Briefing Research paper

Background and Context

Given its large economy and population, U.S. trade with the rest of the world has

been a smaller share of its gross domestic product (GDP) than in most other

developed economies. Nevertheless, over the last fifty years, the trade share of GDP

has more than tripled. Figure 13.1 shows the long ascent of the trade-to-GDP ratio

as it climbed from under 10 percent in the 1960s to around 30 percent after 2010.

Within the long upward trend, there are several short-run downturns in the series,

each of them during and after a recession (1974–1975, 1980–1982, 2001, 2007–

2009). Recessions cause a fall in imports due to the decline in income, and exports

fall as well if other countries are also in recession.

Real-time data

Identify major changes in U.S. economic relations that have led to

bilateral and plurilateral agreements.

LO 13.1

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Figure 13.1 The Trade-to-GDP Ratio for the United States, 1966–2014

Over the last fifty years, trade in goods and services has more than tripled as a share of the U.S. GDP.

Source: Data from World bank, © James Gerber.

The top trading partners of the United States have not changed dramatically over

the last several decades, with the major exception of China (Table 13.1 ). As

recently as 1990, China was the eighth most important source of U.S. imports and

the eighteenth most important market for U.S. exports. By 2007, it was the number

one source of imports and the third most important export market. If the European

Union (EU) is treated as one entity, then it moves into the second spot for both

imports and exports, behind Canada (exports) and China (imports). The

prominence of Canada and Mexico in Table 13.1 illustrates the relative importance

of the North American Free Trade Agreement (NAFTA) partners, not only today, but

over time as well, as both countries have been among the top five U.S. trade

partners for several decades.

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Table 13.1 Leading U.S. Trade Partners, 1990 and 2015

Top Five Trading Partners, in Order of Importance

Exports

    1990 Canada, Japan, Mexico, UK, and Germany

    2015 Canada, Mexico, China, Japan, and UK

Imports

    1990 Canada, Japan, Mexico, Germany, and Taiwan

    2015 China, Canada, Mexico, Japan, and Germany

The goods and services that make up U.S. trade have not changed much either,

although services have become more important. In 1980, services were

approximately 20 percent of U.S. exports, and now they are close to 30 percent and

continue to show strength, not the least of which is that they are an area in which

the United States has a trade surplus. About 40 percent of service exports are travel

and transportation services, while the remaining 60 percent are royalties, education,

financial and insurance services, and business and professional services. Within the

merchandise goods category (manufacturing, oil and minerals, and agricultural

products), the United States is the world’s second largest exporter of goods (behind

China), and about three-fourths of those exports are manufactured goods, with the

remaining one-fourth consisting of agricultural and mineral products, including oil

and gas.

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The Shifting Focus of U.S. Trade Relations

Throughout most of the post-World War II period, the United States was a strong

supporter of multilateral trade opening as negotiated under the auspices of the

General Agreement on Tariffs and Trade (GATT) trade rounds and then under the

World Trade Organization (WTO). Support for open capital markets was less

prominent until the 1980s, when it became another goal of U.S. policy. These

positions were reinforced by the Cold War and the U.S. desire to ensure that

developing nations joined the alliance of capitalist, democratic nations or, at a

minimum, did not form strong ties with the Soviet Union.

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Figure 13.2

Case Study Manufacturing in the United States

In what year did the United States produce its highest output of

manufactured goods? When a large group is asked this question, the

guesses range from the 1960s to the 1990s. The correct answer is usually

“Last year.” Figure 13.2 illustrates this by plotting on the left scale the

real value added in manufacturing, 1950–2014. As the graph shows, there

is a long-run upward trend in the value added of manufacturing output,

which is interrupted by the occasional recession, most recently in 2007–

2009.

Real Value Added and Employment in Manufacturing, 1950–2014

Since the late 1970s, manufacturing employment has declined, while manufacturing output has constantly risen except during recessions.

Source: U.S. Bureau of Economic Analysis; U.S. Bureau of Labor Statistics

The right scale shows manufacturing employment. Employment peaked in

1979 at 19,426,000 and began a long-run decline after that. In 1980, the

United States entered a mild recession and then a more severe one in

1981–1982. Manufacturing employment recovered some of its losses in

1984 but continued its trend downward particularly after 2000.

Within the story of the growth of manufacturing output and manufacturing

employment decline, there are two additional stories not directly shown in

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Several factors have caused shifts in this stance. First, multilateral trade negotiations

became more complicated as the GATT and then the WTO added new members.

When the GATT was originally signed in 1947, it had twenty-three members, but by

the time of the Uruguay Round (1986–1994), there were 128 signatories to the

GATT. Currently there are 162 member countries in the WTO. The increase in

membership has dramatically complicated negotiations.

Second, many quotas have been converted to tariffs, and tariffs in general have

fallen dramatically (see Figure 6.4 ). Consequently, the new multilateral trade

negotiations in the Doha Round are focused on much more difficult issues such as

agricultural support systems, intellectual property, services trade, government

procurement, and assistance for developing countries. These areas pose significant

challenges, in part because they are not easily represented as reciprocal openings. If

the graph. First, there is the story of manufacturing relocation within the

United States. Traditional industrial states in the north central part of the

United States, such as Ohio and Michigan, have seen many jobs leave for

other parts of the country. Some jobs have gone overseas, but quite a few

have also gone to Southern states such as South Carolina, Tennessee, and

Texas. When coupled with the overall decline in the total number of jobs,

the plight of older manufacturing states has been grim. This has also

contributed to the mistaken perception that the United States no longer

has a vibrant manufacturing sector, but the story of Figure 13.2 is that

the United States continues to produce a large and growing quantity of

manufactured goods.

The second story is the rapid increase in productivity in the manufacturing

sector. Fewer workers but more output means that each worker is

producing more, and output per hour worked in manufacturing has

increased at a very rapid rate. This has occurred in part through the

application of new technologies and new processes, and while

productivity growth speeds up and slows down, it is usually much more

rapid in manufacturing than in services or agriculture. Hence, even as the

United States produces more manufactured goods, fewer workers are

involved.

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all countries cut their tariffs by 5 or 10 percent, it is easy to see a mutual gain; but if

all countries agree to enforce intellectual property rights on an equal basis, it is hard

to see the immediate benefits for countries with little or no intellectual property to

defend. In addition, many of these new areas of negotiation are concerned with

issues that are deeply embedded in national politics. For example, creating a level

playing field in government procurement so that foreign firms can bid on contracts

let by a national or sub-national government arouses resentment when domestic

firms lose out in bidding to foreign ones.

Third, the end of the Cold War has removed one of the pressures that caused the

United States to offer trade concessions to other countries. During the Cold War, the

United States used access to its market as an incentive to keep countries from

developing deeper ties to the Soviet Union. It frequently agreed to asymmetric

opening of its markets without demanding equal access to foreign markets when the

country in question was perceived to have geostrategic value in the Cold War. The

United States also used its systems of quotas to reward nations for their cooperation

by allowing them to sell more in the United States, particularly in the textile and

apparel sectors, but also in agriculture. The demise of the USSR removed this need

to compromise or to offer asymmetric access to the U.S. market.

These three factors have shifted the U.S. focus toward greater use of bilateral and

plurilateral trade agreements. The United States is still supportive of the WTO and

officially welcomes a successful conclusion of the Doha Round of negotiations that

began in 2001, but multilateral agreements are no longer the only or even

necessarily the main option. The movement toward bilateral solutions began in

earnest in 1993 with the signing of the NAFTA and its implementation on January 1,

1994. While valuable in its own right, NAFTA also served the purpose of helping to

push the multilateral system toward conclusion of the Uruguay Round of the GATT

agreement by expanding trade policy to include bilateral agreements. This gave the

United States additional leverage in multilateral negotiations, as it signaled that

there are options beyond the GATT/WTO framework. In addition, from the

perspective of the United States and many other countries that have signed a

growing number of trade agreements, working within a bilateral or plurilateral

framework entails easier negotiations than in the multilateral case and has the

additional benefit of serving as a testing ground for new types of agreements. For

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example, the NAFTA agreement was the first to include labor and environmental

standards.

The United States currently has free trade agreements (FTA) in force with twenty

countries grouped into three strategic geographical regions: the Middle East and

North Africa, the Pacific Basin, and the Americas. Most agreements are with small

countries that account for a small share of U.S. merchandise trade, but Canada,

Mexico, and Korea are major exceptions. Table 13.2 shows the agreements in

force, their dates of implementation, and the total amount of merchandise goods

traded in 2015.

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Table 13.2 Free-Trade Agreements and Merchandise Goods Trade, 2015

Regions and Countries Exports (Millions) Imports

(Millions)

Middle East and North Africa

Israel (1985), Bahrain (2006),

Morocco (2006), Oman (2009),

Jordan (2010)

20,176   28,764  

Trans-Pacific

Singapore (2004), Australia (2005),

Korea (2012)

97,193   100,925

Americas

Canada (1989), Mexico (1994), Chile

(2004), Dominican Republic-

Guatemala-Honduras-El Salvador-

Nicaragua-Costa Rica (DR-CAFTA,

2006) Peru (2009), Panama (2011),

Colombia (2012)

594,033 642,079

Total merchandise trade with FTAs 711,402 771,768

Share of total merchandise trade (%) 47.3       34.4      

The final two rows of Table 13.2 summarize size and relative importance of

merchandise exports with free trade areas. Free Trade Agreement (FTA) countries

are around 47 percent of U.S. exports and approximately 34 percent of imports.

Proponents of FTAs make the argument that U.S. markets are relatively more open

than many foreign markets. Given the relative openness of the U.S. market, bilateral

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and plurilateral FTAs that help open foreign markets promote U.S. exports relatively

more than U.S. imports instead of causing a proportional increase in both.

Consequently, U.S. exports to FTA partners are a larger share of total merchandise

trade than U.S. imports from FTA partners.

This interpretation of Table 13.2 supports the idea that FTAs have been relatively

good for the U.S. insofar as they have helped to open foreign markets. Similarly,

many other countries have shifted toward signing bilateral and plurilateral

agreements. Prior to 1990, twenty-seven FTAs were notified to the GATT. In the

1990s, another fifty-five were created, but since 2000, 217 agreements have been

registered with the WTO. Some economists see the upsurge of bilateral and

plurilateral agreements as one of the principal causes for the erosion of the Doha

Round of the WTO, because they have diverted political attention toward bilateral

or regional concerns and away from global ones. Theoretically, FTAs can be

“stumbling blocks” that detract from multilateral agreements or “building blocks”

that create more trade than they divert and that enable countries to try new types of

agreements. The WTO has concluded that in practice, most are complementary to

the multilateral trading system and not substitutes for it.

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