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Free Trade’s Rude Awakening

Thursday, October 6, 2011

The president has submitted three free trade agreements to Congress. But four years of tortuous domestic debate over the FTAs has led the world to doubt U.S. commitment to opening markets.

This week, the U.S. trade agenda arose from its long, fitful slumber. As the agenda gets up, brushes itself off, stretches, and prepares to do business, we can survey the surroundings and ask how things have changed since it first settled into its long dormancy (actually, it was knocked on the head, but set that aside).

The recent revival came when President Obama submitted the South Korea, Colombia, and Panama free trade agreements (FTAs) to Congress. A great deal has changed since those accords were first agreed, between November 2006 and June 2007. At the time, the agreements put the United States at the forefront of global trade liberalization. The pacts were designed to give U.S. exporters preferential access to partner country markets.

That is all gone now. On the global scene, the tortuous domestic battles to pass straightforward four-year-old agreements has led the world to doubt U.S. commitment to opening markets. Also, during the long interregnum, the United States lost some of the possibility for preferential access that the agreements originally offered. Canada signed an FTA with Colombia that came into force last August. That agreement gives Canadian wheat exporters free access to the Colombian market, while U.S. farmers continue to face tariffs. In the larger South Korean market, European firms gained improved access through an EU-Korea FTA last July. The U.S. agreements now before Congress will still be valuable; the deals will level the market access playing field. But now it is a matter of catch-up, not leadership.

The U.S. agreements will still be valuable, but now it is a matter of catch-up, not leadership.

What of the economic impact? Perhaps the passage of time and the difficult efforts at renegotiation have allowed the three agreements to ripen and mature in beneficial ways. The real action here is with South Korea, since it dwarfs Colombia and Panama economically. In 2007, the official arbiter of economic impact estimates, the U.S. International Trade Commission, predicted that the FTA with Korea would boost U.S. exports and output by roughly $11 billion per year. We’ve foregone four years of such gains; what did we get in return? The renegotiation was heavily focused on the auto sector, so the ITC did not bother to reevaluate the whole accord. Instead, in a March 2011 update, it asked what U.S. auto exporters could expect from the reworked deal. Whereas the old estimate foresaw an increase in U.S. motor vehicles and parts exports to South Korea of 46 to 59 percent, the new estimate predicts an increase of 54 percent. So, in terms of economic impact, things are right where we left them. At least the ITC is growing more confident in its precision over time.

Perhaps there was progress on the domestic political front. Has the long delay at least allowed the country to address the rifts between trade skeptics and trade enthusiasts that derailed the trio of deals in 2008? Sadly, no. There was one significant political shift achieved through the renegotiation of the Korea deal: Ford and the United Auto Workers switched from opposition to support. Labor support for FTAs in the United States has been exceedingly rare. Had this conversion heralded a broader realignment, it might well have been worth the wait, but it did not. UAW support for the Korea agreement has been tepid and did not extend to the other agreements. Other prominent labor groups, such as the AFL-CIO, have remained steadfast in their opposition to all three FTAs. This does not bode well for moving beyond the trade agenda of 2006-2007.

Nor is the negotiating apparatus for any further progress in place. The Obama administration has indicated that it would like to turn next to the Trans-Pacific Partnership, an FTA between a nine-country grouping of Asia-Pacific nations. But the legal cover for negotiating such an agreement expired in June 2007. Why should an administration need legal cover to go strike a deal? Because trading partners sitting across from the United States will have two great fears: 1. Their carefully wrought exchange of concessions will be undone through amendments in Congress, and; 2. Their sensitive offers of market access will subject them to political attack at home while the agreements sit and molder. U.S. “Trade Promotion Authority” (once known as Fast Track) is supposed to protect partners on both counts. It was once thought to ensure partners a timely up-or-down vote in the Congress–and it did so until 2008, when then-House Speaker Nancy Pelosi (D-California) demonstrated that the protections were illusory and that agreements could, in fact, be left in purgatory for years on end.

In 2007, it was predicted that the FTA with Korea would boost U.S. exports and output by roughly $11 billion per year. We’ve foregone four years of such gains; what did we get in return?

One of the key legislative maneuvers in the run-up to this week’s FTA submission was the defeat of a Senate amendment that would have restored Trade Promotion Authority to the Obama administration. Senate Minority Leader Mitch McConnell (R-Kentucky) had proposed the amendment, but it was rejected 55-45. Speaking to Congressional Quarterly, Senator Ron Wyden (D-Oregon) “expressed concern about undertaking a complex endeavor that usually takes months or years to complete and is usually contingent on lawmakers and companies working out a long-term U.S. trade policy. The 2002 law (PL 107-210) took 18 months to enact.” If this timetable is right, then the United States is either years away from a fully-revived trade policy, or it had better hope for trading partners who are unworried by the prospect of rough treatment at the hands of a trade-skeptical Congress.

The grim outlook for U.S. trade policy should not dim the enthusiasm to see these three FTAs up and about. They will help the U.S. economy. Their belated passage will begin to repair strained relations with key allies, such as South Korean President Lee Myung-bak, who will visit the White House on October 13. And their conclusion will clear the way for a post-2007 U.S. trade agenda, however challenging that discussion may be.

Philip I. Levy is a resident scholar at the American Enterprise Institute.

FURTHER READING: Levy also writes “Obama’s Great Buffett Confusion,” “How Do Jobs Numbers Work?” “Will Exports Save the U.S. Economy?” and “Who’s Stalling Whom on Trade?

Image by Rob Green | Bergman Group

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