Inside World Trade

The Great Free Trade Debate

Anyone who has been paying attention to the presidential campaign is aware that free trade has emerged as an issue. But not everyone realizes the significance of free trade to the U.S. economy. Nor do many citizens know about the increasing number of countries beyond Canada and Mexico that have signed free trade agreements with the U.S.

So what is a free trade agreement? It means that the U.S. has made an agreement with a foreign country to reduce or eliminate tariffs, which are taxes imposed on their U.S. imports. NAFTA is one of the more high profile agreements that has caused much controversy and debate.

In the past tariffs played an important role in providing revenue to the U.S. Treasury. After the Constitution was ratified in 1789, the fledging U.S. government established a Customs Service to impose and collect tariffs on imported goods. This was the only source of revenue for the newly formed government, which reportedly collected over $2 million in tariffs the first year. These tariffs or duty taxes continued to be the major source of revenue until 1913, when the income tax was established. Although the income tax became the primary source of revenue, duties on imports continued to be a significant source of funding.

Globalization of marketing and manufacturing has increased the competitiveness for favorable trade relationships among trading partners. Such trade relationships are often guided by political and socioeconomic factors that determine what type of tariffs and restrictions will be imposed on imported goods. The U.S. has given "Most Favored Nation" trade status to countries friendly to its interest. The only countries not given this status are Cuba and North Korea, which means they are subject to very high tariff rates. However, the U.S. has also imposed trade sanctions on countries such as Iran, Syria, Sudan, and Zimbabwe, for their support of terrorism or human rights violations. Certain imports from these countries are prohibited.

International organizations have also played a role in determining U.S. policy on trade. The World Trade Organization (WTO) is considered a forum for countries to negotiate trade agreements and settle trade disputes. It operates by a set of rules of international commerce binding on the participating governments to keep their trade policies in line with these negotiated agreements.The bulk of the work of the WTO has involved agreements in the Uruguay Round and the General Agreement on Trade and Tariffs (GATT). The WTO has been subject to controversy and opposition in the U.S. from groups that believe the agreements and rules are not beneficial to the U.S., and impose upon its sovereignty.

The goal of the WTO is the liberalization of trade, which it believes will benefit the world economy. In the various rounds of GATT agreements over the years, the U.S. has agreed to reduce its tariff on imported goods every year, eventually resulting in complete tariff elimination in most cases.

The U.S. has also initiated its own regional free trade agreements with various countries. Some of these have been the results of political expediency to bolster alliances, while others have been efforts to aid underdeveloped countries get a foothold in the international market. Essentially, the free trade agreements mean that most goods imported from these designated countries will not require the payment of a tariff.

In addition to the North America Free Trade Act (NAFTA) there are 14 free trade agreements between the U.S. and other countries that are currently in effect. These agreements are:

1) The Generalized System of Preferences (GSP) - a list of approximately 140 "Beneficiary Developing Countries"

2) The Caribbean Basin Economic Recovery Act (CBERA)

3) U.S.-Israel Free Trade Area Implementation Act of 1985

4) Andean Trade Preference Act(ATPA)

5) African Growth and Opportunity Act(AGOA)

6) Caribbean Basin Trade Partnership Act of 2000

7) U.S.-Jordan Free Trade Area Implementation Act

8) U.S.-Singapore Free Trade Agreement

9) U.S.-Chile Free Trade Agreement

10) U.S.-Morocco Free Trade Agreement

11) U.S.-Australia Free Trade Agreement

12) U.S.-Dominican Republic-Central America Free Trade Agreement (CAFTA-DR)

13) U.S.-Bahrain Free Trade Agreement

14) U.S.-Freely Associated States

Proponents of free trade claim that reducing barriers to trade results in growth, jobs and prosperity for Americans. The Office of the U.S. Trade Representative states that "freer trade has helped raise our GDP by nearly 40%." Trade agreements, it says, "spur exports and the creation of more, higher paying U.S. jobs." Americans benefit from a greater choice of goods at lower prices with free trade, according to the Office. It also says that trade agreements support democracy and economic reforms in countries that have been subjected to wars, chaos and insurgencies. The Small Business Exporters Association says small businesses exported more than $450 billion worth of U.S. goods and services to countries with free trade treaties, thus providing jobs and reducing the trade deficit.

Opponents of free trade claim that such agreements have resulted in the loss of jobs in the U.S. economy, particularly in the manufacturing sector. According to Public Citizen, free trade agreements like NAFTA have resulted in large trade deficits and have put the U.S. economy at risk. They say that from 1993, when NAFTA began, to 2007, 3 million manufacturing jobs were lost and the trade deficit rose to $190 billion. Other critics of free trade point out that while some countries promote free trade for all, they want protectionism for themselves and continue to impose high tariffs. Indeed, the European Union and some South American countries have raised their agricultural tariffs while we have lowered ours.

The free trade debate will continue as more developing countries clamor for special trade preferences with the U.S. The outsourcing of jobs and the offshore manufacturing of American companies will enable more countries to produce and export their products on the world market. Determining the ultimate benefits of free trade agreements to the U.S. economy may not be possible for some time to come.

Frances Allday was a specialist in commercial trade with U.S. Customs and Border Protection for 25 years