Pros & Cons of Free Trade Agreements

Symbol of the North American Free Trade Agreement (NAFTA).

A free trade agreement is a pact between two countries or areas in which they both agree to lift most or all tariffs, quotas, special fees and taxes, and other barriers to trade between the entities.

The purpose of free trade agreements is to allow faster and more business between the two countries/areas, which should benefit both.

Why All Should Benefit from Free Trade

The underlying economic theory of free trade agreements is that of "comparative advantage," which originated in an 1817 book entitled "On the Principles of Political Economy and Taxation" by British political economist David Ricardo.

Put simply, the "theory of comparative advantage " postulates that that in a free marketplace, each country/area will ultimately specialize in that activity where it has comparative advantage (i.e. natural resources, skilled workers, agriculture-friendly weather, etc.)

The result should be that all parties to the pact will increase their income. However, as Wikipedia points out:

"... the theory refers only to aggregate wealth and says nothing about the distribution of wealth. In fact there may be significant losers... The proponent of free trade can, however, retort that the gains of the gainers exceed the losses of the losers."

Claims that 21st Century Free Trade Doesn't Benefit All

Critics from both sides of the political aisle contend that free trade agreements often don't work effectively to benefit either the U.S. or its free trade partners.

One angry complaint is that more than three million U.S. jobs with middle-class wages have been outsourced to foreign countries since 1994.

The New York Times observed in 2006:

"Globalization is tough to sell to average people. Economists can promote the very real benefits of a robustly growing world: when they sell more overseas, American businesses can employ more people.

"But what sticks in our minds is the television image of the father of three laid off when his factory moves offshore."

Latest News

In late June 2011, the Obama administration announced that three free trade agreements,.. with south Korea, Colombia and Panama... are fully negotiated, and ready to send to Congress for review and passage. These three pacts are expected to generate $12 billion in new, annual U.S. sales.

Republicans stalled approval of the agreements, though, because they want to strip a small, 50-year-old worker retraining/support program from the bills.

On December 4, 2010, President Obama announced completion of renegotiations of the Bush-era U.S.-South Korea Free Trade Agreement. See Korea-U.S. Trade Agreement Addresses Liberal Concerns.

"The deal that we've struck includes strong protections for workers' rights and environmental standards--and as a consequence, I believe it's a model for future trade agreements that I will pursue," commented President Obama about the U.S.-South Korea agreement. (see Profile of U.S.-South Korea Trade Agreement.)

The Obama administration is also negotiating an entirely new free trade pact, the Trans-Pacific Partnership ("TPP"), which includes eight nations: U.S., Australia, New Zealand, Chile, Peru, Singapore, Vietnam and Brunei.

Per AFP, "Nearly 100 US companies and business groups" have urged Obama to conclude TPP negotiations by November 2011.

WalMart and 25 other U.S. corporations have reportedly signed onto the TPP pact.

Presidential Fast-Track Trade Authority

In 1994, Congress let fast-track track authority to expire, to give Congress more control as President Clinton pushed the North American Free Trade Agreement.

After his 2000 election, President Bush made free trade the center of his economic agenda, and sought to regain fast-track powers. The Trade Act of 2002 restored fast-track rules for five years.

Using this authority, Bush sealed new free trade deals with Singapore, Australia, Chile and seven smaller countries.

Congress Unhappy with Bush Trade Pacts

Despite pressure from Mr. Bush, Congress refused to extend fast-track authority after it expired on July 1, 2007. Congress was unhappy with Bush trade deals for many reasons, including:

  • Losses of millions of U.S. jobs and companies to foreign countries
  • Exploitation of labor forces and resources and defilement of the environment in foreign countries
  • The enormous trade deficit generated under President Bush

International charity organization Oxfam vows to campaign "to defeat trade agreements that threaten people's rights to: livelihoods, local development, and access to medicines."

History

The first U.S. free trade agreement was with Israel, and took effect on September 1, 1985. The agreement, which has no expiration date, provided for the elimination of duties for goods, except for certain agricultural products, from Israel entering the U.S.

The U.S.-Israeli agreement also allows American products to compete on an equal basis with European goods, which have free access to Israeli markets.

The second U.S. free trade agreement, signed in January 1988 with Canada, was superceded in 1994 by the complex and controversial North American Free Trade Agreement (NAFTA) with Canada and Mexico, signed with much fanfare by President Bill Clinton on September 14, 1993.

Active Free Trade Agreements

For a complete listing of all international trade pacts to which the U.S. is a party, see the United States Trade Representives' listing of global, regional and bilateral trade agreements.

For a listing of all worldwide free trade pacts, see Wikipedia's List of Free Trade Agreements.

Pros

Proponents support U.S. free trade agreements because they believe that:

  • Free trade increases sales and profits for U.S. businesses, thus strenghtening the economy
  • Free trade creates U.S. middle-class jobs over the longterm
  • Free trade is an opportunity for the U.S. to provide financial help to some of the world's poorest countries

Free Trade Increases U.S. Sales and Profits

Removal of costly and delaying trade barriers, such as tariffs, quotas and conditions, inherently leads to easier and swifter trade of consumer goods.

The result is an increased volume of U.S. sales.

Also, use of less expensive materials and labor acquired through free trade leads to a lower cost to manufacture goods.

The result is either increased profit margins (when sales prices are not lowered), or increased sales caused by lower selling prices.

The Peterson Institute for International Economics estimates that ending all trade barriers would increase U.S. income by a whopping $500 billion annually.

Free Trade Creates U.S. Middle-Class Jobs

The theory is that as U.S. businesses grow from greatly increased sales and profits, demand will grow for middle-class higher-wage jobs to facilitate the sales increases.

In February, the Democratic Leadership Council, a centrist, pro-business think-tank headed by Clinton ally former Rep. Harold Ford, Jr., wrote:

"Expanded trade was undeniably a key part of the high-growth, low-inflation, high-wage economic expansion of the 1990s; even now it plays a key role in keeping inflation and unemployment at historically impressive levels. "

The New York Times wrote in 2006:

"Economists can promote the very real benefits of a robustly growing world: when they sell more overseas, American businesses can employ more people."

U.S. Free Trade Helps Poorer Countries

U.S. free trade benefits poorer, non-industrialized nations through increased purchases of their materials and labor services by the U.S.

The Congressional Budget Office explained:

"... economic benefits from international trade arise from the fact that countries are not all the same in their production capabilities. They vary from one another because of differences in natural resources, levels of education of their workforces, technical knowledge, and so on.

Without trade, each country must make everything it needs, including things it is not very efficient at producing. When trade is allowed, by contrast, each country can concentrate its efforts on what it does best... "

Cons

Opponents of U.S. free trade agreements believe that:

  • Free trade has caused more U.S. jobs losses than gains, especially for higher-wage jobs.
  • Many free trade agreements are bad deals for the U.S.

Free Trade Has Caused U.S. Jobs Losses

Washington Post columnist wrote:

"While corporate profits soar, individual wages stagnate, held at least partly in check by the brave new fact of offshoring -- that millions of Americans' jobs can be performed at a fraction of the cost in developing nations near and far."

In his 2006 book "Take This Job and Ship It," Sen. Byron Dorgan (D-ND) decries, "... in this new global economy, no one is more profoundly affected than American workers... in the last five years, we've lost over 3 million U.S. jobs that have been oursourced to other countries, and millions more are poised to leave."

NAFTA: Unfilled Promises and a Giant Sucking Sound

When he signed NAFTA on September 14, 1993, President Bill Clinton exulted, "I believe that NAFTA will create a million jobs in the first five years of its impact. And I believe that that is many more than will be lost... "

But industrialist H. Ross Perot famously predicted a "giant sucking sound" of U.S. jobs heading to Mexico if NAFTA was approved.

Mr. Perot was correct. Reports the Economic Policy Institute:

"Since the North American Free Trade Agreement (NAFTA) was signed in 1993, the rise in the U.S. trade deficit with Canada and Mexico through 2002 has caused the displacement of production that supported 879,280 U.S. jobs. Most of those lost jobs were high-wage positions in manufacturing industries.

"The loss of these jobs is just the most visible tip of NAFTA's impact on the U.S. economy. In fact, NAFTA has also contributed to rising income inequality, suppressed real wages for production workers, weakened workers' collective bargaining powers and ability to organize unions, and reduced fringe benefits."

Many Free Trade Agreements Are Bad Deals

In June 2007, the Boston Globe reported about a pending new agreement, "Last year, South Korea exported 700,000 cars to the United States while U.S. carmakers sold 6,000 in South Korea, Clinton said, attributing more than 80 percent of a $13 billion U.S. trade deficit with South Korea... "

And yet, the proposed new 2007 agreement with South Korea would not eliminate the "barriers that severely restrict the sale of American vehicles" per Sen. Hillary Clinton.

Such lopsided dealings are common in U.S. free trade agreements.

Where It Stands

U.S. free trade agreements have also harmed other countries, including:

  • Workers in other countries are being exploited and harmed.
  • The environment in other countries is being defiled.

For example, the Economic Policy Institute explains about post-NAFTA Mexico:

"In Mexico, real wages have fallen sharply and there has been a steep decline in the number of people holding regular jobs in paid positions. Many workers have been shifted into subsistence-level work in the 'informal sector'... Additionally, a flood of subsidized, low-priced corn from the U.S. has decimated farmers and rural economics."

The impact on workers in countries as India, Indonesia, and China has been even more severe, with innumerable instances of starvation wages, child workers, slave-labor hours and perilous work conditions.

And Sen. Sherrod Brown (D-OH) observes in his book "Myths of Free Trade": "As the Bush administration has worked overtime to weaken environmental and food safety rules in the U.S., Bush trade negotiators are trying to do the same in the global economy...

"The lack of international laws for environmental protection, for example, encourages firms to go to the nation with the weakest standards."

As a result, some nations are conflicted in 2007 over U.S. trade deals. In late 2007, the Los Angeles Times reported about the pending CAFTA pact:

"About 100,000 Costa Ricans, some dressed as skeletons and holding banners, protested Sunday against a U.S. trade pact they said would flood the country with cheap farm goods and cause big job losses.

"Chanting 'No to the free-trade pact!' and 'Costa Rica is not for sale!' protesters including farmers and housewives filled one of San Jose's main boulevards to demonstrate against the Central American Free Trade Agreement with the United States."

Democrats Divided on Free Trade Agreements

"Democrats have coalesced in favor of trade policy reform over the past decade as President Bill Clinton's NAFTA, WTO and China trade deals not only failed to deliver the promised benefits but caused real damage," said Lori Wallach of Global Trade Watch to Nation contributing editor Christopher Hayes.

But the centrist Democratic Leadershp Council insists, "While many Democrats find it tempting to 'Just Say No' to Bush trade policies... , this would squander real opportunities to boost U.S. exports... and keep this country competitive in a global marketplace from which we cannot possibly isolate ourselves."