Briefing Research paper

New and Old Agreements

Table 13.2 shows the recent trade agreements, along with some older ones, that

are in force. The United States is negotiating two additional agreements of some

importance and has put into place a series of unilateral agreements that provide

market access without demanding reciprocation, called preferential agreements .

This type of agreement is enacted to support the development efforts of a set of

countries, or for a specific political reason. Table 13.4 lists the two key FTAs that

are still in negotiation as well as the preferential agreements in place.

Differentiate free trade agreements from preferential trade agreements

and give examples of each.

LO 13.5

State why it is difficult to have precise estimates of job gains and losses

due to trade, and give specific examples of how imports may create jobs and

exports may occur after a loss of jobs.

LO 13.6

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Table 13.4 Key Trade Initiatives of the United States

Free Trade

Agreements

Members Goals

Trans-Pacific

Partnership (TPP)

12 Free trade

Asia-Pacific Economic

Cooperation (APEC)

21 Free trade in theory, but in practice

an economic forum for addressing

issues of concern

Transatlantic Trade

and Investment

Partnership (T-TIP)

29 Trade and investment liberalization

Preferential

Agreements

Beneficiaries Purpose

Generalized System of

Preferences (GSP)

(1976)

122 Duty-free access for many goods

from 122 low- and middle-income

countries

Caribbean Basin

Initiative (CBI) (1983)

17 Duty-free access for most goods

from 17 Caribbean nations

African Growth and

Opportunity Act

(AGOA) (2000)

39 Duty-free access for most goods

from 40 sub-Saharan countries;

eligibility varies with political

conditions

The United States continues to seek new trade and investment agreements while unilaterally offering enhanced market access to many low- and middle-income countries.

Source: Office of the United States Trade Representative.

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The two FTAs listed in Table 13.4 , particularly the Asia Pacific Economic

Cooperation (APEC) economic forum, include a large number of countries. APEC

spans the Pacific, from north to south and east to west, and includes some of the

largest economies in the world, including China, Japan, South Korea, Mexico,

Canada, and Australia. It differs from other FTAs in that it is not directed at creating

an FTA among its members, but rather seeks to create free trade for all, members

and nonmembers, within the Asia-Pacific region. In its original goals, it set 2010 as a

target date for free trade for all its industrial economy members, and 2020 for the

developing economies. The first target date was not met and has been scaled back

as APEC has become a forum for discussing trade issues of concern. In part, it was

lack of progress in APEC that caused the United States to join with a subset of APEC

countries to pursue a FTA in the form of the Trans-Pacific Partnership (TPP).

In the agreements completed (Table 13.2 ) under negotiation, similar issues arise

over and over. These include labor and environmental standards, investment, and

job loss.

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Labor and Environmental Standards

In nearly all the trade agreements signed since NAFTA (1994), the labor and

environmental side agreements (North American Agreement on Labor Cooperation

and North American Agreement on Environmental Cooperation) have served as a

framework for adding labor and environmental clauses. The key principles of the

labor and environmental side agreements to the NAFTA are that countries should

enforce their own laws and that low or poorly enforced labor and environmental

standards should not be used to attract trade or investment. Enforcement, for the

most part, relies on consultations with parties levying a complaint of

nonenforcement, and investigation by the home country government. The wording

of the agreements is very specific and states that no investigation or enforcement

may be performed by one country in the territory of another. Instead, the

agreements attempt to create public awareness of noncompliance without setting

specific standards or encroaching on the sovereignty of national governments.

In the newest of the proposed agreements, the Trans-Pacific Partnership, labor

standards are part of the agreement, with a dispute resolution process and the

possibility for imposing trade sanctions such as tariffs when standards are not met.

The content of the labor standards reflect the core principles of the International

Labour Organization’s (ILO) Declaration on Fundamental Principles and Rights at

Work and its follow-up (see Chapter 8 ):

1. Freedom of association and the effective recognition of the right to collective

bargaining.

2. The elimination of all forms of forced or compulsory labor.

3. The effective abolition of child labor.

4. The elimination of discrimination with respect to employment and

occupation.

The TPP is not the first agreement to incorporate labor standards directly rather

than as a side agreement, but it is the first to offer the possibility of trade sanctions

as a remedy for noncompliance and it is the first to specify the content of labor

standards rather than leaving it up to individual countries to set their own

standards. Note, however, that the specific content is rather general, and

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consequently, it would be incorrect to assume that standards are harmonized. For

example, worker health and safety regulations, wages, and hours of work, will

undoubtedly vary greatly across the members of the proposed TPP.

The environmental side agreement of the NAFTA established the framework for

incorporating environmental clauses into subsequent FTAs. In many respects, it is

parallel to the labor clause and is motivated by similar concerns that low

environmental standards not be used to gain competitive advantages. As noted in

Chapter 8 , it is unrealistic to expect environmental standards, clean-up

preferences, or resource commitments to be identical in countries with different

income levels. Whereas some countries may prioritize the reduction of greenhouse

gases, others may still be struggling to provide access to clean drinking water. The

marginal benefits of one priority over another depend on the level of income and

the state of the environment in each place. Consequently, the goal of the

environmental side agreement to the NAFTA was, like the labor side agreement, to

ensure that countries enforced their own laws and that they did not use low

standards or poorly enforced standards as a means to attract investment or to lower

costs of production.

The proposed TPP does not harmonize environmental standards. Rather it focuses

on the enforcement of a number of international agreements, such as agreements on

wildlife trafficking, protection of endangered species, and others, while also

eliminating some subsidies to fishermen that have led to over-fishing. As with labor

standards, its primary emphasis is on enforcement of each country’s own standards,

along with recognition of a number of multilateral commitments all countries have

made, or must make.

Critics of the labor and environmental clauses come in two forms. Some economists

think that trade agreements should not be about labor and the environment, and so

these clauses do not belong in trade agreements. They think that including these

clauses gives support to protectionists who will inevitably oppose increased trade

flows by making arguments, whether based on fact or not, that the trade partner

does not enforce its laws adequately. Another set of economists argue that the

clauses are meaningless because there is no real enforcement mechanism. Countries

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are left to their own devices to determine whether laws are adequately enforced,

and there is no clear consequence of nonenforcement.

These criticisms have resulted in the new approach that is being tried with the

proposed TPP. The chief negotiator for the United States, called the U.S. Trade

Representative (USTR), has insisted that basic labor standards be incorporated into

the agreement and that countries must recognize and enforce environmental

standards that have multilateral support, such as rules on wildlife trafficking and

protection of endangered species. In addition, for the first time, trade sanctions

would be allowed as a way to enforce standards.

It is fairly certain that NAFTA would not have been ratified by Congress without the

inclusion of the labor and environment side agreements as a package deal. Members

of Congress were nervous about the potential for jobs to migrate south, and they

worried that Mexico’s weaker enforcement of labor and environmental laws could

be used to gain competitiveness. Since then, the strategy of including labor and

environmental chapters directly in the trade agreements has helped gain

Congressional support and has become the standard strategy for ensuring passage

of new agreements. Whether the new approach of specifying in more detail the

content of the standards and allowing for the possibility of trade sanctions as a

punishment for noncompliance will help gain passage of the proposed TPP remains

to be seen. Undoubtedly, any future agreement will have something similar.

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Investor-State Relations

A majority of the FTAs in force have chapters on investment. In addition, the United

States has forty-two bilateral investment treaties (BIT) with countries across the

globe. These agreements, like the FTA chapters on investment, set out the rules

governing cross-border investment, including the options for dispute resolution

when an investor thinks they have been treated unfairly. The rules are set within a

framework emphasizing national treatment for foreign investors with the intention

of eliminating all distinctions between national and foreign investors. The rules also

eliminate the use of most performance requirements for foreign investment (e.g.,

export requirement or local content use) and guarantee a uniform set of regulatory

standards for foreign and domestic firms. As transportation and communication

improvements have enabled more businesses to offshore some of their production

processes, U.S. trade policy has sought to address the concerns they have about

investing abroad. In a very general sense, the goal of these agreements is to create a

higher level of certainty for investors with respect to their property rights if they

invest in a country that has an agreement with the United States.

Again, NAFTA set a framework for investor-state rules by creating a dispute

settlement process specifically for investors from one NAFTA country that invest in

another NAFTA country. Chapter 11 of NAFTA sets out the rules, and is perhaps

the most controversial part of the agreement. Specifically, Article 1110 states:

“No Party may directly or indirectly nationalize or expropriate an

investment of an investor of another Party in its territory or take a

measure tantamount to nationalization or expropriation of such an

investment….” (emphasis added)*

except for public purpose, on a nondiscriminatory basis, and with compensation.

Critics of the NAFTA argue that undermines the sovereignty of nations by allowing

private enterprises to sue governments that are seeking to protect their workers or

their environment, or that implement regulations that they believe to be in the

public interest. Since then, FTAs and BITs have introduced language referring to

“indirect nationalization” and added clauses to the effect that nothing in the

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agreement shall be interpreted to mean that environmental or other standards may

not be upheld or implemented if they protect the public interest.

Critics of these agreements argue that the asymmetry between the United States and

many developing countries necessarily creates an unlevel playing field in which U.S.

corporations with extensive resources can bully developing countries’ governments

with the threat of lawsuits if they attempt to raise their regulatory standards. Again,

the proposed TPP attempts to overcome the objections of critics by explicitly stating

that nothing in the agreement can be interpreted as a limitation on the ability of

countries to impose regulations to protect public health and safety or environmental

quality.

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Jobs and Trade Agreements

There are quite a few estimates of the job gains or losses caused by NAFTA and

other trade agreements. Within five years of NAFTA’s implementation, the estimates

ranged from a net loss of 98,000 a year to a net gain of 42,000 a year. It is possible to

estimate the number of workers needed to produce a given quantity of exports, and

to estimate the number of jobs that would be created if imports were produced at

home, but these values are not the same as job creation and destruction due to a

trade agreement. For example, imports may supply a firm with capital or

intermediate goods that make the firm more competitive and better able to survive;

and exports may supply a foreign affiliate that has been recently off-shored by the

home country firm. Hence, some imports create jobs, while some exports exist only

because jobs at home have been moved abroad. Given these conceptual difficulties,

actual estimates of the number of jobs gained or lost are closer to guesses. In

addition, pro-trade think-tanks and scholars usually show job gains, while anti-trade

think-tanks show job losses. In either case, however, neither side of the debate can

show large job gains or losses in the United States due to trade agreements. Given

that the United States creates more than 2 million net new jobs in an average

(nonrecession) year, most estimates of job losses or gains due to the trade

agreement are well below 5 percent of the measured total change.

Figure 13.3 illustrates this point by plotting gross job gains and gross job losses in

the U.S. economy from March 1994, through March 2015. The values on the vertical

axis are in thousands, making 8,000 equivalent to 8,000 thousand, or 8 million.

Figures are annual totals, measured from March to March. Job gains include new

establishments or expansions in existing ones, while job losses include layoffs and

establishment closings. Whenever job losses exceed job gains, there is net job loss,

and vice versa when gains are greater. First, note that the two major episodes of job

losses are during the recessions of 2001 and 2007–2009. Second, the period

immediately after the implementation of NAFTA is not one with net job losses, but

on the contrary, corresponds to a period of strong net job gains. That does not prove

that NAFTA created jobs, but it does show that if there were job losses, they were

substantially outweighed by other factors, including the strong economic growth of

the second half of the 1990s. The most important point of Figure 13.3 is that the

U.S. economy is larger than most people realize and that it is very dynamic.

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Figure 13.3

Real-time data

Gross Job Gains and Losses, 1994–2015

The U.S. economy creates between 10 and 16 million new jobs (gross) each year, while it loses slightly fewer in normal, nonrecession, years.

Source: Bureau of Labor Statistics

A second point that has often been overlooked in the evaluation of NAFTA and

other trade agreements is that the United States has much less unbalanced trade

with the countries that have signed FTAs. Table 13.5 shows U.S. merchandise

exports, imports, and deficits for FTA countries and the rest of the world.

Merchandise goods trade balances are much more favorable when countries sign an

FTA because U.S. markets are already relatively open and tariff barriers are low,

with the exceptions outlined in Chapter 7 . When countries enter into an FTA, the

required elimination of trade barriers is usually much greater outside the United

States than it is inside. As foreign barriers decline, U.S. exports expand.

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Table 13.5 US Merchandise Goods Exports, Imports, and Deficits

Exports Imports Deficits

FTAs

Total (billions US$) 711.4 771.8 −60.6

Share (%)   47.3   34.4    8.2

Rest of world

Total (billions US$) 793.2 1,469.9 −676.7

Share (%)   52.7   65.6   91.8

U.S. trade deficits are much smaller with countries that sign FTAs.

Source: See Table 13.2 .

Anti-trade rhetoric usually assumes that trade deficits are encouraged by trade

agreements, yet the data show otherwise. Anti-trade arguments also often assume

that mercantilism is correct in its assertion that imports are harmful while exports

are beneficial. Yet, consumers have more choices and businesses more competitive

when they have access to imports. Nevertheless, it is important to try to understand

the sources of anti-trade rhetoric. If FTAs are not the problem and if imports are

beneficial, then why do so many people in the United States view international trade

as harmful? There is no easy answer to this question and economists have not been

able to reach a consensus as to the causes of anti-trade sentiments in the wider

public. It may be partially related to the loss of manufacturing jobs, or to wage

stagnation and growing inequality, or to the complaints of a vocal minority that has

lost its livelihood as a result of trade and investment abroad. As Chapters 3 and

4 show, trade causes economies to shift their production and some workers are

displaced. Whatever their causes, anti-trade perspectives reflect a deep set of

concerns about the future of the country.

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Case Study The African Growth and Opportunity Act

Preferential trade agreements cover a variety of schemes that admit

imports either tariff free or with a reduced tariff. Most high-income

countries and some developing countries use these schemes to support

low- and middle-income countries by letting their goods bypass the

normal tariff barriers. The most common scheme is called the Generalized

System of Preferences (GSP) . The United States implemented the GSP in

1976 and currently offers tariff-free access to its market for a large

percentage of goods coming from 122 developing countries.

In addition to the GSP, the United States offers two other preferential

agreements: the Caribbean Basin Initiative (CBI) , and the African

Growth and Opportunity Act (AGOA) (Table 13.4 ). Goods not covered

under the GSP are covered in these additional preference schemes,

although none of them cover all exports by the beneficiary countries. Each

of these agreements has a political or economic objective. The CBI was

implemented to diversify Caribbean exports and strengthen growth during

a time of political unrest, guerilla warfare, and rising socialist parties in

Central America and the AGOA is intended to promote export

diversification and economic development in sub-Saharan Africa.

AGOA is the most recent of the agreements. Signed into U.S. law in 2000, it

currently covers thirty-nine countries in sub-Saharan Africa and is the

primary trade-promotion initiative of the U.S. government for Africa. It

provides duty-free entry for 5,200 products, covering about 86 percent of

products that the U.S. imports. Countries that qualify for duty-free access

to the U.S. market under the AGOA include some of the poorest nations of

sub-Saharan Africa, many with per capita incomes under $1,000 per

person per year. The goal of the U.S. in offering enhanced market access

on a unilateral basis is to encourage export diversification and promotion

as a catalyst for economic development.

Duty-free access to the U.S. market is a significant benefit for sub-Saharan

Africa and a few countries have taken advantage of the opportunity to

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*NAFTA, Organization of American States

increase exports, particularly in the automotive sector (car parts) and the

relatively highly protected apparel sector. In spite of a few successes,

more than one-half of all AGOA designated countries export less than $1

million in goods to the United States, and many of those with significant

exports mostly sell oil, the most common export. The difficulties

associated with diversifying out of oil are limited by two factors. First, a

few goods that are sensitive to the United States are excluded. These are

primarily agricultural products and include some key sectors. For example,

cotton is an important product in several countries (see the case study on

losing comparative advantage in Chapter 3 ), as are the excluded items

peanuts and sugar. Secondly, distance matters, as it leads to higher

transportation costs and less competitive pricing. Western African nations

are not so far from the United States, given cheap ocean transportation,

but East Africa is another matter. Furthermore, the disadvantage of

distance is compounded for fourteen sub-Saharan African nations that are

landlocked without direct access to the sea. (Africa has more landlocked

nations than any other continent.)

As noted above, AGOA exports have grown since the implementation of

the preferential scheme. Ideally, export growth would show a diversified

set of manufactured goods and agricultural products, representing robust

economic performance and new opportunities for these sub-Saharan

nations. Yet, most of the growth has been in oil exports. Increased

exploration and new discoveries have led to significant increases in oil

exports to the United States from Angola, Chad, Equatorial Guinea, Gabon,

and Nigeria. In 2015, 35.8 percent of U.S. imports from AGOA countries

were oil and related products.

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