobs in Massachusetts and 20% of all manufacturing jobs in Michigan are supported by exports. Iowa is the United States' second largest agricultural products exporter, with exports valued at over $4 billion and exporting 180 foreign markets in 2005. Also, in-sourced jobs support 5.1 million Americans working for U.S. subsidiaries of foreign companies. For example, 225,000 of Pennsylvania employees are employed by foreign companies. 127,000 people in Tennessee and 71,000 people in Alabama are employed by foreign companies. It is expected that the future reductions in trade barriers will create greater exports, which will lead to the creation of more and higher paid jobs in the United States in the near future: "trade keeps our economy open, dynamic, and competitive, and helps ensure that America continues to be the best place in the world to do business" (Office of the United States Trade Representative, 2006).

Also, free trade generates a high level of prosperity: "American families benefit from trade and open markets every day. Trade delivers a greater choice of goods - everything from food and furniture to computers and cars - at lower prices" (the Office of the United States Trade Representative, 2006). The increased trade liberalization since 1945 led to $1 trillion higher annual incomes, $9,000 per household in he United States at the present moment. Annual benefits of $1,300-2000 for average American families are generated by NAFTA and the Uruguay Round in the 1990s. The future elimination of global trade barriers would annual incomes for the United States increased by an additional $500 billion and $4,500 per household.

The free trade activity also generates security for the United States citizens, as "trade builds International Partnerships for Security" (the Office of the United States Trade Representative, 2006). The security is influenced by the fact that free trade creates transparency, it counteracts corruption, it strengthens the rule of law, and also, it encourages economic integration by building prosperity partnerships for the United States. For example, the Central America-Dominican Republic Free Trade Agreement (CAFTA), strongly supports freedom, democracy, and economic reform. The United States President proposed on 9 May 2003 a United States-Middle East Free Trade Area within a decade, in order to determine economic growth and to expand opportunity in the Middle East.

But there is paradox involved in the United States trade situation: director Daniel Griswold of the Center for Trade Policy Studies, Cato Institute, stated that "the record U.S. trade deficit for 2006 was a drag on U.S. economic growth. The consensus reflects a basic assumption that growing imports to the United States displace domestic production, reducing growth of real gross domestic product. But the consensus on trade deficits and growth ignores the actual record of the U.S. economy in recent decades and the positive correlation of imports to domestic production" (2007).

The United States Commerce Department reported a record U.S. trade deficit of $763.6 million for 2006. This record trade deficit is considered by most economists to be threatening the United States' future economic development. The Free Trade Bulletin explains this paradox situation: it seems that the expansion of economy increases demand for domestic production and for imports also. In addition to this, it also requires more domestic investment as businesses seek to meet the increased demand and to capitalize on new investment opportunities. These investment opportunities that are increasing, attract foreign capital to the United States in order to support the investments that cannot be financed by domestic funds only. Then, the foreign capital inflows generate the current account deficit. The current account deficit is directly proportional with the net inflows of foreign capital, so that it accommodates the inflows. Therefore, the accelerated growth of the GDP generates increased domestic investments, inflows of foreign capital, and the current account deficit.

Free Trade Agreements' effects on the United States

The Office of the United States Trade Representative considers that the free trade agreements that the United States are part of have shown positive effects for the United States ever since each of these agreements came into effect (2005). The most important free trade agreements known to have already shown their benefits on the American workers, farmers, ranchers, and service providers are those with Chile, Singapore and Australia.

After NAFTA area, the United States-Central America-Dominican Republic Free Trade Agreement (CAFTA) represents the largest destination for U.S. exporters. Therefore, the exports of the United States will increase due to free trade agreements. The CAFTA Policy Brief shows that: the U.S. exports to Chile increased by 33.5% in 2004, so that the United States became Chile's most important trade partner; the U.S. trade surplus with Singapore tripled after the first year of the U.S.-Singapore FTA, reaching $4.3 billion; the U.S. trade surplus with Australia grew 31.7% up to $2.13 billion; the U.S. export to both Chile and Singapore grew $4 billion after the first year of the free trade agreement between these countries and the United States.

The U.S.-Chile FTA generated U.S. exports to Chile of $3.6 billion in 2004. The most important export sector to have increased is the vehicles and parts sector, that increased by 36%; also, the U.S. exports of sophisticated machinery increased 33% to over $1.1 billion (CAFTA Policy Brief, 2005).

The U.S.-Australia FTA's most important benefit is the fact that the agreement determined U.S. exports to Australia to increase 11.7% in the beginning of 2005, reaching $3.7 billion. The most important export sector for this agreement is agriculture, with increased exports up 20%, with large gains in pork, grapes and rice: U.S. pork exports to Australia increased 885% reaching $19 million in 2004. Also, the U.S.-Australia FTA had another very significant benefit for the United States: it improved the overall U.S. trade deficit situation, since the U.S. trade surplus with Australia increased by 31.7%, reaching $2.1 billion (CAFTA Policy Brief, 2005).

The U.S.-Singapore FTA also brought great benefits for the United States: after the implementation of the free trade agreement the U.S. exports to Singapore increased up to $19.6 billion, 18.4% higher than the exports of the previous year. The economic sectors show the highest increase percentage in the exports are: the it equipment sector up to 62%, the machinery and parts sector up to 24%, the minerals and fuel sector up to 86%, the furniture sector up to 99%, and the vehicles and parts sector up to 84% (CAFTA Policy Brief, 2005).

CAFTA is expected to expand its positive effects in the future: the U.S. exports in this region are expected to reach $15 billion annually; the U.S. trade deficit is expected to be reduced by $756 million due to CAFTA; the U.S. farm exports to the region will probably increase by $1.5 billion every year, as the American Farm Bureau Federation estimates. In addition to this, the National Association of Manufacturers expects a $1 billion increase in the U.S. manufactured goods exported to the region.

General advantages and disadvantages of free trade