Skip to main content

Chapter 4: Trade Agreements and U.S. Commercial Interests

Under the auspices of the General Agreement on Tariffs and Trade /World Trade Organization (GATT/WTO), the developed countries’ tariffs on nonagricultural goods have fallen from an average of 40 percent after World War II to less than 4 percent today, and this has been a major driver of the enormous increase in world trade that has occurred during the past sixty years. Because of the weaknesses of economic data, however, it is difficult to estimate the impact of this lessening of tariffs on the U.S. economy, although most economists believe it has been significant. Other GATT /WTO agreements, such as services and government procurement, have probably only had a small impact, although the agreement on protection of intellectual property has undoubtedly been important.

By William Krist

Additionally, most economists believe the impact of the North American Free Trade Agreement (NAFTA) has been significant; the United States’ other agreements now in effect have all been either with small countries or with countries such as Australia and South Korea that are on the other side of the world, and accordingly these have had less economic impact on the United States. However, current negotiations for a Trans-Pacific Partnership and for a Trans-Atlantic Trade and Investment Partnership have potentially enormous commercial importance.

The U.S. trade balance shifted from surplus to deficit in 1971, and it has increased steadily until it accounted for almost 6 percent of U.S. gross domestic product (GDP) in 2008 before the global financial and economic crisis.  This structural deficit has had an adverse impact on the U.S. economy.

International trade in goods and services has become far more important today to both the world economy and to the United States than was the case sixty years ago. In fact, since 1950 world trade has increased twenty-seven-fold in volume terms, according to the WTO, while the world economy has only increased eightfold during the same period.[1]  In other words, world trade has grown more than three times as fast as has global GDP, and by 2007 for the first time international trade equaled more than half of global GDP.

In fact, in just the decade between 2000 and 2010 world trade more than doubled, as can be seen in table 4.1, rising from $8.5 trillion to just over $20 trillion. Trade in nonagricultural merchandise accounted for about three-quarters of total trade in goods and services in 2010, while trade in agricultural products accounted for under 7 percent, and services for just over 18 percent.

Some trade today takes place under the conditions of absolute advantage on which Adam Smith based his revolutionary theory of international trade in 1776. For example, the United States imports asparagus in the winter to satisfy the nation’s demand for fresh vegetables.

Most trade, however, takes place under the conditions of comparative advantage, as set out by David Ricardo and Hechsher-Ohlin. This would include products and services subject to the classic assumption of increasing costs of return, whereby each additional unit produced is more expensive than the last. For example, a farmer will experience increasing costs of return if he expands wheat production by producing on less fertile land. And it includes products and services subject to decreasing costs of return, such as automobiles or semiconductors, where the cost of producing an additional unit falls as production can be more efficiently mechanized (past a certain size, of course, costs would no longer decrease as production expanded further).

Along with this enormous growth in world trade, the GATT/WTO, largely under U.S. leadership, has developed an extensive system of rules that govern a great deal of international trade in goods, services, and the protection of intellectual property. To enforce these rules, the WTO has a well-developed dispute settlement mechanism with the power to impose sanctions. (as noted, however, the rules have a number of extremely important loopholes.)

Tariffs and the GATT/ WTO

The reduction of tariffs and related nontariff barriers such as quotas and import licensing that took place in the eight rounds of multilateral trade negotiations held under the GATT’s auspices played a critical role in this increase in world trade. At the end of World War II, developed-country tariffs on industrial goods averaged approximately 40 percent; by the start of the Doha Round in 2001, average tariffs were down to less than 4 percent.[2]

Tariffs on industrial goods were cut by approximately 35 percent in the first five GATT trade rounds held between 1947 and 1961. Only twenty-three countries participated in the first of these rounds; and only a few more, twenty-six countries in total, participated in the last, the Dillon Round.

By 1965, as the Kennedy Round was just getting under way, developed-country tariffs on industrial products were down to an average of about 25 percent. By 1977, when the Kennedy Round tariff reductions had been fully implemented, tariffs had fallen by about another 35 percent, to about 16 percent. These lower tariffs enabled multinational corporations to begin to develop global supply chains in which parts and raw materials were sourced wherever they could be purchased most economically and then sold globally. The global companies at the top of these supply chain pyramids purchase their parts and raw materials from the cheapest source, which may be determined on the basis of comparative advantage, special preferential treatment, government subsidies, currency manipulation, geographic location, or other factors. Spurred by these global supply chains, as well as by falling costs of international transportation and communications, trade has increased some two times as fast as economic growth since the end of the Kennedy Round.

The Tokyo Round, which began in 1973 and concluded in 1979, produced an additional 35 percent reduction in developed-country industrial tariffs when the cuts were fully implemented. As a result of the Tokyo Round, the average U.S. tariff on industrial products declined from 6.1 to 4.2 percent, and comparable reductions were made by all the nineteen major developed-country participants. As noted in chapter 2, many nontariff barriers, such as quotas and import licensing, were eliminated, along with the reduction in tariff rates. Then the Uruguay Round, which began in 1986 and concluded in 1994, further reduced developed country industrial tariffs by an additional 35 percent when the cuts were fully implemented in 2005.

The number of countries participating in each round also steadily increased, from 62 in the Kennedy Round to 123 in the Uruguay Round.  Most of these new participants were developing countries, and they made significantly fewer tariff reductions than did the developed countries, and the least-developed countries did not have to make any concessions.  Additionally, as noted, few reductions in trade barriers were made, even by the developed countries, in the agricultural area.

Although developed-country tariffs on nonagricultural goods were reduced enormously on average in these rounds of negotiation, tariffs on some products remain high, and a few nontariff barriers still remain. For example, the United States still maintains high duties on textiles (the average U.S. tariff on textiles is 7.9 percent, although some specific textile tariff lines are as high as 40 percent).[3]

Given the way these negotiations were conducted, one would expect that developed-country tariffs on nonagricultural goods would be low and that their tariffs on agricultural products would be significantly higher. And one would expect developing-country tariffs to be significantly higher than the tariffs of developed countries.  

This is basically the pattern of tariffs among countries. Since the implementation of the Uruguay Round agreement, U.S. tariffs on nonagricultural goods are just 3.3 percent, whereas Japan’s are just 2.5 percent and the European Unions are just 3.9 percent, and almost all tariffs in each of these three blocs are bound. Tariffs on agricultural goods, however, are far higher. The average bound tariff on agricultural goods for the United States is 4.8 percent, for the European Union, 12.3 percent; and for Japan, 20.9 percent.

Developing-country tariffs are generally significantly higher for both agricultural and nonagricultural goods than are developed-country tariffs, as can be seen in table 4.2 for China, Mexico, India, and Brazil. For example, Mexico’s average bound tariff on nonagricultural goods is 34.9 percent, and India’s is 34.6 percent. However, the rates actually applied by many developing countries are far lower than their bound rates.

The enormous reduction in trade barriers on industrial goods that occurred from 1947 to the 1980s would not have happened without the eight rounds of multilateral trade negotiations held by the GATT. U.S. industry, as well as labor, would have bitterly resisted unilateral tariff reductions.   In the face of this opposition, Congress never would have agreed to such a substantial reduction of U.S. tariffs.[4] The United States and other developed countries were only willing to reduce their barriers in exchange for the prospect of gaining access to new markets.

Other Drivers of Trade Liberalization

To a lesser extent, trade liberalization has also been driven by other forces than GATT/WTO multilateral negotiations. Preferential systems to benefit developing countries, bilateral and regional free trade agreements (FTAs), and unilateral trade liberalization often driven by the International Monetary Fund have also played a significant role.

Preferential systems, which are a major derogation from the most favored-nation (MFN) principle, were authorized by the GATT in 1971.  Under this derogation, developed countries may give preferential tariff treatment to products imported from developing countries, and today all developed countries have such schemes in place, as do some of the advanced developing countries. Under this provision, in 1976 the United States implemented its Generalized System of Preferences (GSP), whereby eligible countries could export products covered by the scheme duty free to the United States. Today there are 131 eligible countries and 4,800 covered products; excluded from coverage are a number of import-sensitive products such as textiles. Communist countries, countries on the U.S. State Department’s list of countries that support terrorism, and countries that have been designated as failing to protect intellectual property are excluded from eligibility. If an eligible country develops and reaches the status of a high-income developing country, it is graduated from the program, that is, it is no longer eligible for preferential trade treatment.

The United States also has several preference schemes in place that build on the GSP system. The largest is the African Growth and Opportunity Act (AGOA), which was instituted in 2000. Sub-Saharan African countries are eligible to participate in AGOA provided they meet specific criteria, such as either being a market-based economy or making progress toward becoming one, eliminating barriers to U.S. trade and investment, protecting intellectual property rights, and protecting human rights and workers’ rights. Countries can lose their eligibility if they fail to meet the criteria; some thirty-five countries have participated, although the participating countries have varied. Other U.S. preferential schemes include the Caribbean Basin Initiative, with eighteen beneficiary countries; and the Andean Act, which was enacted in 1991 to benefit Bolivia, Colombia, Ecuador, and Peru.[5]

The preference programs of the United States and other countries have several serious limitations. First, they are unilateral. This means that a beneficiary country can be dropped or the eligibility criteria can be changed at any time the United States or other providing country so chooses. These preference programs are also one-way; while the United States grants preferential treatment to the developing countries, they do not grant similar treatment to U.S. exporters. Second, these programs need to be periodically renewed by Congress, which creates business uncertainty.  And third, these programs do not cover all goods; in fact, many of the products not covered are precisely those labor-intensive products where developing countries have a comparative advantage.

Trade liberalization has also been driven by the bilateral and regional FTAs that the United States and other countries have negotiated, as described in chapter 2. These were allowed under the original GATT, although it was not originally envisioned that such agreements would be very extensive. The first agreement for the United States, as previously noted, was the 1985 agreement with Israel, and today the United States has such agreements in place with twenty countries.  Other countries and the European Union have many similar agreements, and today a significant portion of world trade takes place under these FTAs.

Under GATT/WTO rules, FTAs are supposed to eliminate substantially all barriers to trade in goods and services; a transitional period is allowed, during which barriers on non-sensitive products are eliminated immediately while barriers on sensitive products may be reduced—and eventually eliminated—in annual increments, often over a ten-year span.  Unlike preferential systems to benefit developing countries, which must be periodically renewed, FTAs are expected to be permanent—although they do contain provisions to allow them to be abrogated. And they are two-way; that is, United States’ exporters also benefit from free access to its partner country.

As a result of the United States’ trade agreements program, in 2012 just under 35 percent of the United States’ imports entered under one of its bilateral or regional FTAs.[6]  An additional 14 percent entered duty free under the GSP program and 2 percent under AGOA. However, the basic U.S. tariff rate structure set out in the Smoot-Hawley tariff is still in effect, but applies to only a miniscule percentage of total U.S. imports, basically imports from North Korea and Cuba.

Another driver of trade liberalization worldwide has been the International Monetary Fund. From 1980 to 2000, the IMF often required developing countries to unilaterally reduce their tariff s and other trade barriers as a condition for receiving its financial support. The IMF imposed requirements to reduce tariffs on fifteen middle-income countries and twenty-five low-income countries that were WTO members, and on three middle-income countries and seven low-income countries that were in the process of joining the WTO.

However, the IMF’s approach to reducing trade barriers was substantially different from the WTO’s. The Independent Evaluation Office  of the IMF says that

while both [the IMF and the WTO] are dedicated to a common vision of a liberal global trading system, their approaches to trade liberalization are fundamentally different. . . . The WTO’s approach involves reciprocal liberalization through multilateral negotiations backed by a dispute settlement mechanism. The IMF aims to support best practices—trade policies (even if not the result of reciprocal bargaining) it views as bolstering efficiency and stability. Also, the WTO provides greater leeway for its developing country members to phase in global agreements, while the IMF aims to apply economic principles uniformly across its members, albeit with muscle linked to whether a country has a lending arrangement.[7]

Although the IMF demanded these unilateral tariff reductions, it did not require that they be bound under the WTO. Accordingly, these countries were free to later raise their duties back to higher levels.

The IMF’s heavy-handed approach to trade liberalization raised substantial criticisms. The IMF’s Independent Evaluation Office acknowledges that “the IMF’s orientation toward unilateral trade liberalization has stoked the debates on whether such liberalization is always in a country’s own interests and whether preferential trade agreements are harmful.”  In the face of widespread criticism, in 2000 the IMF scaled back its involvement in removing traditional barriers to trade.

The GATT/WTO’s approach is a better approach than was the IMF’s in several ways. First, bound tariff rates have the advantage of giving the business community certainty for making important decisions, while applied rates, which can be easily changed, do not. Second, the abrupt elimination of barriers required by the IMF did not provide an opportunity for orderly adjustment to increased competition, whereas the GATT/WTO’s approach of phasing in tariff reductions over a number of years does. For example, with regard to Tanzania, the IMF’s Independent Evaluation Office notes that “the pace of tariff reform . . . was probably too ambitious. While it is not clear that slower phasing of the tariff reform would have aroused less opposition from business groups, it could arguably have allowed the authorities to deal better with the fiscal implications of lower tariff rates.”[8]

The Economic Impact of Trade Liberalization

What then has been the economic impact of this substantial reduction in tariffs and related nontariff barriers, both from the eight rounds of multilateral trade negotiations and from the extensive FTAs of the United States and of other countries? Unfortunately, it is difficult to answer this question with any precision for a number of reasons:

  • It is extremely difficult if not impossible to isolate the effects of trade agreements from the impact of changes in transportation and communications, exchange rate variations, geopolitical events, and other economic events. And often these other factors have a greater economic impact than do trade agreements.
  • The necessary data to compare trade agreement partners with nonmembers are fairly sketchy.
  • The major multilateral trade rounds have had transition periods of five to ten years, which complicates analysis. FTAs also have transition periods, and tariffs are eliminated over different time periods for different products, an even greater complication.
  • Many other factors besides tariff rates affect trade flows, such as geographic proximity, common versus different language, differing currencies, and historical accident.
  • Many of the FTAs have not been in effect long enough to make reasoned judgments.

Accordingly, it is not surprising that economists have differing views on the impact of trade agreements. Here it is useful to highlight just a few.

Daniel Drezner highlights a study by analysts at the Institute for International Economics who attempted to measure the cumulative impact of trade liberalization since 1945 by using a Computable General Equilibrium model. Their estimate was that the economic benefits for the United States range between $800 billion to $1.45 trillion per year in additional output, which would be a benefit of between $2,800 and $5,000 per person.[9]

Theo Eicher and Christian Henn outline a sequence of conflicting studies by economists regarding the impact of the WTO: “Rose jumpstarted the literature when he documented the absence of WTO effects on bilateral trade volumes. After updating Rose’s data set to include both de jure and de facto WTO membership, Tomz, Goldstien and Rivers . . . did find positive WTO trade effects. Alternatively, Subramanian and Wei . . . examined different groups of WTO members and reported positive WTO trade effects for industrialized countries only.”[10]  Eicher and Henn go on to conclude that they could not find trade effects of WTO membership, but that there were significant effects from preferential FTAs.

Actually, these conclusions are not inconsistent. First, developing countries have only marginally participated in the multilateral trade rounds, and consequently little trade effects would be expected. This would be consistent with Subramanian and Wei’s finding of positive effects for industrialized countries only. Second, some analyses of the trade effects include agriculture along with industrial products; but as we have noted, tariff cuts on agricultural products in the trade rounds were minimal.

More fundamentally, however, the Institute for International Economics study looked at the cumulative impact of the GATT multilateral trade rounds. At the launch of the GATT, developed-country tariffs on industrial products averaged some 40 percent, and these were cut by roughly 35 percent in the first five trade rounds. Then they were cut an additional 35 to 40 percent in the Kennedy Round and another 35 to 40 percent in the Tokyo Round, and finally the Uruguay Round cut another 35 to 40 percent. Though the percentage reduction in each of these three rounds is similar, the amount cut was less in each subsequent round because the starting level was lower; consequently the trade effect was less with each round of tariff cuts.

It is hard to imagine that reducing developed-country tariffs over the past sixty years from an average of 40 percent to less than 5 percent today did not have an enormous impact, spurring global trade and promoting growth. However, it is also true that recent rounds have had less effect, and that the potential future gains from reducing developed country tariffs on nonagricultural goods are relatively small. Potential gains to world welfare from trade liberalization in the agricultural sector and by developing countries, however, remain large.

The Impact of the United States’ Bilateral Agreements

The U.S. preferential agreement that has had far and away the greatest impact on trade and the U.S. economy is NAFTA. The Congressional Research Service evaluated four studies on the impact of the agreement during its first decade—one by the Congressional Budget Office, the second by the World Bank, the third by the Carnegie Endowment for International Peace, and the fourth by the U.S. International Trade Commission. These studies indicate that NAFTA has had a modest positive impact on both the United States and Mexico.

For example, the Congressional Budget Office model estimated that NAFTA accounted for a 2 percent marginal growth rate in U.S. exports and imports in 1994, but that this rose to an 11 percent increase in U.S. exports and an 8 percent increase in U.S. imports in 2001. However, it concluded that other events, particularly the 1994 Mexican peso crisis, had a greater impact on trade trends than did the elimination of tariffs.  They noted, however, that one of the important effects of the trade agreement was that Mexico raised tariffs against non-NAFTA countries during the peso crisis but not against its NAFTA partners, an example of how trade agreements can lock in trade rules and increase certainty for the business community.[11]  The World Bank study estimated that Mexico’s GDP per capita was 4 to 5 percent higher than it would have been without NAFTA by 2002.

Other than NAFTA with Canada and Mexico, the only other U.S .trade partners of significant economic size have been Australia and South Korea, and each of these countries has an economy only about 5 percent as large as that of the United States. America’s other bilateral and regional agreements have all been with small countries—ranging from the smallest, Nicaragua, which is less than 0.5 percent the size of the U.S. economy, to Chile, which is about 1.5 percent of the size of the U.S. economy, as can be seen in table 4.3. The trade generated by these agreements with small countries will not be significant enough to have a measurable impact on the U.S. economy, although some specific sectors may be affected by some of these other agreements.

Although Australia and South Korea are roughly the size of the Mexican economy, the economic impact on the United States will be far less than the impact of the United States’ FTA with Mexico. This is because these countries are literally on the other side of the Earth, while America shares a 2,000-mile border with Mexico. Geographic proximity means less costly transportation and more business familiarity. 

Many U.S. bilateral agreements are with developing nations, which were able to export many products to the United States duty free under the U.S.  Generalized System of Preferences or other preferential arrangement before the FTA went into effect. However, the FTA will provide almost completely duty-free access and greater assurance of access to the U.S. market for these countries.  In contrast, the United States is gaining substantially improved access to each of its partner countries, except for Singapore, which already had basically zero duties on all imports from all countries. Average tariffs in some U.S. partner countries are quite high, and accordingly this represents a significant advantage for U.S. exporters in competing in these markets vis-à-vis exporters that face the MFN duty.

Many U.S. partner countries have FTAs in place or are negotiating them, with some U.S. competitors, such as the EU and Canada, as can be seen in table 4.4. In these cases, U.S. agreements level the playing field with exporters from other countries that also have an FTA.

For example, Israel had negotiated an FTA with the EU before the U.S. agreement, and U.S. exporters had been losing share to European firms for several years earlier than the U.S. agreement because of trade diversion. The United States’ agreement with Israel put U.S. exporters on a competitive footing with EU exporters. Another example is Chile.  Before the U.S. agreement, the United States had lost market share to Argentina, Brazil, and other nations that already had FTAs with Chile.  However, after the agreement, U.S. exports to Chile increased by 365 percent, from $2.4 billion to $11.4 billion from 2003 to 2008, and the U.S. market share rose from 15 percent in 2003 to 19 percent in 2008.[12]

By 2011, U.S. tariffs had only been eliminated on imports from Israel, Canada, Mexico, and Jordan. The United States’ duties are not fully eliminated on imports from Singapore until 2014, and its tariffs in the other agreements will not be fully eliminated until the middle of this decade, and not until 2023 on some agricultural imports from Australia.  Accordingly, the economic impact from these FTAs will only be felt over a period of time.

Additionally, a number of the agreements also allow the United States to maintain tariff rate quotas on a number of agricultural products; whereas imports at a level below the quota will be duty free, any imports above the quota may still face a very high duty. For example, the Caribbean region is a major sugar producer. However, under the Central American Free Trade Agreement–Dominican Republic (CAFTA-DR), the United States is only increasing its tariff rate quota on sugar to a slight extent with prohibitive tariff rates in effect for imports over the quota. Accordingly, there will only be a minor increase in U.S. sugar imports from the Dominican Republic and the CAFTA countries.

The Commercial Potential of TPP and TTIP

In contrast, the United States’ negotiations for a Trans-Pacific Partnership (TPP) and for a Trans-Atlantic Trade and Investment Partnership (TTIP) potentially have enormous commercial significance.

The United States is currently negotiating with eleven other countries to create a TPP free trade area. The United States already has an FTA with six of these countries: Australia, Canada, Chile, Mexico, Peru, and Singapore. Four of the five countries with which it does not have an agreement—Brunei, Malaysia, New Zealand, and Vietnam—are all relatively small economically; combined, their GDP is only $578 billion, which is less than 4 percent of the size of the U.S. GDP of $15 trillion, so gaining full access to these markets is not a high commercial priority.  However, with a GDP of $5.8 trillion, Japan’s participation greatly increases the commercial significance of these negotiations.

In addition to opening these new markets to U.S. exporters, however, a successful TPP negotiation could provide a mechanism for strengthening the United States’ existing agreements with the six other countries with which we currently have a free trade agreement. In particular, the 1994 NAFTA does not have a number of the features of the newer agreements, and the TPP negotiations provide a venue for upgrading this agreement. U.S. agreements with Australia, Chile, Peru, and Singapore could also be upgraded to some extent. Again, however, improving these six agreements is not a top commercial priority.

The main commercial importance of the TPP negotiations is that a successful TPP agreement could provide a template for future agreements with other APEC countries, such as Indonesia and China, and possibly for future multilateral WTO negotiations. As noted, current multilateral rules under the WTO have some very serious gaps that neomercantilist countries can exploit to gain a commercial advantage at their trade partner’s expense. Major gaps include the lack of effective rules governing currency manipulation, the behavior of state-owned enterprises, forced transfers of technology, and anticompetitive behavior.  To protect the United States’ commercial interests and to achieve its potential as a template for other future agreements, the TPP needs to address these issues.

Although the negotiations with the European Union are in a very early stage, the commercial importance of a possible U.S-EU FTA is enormous.  Whereas both the United States and the EU have low tariffs and relatively few nontariff trade barriers, the twenty-seven EU member nations constitute a huge market (the EU countries have a combined GDP of $17.5 trillion, compared with the $15 trillion U.S. economy), and accordingly there are substantial opportunities for market expansion.[13]

In both the TPP and TTIP, negotiators are discussing other avenues to expanding trade and promoting economic efficiency, particularly by reducing the trade-distorting aspects of differing regulations, which may be a greater barrier to expanded trade today than formal trade barriers.

To get a sense of the potential of this, the United Nations Industrial Development Organization reports that the U.S. Food and Drug Administration and its EU and Japanese counterparts require a total of sixty seven different tests for fish and shellfish products.[14]  Qualifying under these standards requires testing and certification mechanisms within each country that are internationally recognized, and this is costly for both the regulators and businesses.

The Government Procurement Code’s Impact

The forty-one WTO member countries that have signed onto the government procurement code did so to open new markets for their firms and to make their own procurement systems more effective. The code requires that these countries publish procurement opportunities for goods and services over the threshold level for covered entities, as described in chapter 2.

To the extent that foreign suppliers can provide goods and services at a lower price than domestic firms and win procurement contracts covered by the code, the U.S. taxpayer will benefit as government procurement dollars purchase more for less. However, in competing for foreign procurement opportunities, most companies generally invest in the targeted country. The implication of this for the U.S. trade balance is complex.  A U.S. firm investing overseas is probably more likely to source parts and raw materials from the United States than would be a foreign firm, and similarly a foreign firm investing in the United States is more likely to source parts and raw materials from its home market than would a U.S. company. Accordingly, U.S. exports might increase to some extent if U.S. firms gain sales in other country procurement markets, and U.S. imports might increase to some extent as other national firms win procurement sales in America.

The larger impact on the balance of payments, however, would likely occur if firms investing overseas and winning new markets through government procurement repatriate profits to the home country. These profits might be used to expand investment in the home country or passed on to stockholders, thereby benefiting the economy. However, U.S. tax law discourages the repatriation of profits, thereby denying the U.S. economy these potential benefits. (This is discussed further in chapter 9.)

Article XIX:5 of the WTO’s Government Procurement Agreement (GPA) requires signatories to collect and provide to the GPA Committee on an annual basis statistics on the number and estimated value of contracts awarded, broken down by entity and categories of products and services. To the extent possible, statistics must also be provided on the country of origin of products and services purchased by a party to the government procurement code.

However, a number of the signatories do not provide data on the country of origin of the products and services purchased, including the United States and Canada, although a few, like the EU, do provide data on purchases by the country of origin. A number of other signatories have not reported any data, and others have not posted recent data. Accordingly, it is impossible to assess whether U.S. firms benefit to the same extent or a greater or lesser extent than other countries’ firms under the WTO’s GPA.

As noted in chapter 2, the United States’ bilateral FTAs also commit the United States and its partners to open their government procurement markets beyond the requirements of the WTO. However, there are also no data on the extent to which these agreements opened additional procurement.

Given the inadequacy of the data on actual procurement under the GPA, the only assessment that can be made is to consider the theoretical government procurement market opened up by the United States and other countries. This theoretical government procurement market excludes procurement under the threshold level, procurement by non-covered entities, employee compensation, and some specific carve-outs (e.g., the United States retains set-asides for small and minority businesses).

In a 2002 paper published by the Organization for Economic Cooperation and Development (OECD), Denis Audet estimated that OECD countries committed to allowing bids from other signatory companies valued at $1,795 billion, and non-OECD signatories committed to allow bids on an additional $287 billion.[15]  He estimated that this “contestable” procurement was equal to some 30 percent of 1998 world merchandise and commercial services exports, although obviously many foreign bidders for procurement contracts would not actually win their bids.

Liberalizing Trade in Services

The services sector today accounts for more than 60 percent of global production and employment, and it represents 20 percent of total trade on a balance-of-payments basis, according to the WTO.[16]  International trade in services has been growing rapidly, with some economists estimating that it is growing at perhaps double the rate of goods trade.[17]

Partly, of course, the increase in trade in services is due to the Internet and electronic commerce, although the major cause is probably the increasing importance of services in maturing economies.

By and large, services represent a larger element of the economy in developed countries than developing countries, although there is a large variance between countries. The services sector accounts for 76.2 percent of the U.S. GDP, the third highest of OECD countries, with Luxembourg the highest, at 85.1 percent, and France second, at 77.3 percent.[18]

The financial sector is the largest service sector in the United States, with value added in 2010 just over $3 trillion.  Business, professional, and technical services is the second-largest sector, followed by the distribution, health, construction, transportation, telecommunications, educational, and recreational sectors. In terms of employment, however, the ranking changes. The distribution sector employs the most, with just over 22 million workers; the health sector is second, with 15.8 million workers; business and professional is third, with 9.4 million workers; and construction is fourth, with 7.9 million workers. The financial sector is fifth, with 6.2 million workers.

The business services sector is the largest exporter of services, followed by the transportation and financial sectors. All sectors have a positive balance of payments except transportation, which has a deficit of $14 billion. Business and professional services has a large surplus of $39 billion. Data on trade in the distribution sector are not available, although some trade in the United States is certainly conducted by foreign-owned service providers, and a great deal of trade is in imported products or goods for export.

Generally, the delivery of services requires that the provider be close to the customer; for example, repair of equipment requires the mechanic to be on site to work on the equipment. Because of the need for proximity, many service providers—particularly large ones—invest in the markets they wish to serve. Additionally, almost all services are consumed as soon as provided and cannot be stored in inventory to be used later.

Because of the need for proximity, almost twice as much of the overseas sales by U.S. service providers is through foreign affiliates (Mode 3) as is exported across the border (Modes 1 and 2). U.S. Department of Commerce data show that by value, $806 billion of services sales to foreign markets by American providers was through foreign affiliates in 2006, compared with just $415 billion in sales across the border. U.S. imports of services of $616 billion came through foreign affiliates established in the United States, compared with $314 billion imported across the border.[19]  Most of services trade carried out through foreign affiliates is conducted by large corporations that can afford the overhead costs of a foreign office and can accept the risks of operating in a foreign environment.

A major problem in trying to assess the commercial impact of the services provisions in the United States’ trade agreements is that the data on services barriers and trade are weak, although they are greatly improved from what were available during the Uruguay Round.

The United States compiles data on trade for the services sector in a different format than the WTO categories, and it is hard to reconcile U.S. data with the WTO categories. Furthermore, some traded services have historically been lumped into manufacturing statistics. Specifically, goods trade is often reported on a CIF basis, which includes both insurance for the goods and the cost of freight (services), as well as the cost of the particular good being traded.

An additional reason why data on services trade are weak is that trade in services is largely invisible; it comes across the computer, is purchased when traveling abroad, or is generated by a foreign investment in the country. Unlike goods trade, where customs receipts provide reasonably accurate data, services trade is not directly observable. Accordingly, data must be collected through government surveys, which are less reliable than customs receipts.[20]

In addition to the problems of collecting data, it is difficult to even identify barriers to services trade. As noted, determining the trade impact of a regulation often requires detailed knowledge of the industry; and judgments have to be made whether a regulation is protectionist or serves a legitimate purpose.

To get around the problem of the lack of good data on barriers to services trade, economists are trying a number of different approaches.  Some examples of these approaches include:

  • A direct approach, which may involve interviewing companies involved in the market; this, of course is resource intensive and often subjective.
  • Indirectly, by inferring the presence of market barriers from other factors, such as price differentials between markets. However, it is hard to make comparisons based on price alone, because prices are influenced by quality, tax structure, currency changes, domestic regulations, and many other factors.
  • A measurement of a country’s openness based on its commitments to the WTO, as developed by Bernard Hoekman of the World Bank.  He assigned a weight of zero to “unbound” commitments, a weight of 1 to full commitments, and a weight of 0.5 to commitments where restrictions were notified. As noted, however, most countries’ practices are significantly more liberal than their WTO commitments, so at best this approach only estimates the degree of openness of WTO bound commitments.

John Whalley suggests with some understatement that efforts to date to measure “barriers to service trade flows, while clearly defensible on the grounds that this is all there is, nonetheless encounter numerous pitfalls and must therefore be used with great care.”[21]

Given all these problems, it should be no surprise that it is difficult to determine the actual economic impact of the WTO’s General Agreement on Trade in Services (GATS) agreement or of the services provisions in U.S. preferential trade agreements, both in terms of trade expansion and economic effects. As noted, little actual liberalization occurred as a result of the GATS or the U.S. preferential trade agreements. Further, trade patterns are heavily influenced by many factors other than market access, such as currency changes, or differing rates of economic growth in foreign markets compared with the United States. These factors would have a far greater impact on trade patterns than would the small degree of liberalization resulting from U.S. trade agreements.

Although it is not possible to measure the precise impact of the services provisions in U.S. trade agreements, a number of specific effects can be noted. First, the importance of binding current practices should not be underestimated. For example, the Internet was just beginning to change communications in a fundamental way in 1995, and binding the existing level of openness at that time proved to be extremely important. Another example of the importance of commitments that freeze the status quo is provided by Japan’s commitment not to discriminate in insurance. Today,

Japan is in the process of privatizing its postal service, which has historically been a major provider of insurance, and this will have to be done in a manner consistent with its binding. A third example is the U.S. commitment to bind the number of H1-B visas, which allow temporary workers to enter the United States for work purposes, at the 1995 level under Mode 4. Later, in response to domestic political pressures, Congress wanted to reduce the number of H1-B visas below the United States’ bound level, but it was restrained by the U.S. GATS commitment. Binding practices in a public document notified to the WTO also provides greater transparency and gives service providers a better understanding of the rules of the road as they seek to expand business globally.

Another tangible benefit is that the GATS framework provides the basis for negotiating the accession of new WTO members. At the end of the Uruguay Round, there were 123 members, and by August 2012, there were 157. Each of these new members had to make concessions—often very extensive—to be admitted to the WTO. For example, as part of the price to be admitted to the WTO in 2001, China’s commitments on financial services “were among the most radical ever negotiated in the context of the WTO.”[22]

Regarding the impact of the services provisions in the United States’ bilateral FTAs, the U.S. International Trade Commission (ITC) has analyzed the Chile, Singapore, Australia, Morocco, CAFTA-DR, and Bahrain agreements.[23]  The ITC concluded that United States’ imports of services from its partner country are not expected to increase as a result of its preferential trade agreements because the U.S. services market is already largely open. Additionally, the ITC concluded that U.S. exports of services are also not projected to increase significantly due to these agreements. Except for Australia, this is due in large measure to the small market size of the U.S. partner; and in the case of Chile, Singapore, and Australia, this prediction is also due to the existing openness of these markets. However, the ITC did project that several sectors, such as insurance and banking, will have minor gains.

The economic impact on the United States of export of services through either Modes 1 or 2 is the same as the export of goods; specifically, it creates revenue for the exporter that may be invested in the United States to expand the business or used to expand consumption or savings in the United States.

Expanded exports under Mode 3, where a U.S. firm invests in another country to deliver services, has less benefit for the U.S. economy. Basically, the major benefit to the U.S. economy from this mode of expanded services exports occurs if the firm repatriates profits to the United States, either to return to stockholders or to invest in the United States. Additionally there could be a small increase in employment in the home office of the company to support the overseas investment, or increased sourcing of parts from the United States for the new facility.

The economic impact of Mode 4, where foreign workers or students come to the United States, is more complex. The firm using such workers would presumably benefit and increase output, which would have a positive impact. However, the additional workers might displace American workers, thereby having a negative impact. The number of such temporary workers is currently capped by Congress at 65,000 and is limited to the highly skilled workers on which the technology industry and others say they depend, because a sufficient number of these workers are not otherwise available in the United States.[24]

Protecting Intellectual Property

Most economists believe that a core comparative advantage for the United States is its intellectual property, including the knowledge of how to produce something, the unique name of a company or product, a book or song, or a new computer program. Innovation in developing new products and techniques has driven development throughout much of U.S. history.

A major motivation for firms and individuals to develop new intellectual property is the chance it can give for profit. However, intellectual property loses much of its value if competitors can freely use the knowledge.  Accordingly, one of the most important mechanisms by which the

United States and other countries seek to encourage the development of intellectual property is by granting the developer an exclusive right to use the intellectual property for a defined period of time.

Principal examples of such protection are patents, trademarks, and copyrights. A patent in the United States may be given to a new and nonobvious process or article of manufacture, and it grants the holder the exclusive right to use that knowledge for twenty years. Often the patent holder will choose to make the patented intellectual property available to others, generally for a royalty fee.

A trademark is a word, phrase, or symbol that identifies a company, product, or other item from other similar items. Trademarks are important to many companies that want consumers to recognize and value their products over those of their competitors. Trademarks can be registered with the Trademark Office, but they are only enforceable through the court system, and they are only valid for as long as the product is in active commerce.

Copyrights apply to original works of authorship—such as books, articles, and music—and they give the author the exclusive right to the material, although copyright holders often license use of the material for a royalty fee. Material does not need to be registered to be protected by copyright law; but in the event of violations, the ability of the holder of the copyright to enforce his or her rights through the legal system is enhanced if the work has been registered with the U.S. Copyright Office.

Because many firms conduct business around the world, in addition to protecting their intellectual property in the United States, many firms and individuals also seek to protect their knowledge or product in other markets. Similarly, firms and individuals in other countries often seek to protect their intellectual property in the United States.

Although intellectual property is still a comparative advantage of the United States, its lead has been declining as other countries have actively sought to develop their own intellectual property. As an example of this, the U.S. patent office issued slightly more than 107,000 patents in 2010 to U.S. companies or individuals, but it issued slightly more patents to foreign inventors, just over 111,000. The major foreign recipients of U.S. patents in 2010 were Japan (44,814), Germany (12,363), South Korea (11,671), Taiwan (8,238), Canada (4,852), France (4,450), and the United Kingdom (4,302).[25]

Royalty payments to U.S. firms and individuals for the use of their intellectual property by foreigners in 2010 equaled $95.8 billion, up from $16.6 billion in 1990, whereas payments to foreign firms and individuals by U.S. entities for the use of their intellectual property equaled only $29.2 billion in 2010, up from $3.1 billion in 1990. This actually understates the value of U.S. intellectual property, because many firms and individuals do not license their intellectual property for royalty payments, but instead use it for themselves.

As noted in chapter 2, to better protect U.S. intellectual property, the Uruguay Round’s trade negotiators developed the Agreement on Trade-Related Intellectual Property (TRIPS). Intellectual property had already been protected at that time by a number of international agreements, most prominently the World Intellectual Property Organization (WIPO).

However, WIPO had no enforcement mechanism, and some countries had not adequately incorporated their WIPO obligations into their domestic laws.

Piracy of intellectual property was common; even where countries had laws to protect intellectual property, enforcement was often weak and ineffective. This, of course, meant that trying to enforce intellectual property rights in the courts of these countries was an exercise in futility.  Piracy of U.S. intellectual property hurts U.S. exporters attempting to sell in the market where piracy occurs, and it hurts U.S. exporters in other markets, because pirated goods often find their way into the global trade system. By including the WIPO rules in the TRIPS agreement, WTO members were now compelled to abide by these provisions or be subject to the stringent WTO dispute settlement mechanism. This forced a number of countries to clamp down on piracy.

For example, before joining the WTO, China’s laws protecting intellectual property were inadequate and there was virtually no enforcement of even the existing laws. As a result, many items—such as records, designer clothes, and books—were systematically pirated. As the price for joining the WTO, China was required to strengthen its laws and practices regarding intellectual property protection. However, enforcement is still very weak, and there is still enormous piracy of U.S. intellectual property in China.

Other countries also had to significantly strengthen their intellectual property protection. For example, a number of large developing countries—such as Argentina, Brazil, and India—had excluded pharmaceutical products from eligibility for patent protection, and vigorous industries developed in those countries that basically pirated brand drugs, costing U.S. pharmaceutical companies billions in profits.[26]

The TRIPS agreement also required the United States to extend the term of patent protection to twenty years from the seventeen years that had been in effect. This change was largely driven in the Uruguay Round negotiations by the EU and Japan and by the U.S. pharmaceutical industry, which faces high costs to develop new drugs and large risks that new drugs will not be approved by the regulatory authorities. Additionally, once the research has led to an approved new drug, the costs of production are low, which makes it inexpensive to produce generics to compete.

Accordingly, the industry was able to persuade negotiators that twenty years of patent protection was appropriate.

U.S. industry generally views the TRIPS agreement as an important tool in protecting its intellectual property. However, there is still an enormous amount of piracy of intellectual property globally. To a large extent, this is because the TRIPS agreement is relatively weak in ensuring that countries fully enforce their domestic laws.

The Impact of Import Relief Actions

As noted in chapter 2, the WTO allows three basic measures that can be taken to protect domestic industry against foreign competition, namely, duties that can be imposed on products deemed to be “dumped” in the market (antidumping duties), countervailing duty actions against foreign subsidies, and broad import relief that can be imposed against imports of a specific product from all nations (safeguards).

By far, the most frequently used of these actions are the antidumping provisions. Since January 1, 1995, when the WTO went into effect, and June 30, 2010, an investigation was initiated by a WTO member on 3,752 occasions to see if an imported product was being dumped in the market.

By comparison, only 250 countervailing duty actions and 216 safeguard actions were initiated.

Before the conclusion of the Uruguay Round, the United States and the EU were the major practitioners of the antidumping provisions. In the Kennedy, Tokyo, and Uruguay rounds, countries with export interests, such as Japan and South Korea, pressed for provisions that would make it more difficult to impose antidumping duties. The United States, as a major user of these rules, was largely on the defensive.

However, since the Uruguay Round, other countries, such as India, have become major users of the antidumping provisions. The United States has initiated the second-highest number of actions, at 442, followed by the EU, Argentina, and Australia. The

United States is the major user of countervailing duties, having initiated 104 cases, followed by the EU with 56, while India is the major user of the safeguard provisions, with 26 initiations.

China has most often been the target of dumping complaints (764 instances), followed by South Korea (268 instances); however, the United States has been targeted 210 times during this period. With regard to countervailing duty actions, India has been targeted the most (48 instances), followed by China (40) and South Korea (17); the United States has been targeted 12 times. (Safeguard actions, as noted, are implemented against imports from all countries and are not country specific).  Base metals are the most frequent target for antidumping and countervailing duty cases; second is the chemicals sector, third are resins and plastics, and prepared foodstuffs and beverages are fourth.

A number of economists support the usage of countervailing duties; as Stephen Cohen notes, “because subsidies are considered an interference with free markets to begin with, countervailing duties that offset foreign subsidies are seen as restoring the market to its natural equilibrium, and thus as making international markets work more efficiently.”[27]  However, other economists believe that countries are best off ignoring foreign subsidies or dumping, even when they might injure domestic industry, because the consumer benefits from the cheaper goods.

However, the commercial impact is more complex. Antidumping duties are often criticized as protectionist, because dumping can be a legitimate business reaction to dispose of excess inventory. As Daniel Ikenson notes, “Many firms—particularly those operating in high-fixed-cost industries—drop their prices below the full costs of production when facing reduced demand for seasonal or cyclical reasons. As long as the price charged is high enough to cover the firm’s variable costs, any price above variable cost contributes toward coverage of the firm’s fixed costs.”[28]

Conversely, dumping can be a legitimate cause of concern, and antidumping duties can be entirely appropriate if a dominant firm is dumping its products in a foreign market in order to weaken its competitors, or if its actions have the effect of destroying competition even if this is not the intent. In his study of antidumping activity, Douglas Irwin notes that there are more frequent petitions for antidumping duties when tariffs are low, when unemployment is high, when the exchange rates do not reflect commercial conditions, or when import penetration is high.

Unlike countervailing or antidumping duties, safeguard actions are inherently protectionist in nature. The intent of a safeguard action is to give a domestic industry “breathing room” to enable it to regroup and either become competitive in the future or phase down in an orderly fashion to give workers and capital an opportunity to redeploy.

Safeguard rules have a number of features designed to ensure that any action is limited. First, a country adopting a safeguard measure generally compensates its trade partners that are injured by the action.  Thus, while the safeguard is protectionist, a balance of trade advantages is maintained.

Second, in theory, antidumping duties are supposed to be temporary, but many remain in effect for many years, while safeguard actions cannot exceed eight years and need to be progressively reduced and phased out during that period. Third, in applying antidumping and countervailing duties, the government is not allowed to take into account the impact on consuming interests such as retailers; in considering a safeguard action, however, these interests may be taken into account, and the remedy can often be tailored to minimize peripheral damage.

However, perhaps the most important advantage of safeguards over antidumping is that the government can require the domestic industry to take specific actions as a condition for receiving temporary protection.  These specific actions may be designed to help the industry adjust to global competition, or they may be designed to encourage an orderly phase-out.

An example of an effective safeguard action was the U.S. action on motorcycles in 1984. At that time there was only one U.S. producer—Harley Davidson—and that company submitted an action plan as to how it intended to regain competitiveness if import relief was granted; that plan was monitored annually to ensure that it was fulfilling its commitments.  Additionally, injury to Harley Davidson was only caused by motorcycles with large engines, and so smaller bikes were exempted from the import duties. Harley Davidson was given five years of relief, but after four years the company had regained competitiveness and requested that the import duties imposed under the safeguard action be removed. As a result of this safeguard action, Harley Davidson is still in business today.

Though safeguards are a mechanism allowed by the WTO and have advantages over other forms of import protection, they were last used by the United States in 2001. Other countries, however, use this mechanism.  For example, the EU imposed safeguards in 2002, 2003, 2004, 2005, and 2010, and Canada had two safeguard actions in 2005.

It is impossible to assess the impact of these import relief measures on world trade. Safeguard actions obviously temporarily lessen the gains to the world economy from trade liberalization, although they may promote competition in the long run if they enable an industry to survive that otherwise would be severely injured by an event outside its control.  Antidumping and countervailing duty actions promote trade based on comparative advantage in theory provided they exactly offset the subsidy or extent of dumping; but in practice, both have protectionist elements, making any overall assessment difficult and unreliable.

The U.S. Trade Deficit

In general one can conclude that this enormous reduction in tariffs and other trade barriers as a result of the United States’ trade agreements has had a strong positive impact on its broad economy, although some industries and workers have been injured. However, special note must be taken of the huge structural U.S. trade deficit. As noted in chapter 3, economists generally assume that trade deficits are not structural, and thus not something to worry about. Unfortunately the U.S. trade deficit is structural and has been deteriorating, and equaled some 5 percent of U.S. GDP between 2005 and 2008.

The U.S. trade deficit creates two major problems. First, most economists believe there will come a point when U.S. creditors will no longer be willing or able to lend America money to continue funding its consumption. In that event, the value of the dollar will fall and interest rates will rise, which will likely precipitate a severe recession or even a depression.

The second problem, however, is that the United States’ trade deficit is a drag on its economy, and its structural deficit means that the United States is importing some products where it actually has a comparative advantage and that it is not exporting other products that would be exported if the market were working correctly. Joseph Stiglitz notes that “just as exports create jobs, imports destroy them, and when imports exceed exports there is a real risk of insufficiency of aggregate demand. Aggregate demand that would have been translated into jobs at home is translated into demand for goods produced abroad.”[29]

The Department of Commerce estimates that every $1 billion in exports created 4,926 jobs in 2012.[30]  In theory, this would mean that there would have been an additional 2.8 million jobs in the United States if it had eliminated its $560 billion trade deficit through increased exports.

However, reality is more complicated than this. Many factors contribute to the employment level, such as the stage of the business cycle and the age of the population, although trade is a significant factor. Nonetheless, over the long term the United States’ employment rate and its standard of living would have been higher if its trade was better balanced between imports and exports.[31]

So what has caused the United States’ current account deficit, and what role have its trade agreements played in this? First, its current account deficit is driven by its deficit in goods trade. The United States has a positive trade balance in services, although its surplus is only about 10 percent the size of its deficit in goods trade. Remittances on U.S. investments in other countries and remittances from the United States to foreign investors are roughly in balance, so that is not a factor, and the other elements of the current account are small.

The United States consistently ran a surplus in trade in goods until 1971, when it shifted into deficit, and its deficits have increased fairly steadily since that time, although with some variation due to the business cycle. The United States’ huge trade deficit in goods equaled $738 billion in 2011, and of this $25 billion was in oil and $295 billion was in its bilateral trade deficit with China.

The easiest part to explain regarding the United States’ trade deficit is its dependence on imported oil, which is largely due to its failure to develop an energy policy, even though it has known since the 1970s that its dependence on imported oil was not in its economic or national security interest. A 2010 study by the Congressional Research Service notes that the United States has the largest energy reserves of any country, although its oil reserves are relatively small, equal to only about seven years of current consumption. Some analysts are projecting that the United States will be a net exporter of fossil fuel energy within several years.

The other causes of the United States’ structural trade deficit are more difficult to explain. There is some difference of views among economists as to the primary cause of the United States’ enormous deficits with China and other countries in non-oil products. Some economists argue that the U.S. trade deficit is driven by capital flows, as described in chapter 3. The argument behind this view is complex, but (to oversimplify) it is based on the fact that by definition every nation’s balance of payments must be in exact balance; the balance of payments consists of the current account, where the United States has a huge deficit, and the capital account, where it has an equally huge surplus.

What is happening in trade today is that the United States is importing substantially more goods and services than it exports and it pays for these imports largely by issuing Treasury bills, which in essence are IOUs for future payment. It is the purchase of these Treasury bills by the Chinese and others that underlies the huge surplus in the U.S. capital account.  The problem is that producing and exporting real goods and services increases employment and the nation’s productive capability; producing Treasury bills only requires the click of a computer’s mouse.

So the United States is losing out in terms of economic benefit to the broad economy; in essence, it is borrowing from tomorrow to pay for consumption today.

The debate among economists is whether these capital flows drive the United States’ trade deficit or whether the trade deficit drives the surplus on its capital account. Is the reality that the Chinese and others want to purchase U.S. Treasury bills as a good investment, which then requires a U.S. trade deficit of equal size, or is it that America does not produce as much as it wants to consume and therefore must borrow money from the rest of the world?

Most likely, both these elements are at play. The U.S. capital markets are the world’s safe haven, and other countries’ investors seek refuge in Treasury bills or other U.S. financial assets to balance their portfolios or as a place to hide in uncertain times. This causes a surplus in the U.S. capital account and a mirror-image deficit in the current account.

Coupled with this, the United States has a very low rate of savings as a nation, primarily driven by its persistent federal budget deficits and extensive borrowing by households. To finance its consumption that exceeds its savings, it eagerly borrows from abroad and, as noted, other countries so far have been ready to lend it money. However, when the global economic uncertainty that has rocked world markets since 2008 subsides, investors may invest in markets other than the United States because of concerns that it will be repaying its debts in sharply devalued dollars.

Two other factors also play an important role in the United States’ trade deficits. The most significant is the deliberate neomercantilist strategies for economic development pursued by some countries, most notably China today, but also by Japan in the 1970s and 1980s. Under this strategy, the Chinese government deliberately pegs its currency, the renminbi, at an artificially low exchange rate to the dollar. The resulting undervalued currency acts as both a subsidy for Chinese exports and as a trade barrier for U.S. exports into China. Rather than trying to accumulate gold, as mercantilists did in Thomas Muns’s day, China is trying to increase employment and reduce its enormous level of poverty through rapidly expanding exports.

It needs to be noted, however, that the United States’ 2011 $295 billion trade deficit with China overstates the real bilateral imbalance with that country. Global business has changed from the way it was when the U.S. system of collecting trade statistics was developed; today, many products are produced by companies that have huge global supply chains, compared with the older model of firms generally producing a finished product with raw materials from the same nation.  Many U.S. imports from China are goods that have been produced with raw materials and components that have been sourced from around the world.

What this means is that standard trade nomenclature overinflates the size of the United States’ trade deficit with China. If statistics were able to more accurately track these complex transactions, we would see that some of the deficit that America now attributes to China is actually spread out among a number of countries. However, China’s undervalued renminbi is a particular concern, because it forces many of its neighbors to also maintain undervalued currencies in order to compete in global markets.

What this analysis indicates is that the WTO/GATT and the United States’ trade agreements did not cause the U.S. trade imbalance. Much of the United States’ trade deficit is due to its own policies, particularly the federal budget deficit, its low savings rate, and its overreliance on foreign petroleum. However, there are large gaps in the trade rules, most notably the lack of effective rules governing currency manipulation, and this does play a significant role by allowing neomercantilist countries to pursue beggar-thy-neighbor policies that do cause the U.S. economy real harm.


Developed-country tariffs on industrial goods have been reduced from an average of approximately 40 percent to less than 4 percent today, although trade barriers and distortions in the agricultural sector remain high. Developing-country tariffs have also been reduced, although they are significantly higher than developed-country tariffs.  Additionally, nontariff barriers to trade have been enormously reduced. This trade liberalization has been a major cause of the twenty-seven-fold increase in volume in world trade since 1950, which is more than three times the increase in the world economy. Because trade is only one of many factors that have had an impact on economic growth and because of the weaknesses of economic data, it is difficult to estimate the actual effect of trade liberalization, and the range of opinions on the impact is wide, although most economists believe the impact has been significant.

It is impossible to estimate the impact of the WTO’s Government Procurement Agreement because the United States and a number of other code signatories do not provide data on the level of purchases by the country of origin. Under the services agreement, the United States and other signatories basically just bound the level of current barriers to trade. Though bindings are important and have prevented the imposition of new barriers, it is doubtful if this agreement has led to a significant increase in services trade.

A core competitive advantage for the United States is its intellectual property, and the TRIPS agreement has had a significant impact in strengthening the protection of its intellectual property in many countries, including China, India, and Brazil. Though more still needs to be done to better protect U.S. intellectual property, particularly with regard to enforcement, this agreement has undoubtedly led to an increase in U.S. exports and in the royalty payments received by U.S. holders of intellectual property.

Except for Canada, Mexico, South Korea, and Australia, the United States’ FTAs have all been with countries that are less than 5 percent the size of the U.S. economy, and these agreements have had almost no impact on the U.S. economy. The South Korean and Australian agreements will have some impact, but it will be lessened due to the distance between them and America. However, according to the Congressional Budget Office, NAFTA may have led to an 11 percent increase in U.S. exports and an 8 percent increase in U.S. imports in 2001.

Current U.S. negotiations—the Trans-Pacific Partnership and the Trans-Atlantic Trade and Investment Partnership—may produce agreements that will have an enormous impact, both on the U.S. economy and on the world trade system.

The U.S. trade balance turned from surplus to deficit in 1971, has grown relatively steadily since, and has ballooned to an unsustainable level since 2000. America’s deficit is caused by its fiscal policies, its dependence on foreign oil, and the neomercantilist trade policies pursued by some of its trade partners, particularly China, which include currency manipulation and trade distortions that take advantage of gaps in the international trade rules. The United States’ huge structural trade deficit equaled almost 6 percent of its GDP before the recent global financial and economic crisis, and leads to a substantial loss of production and jobs.

.[1] World Trade Organization, “The Trade Situation in 2009–10,” in World Trade Report, 2010: Trade in Natural Resources (Geneva: World Trade Organization), 20–37.

[2] Daniel W. Drezner, U.S. Trade Strategy: Free Versus Fair. Critical Policy Choices Series (New York: Council on Foreign Relations, 2006), 89.

[3] These data are available from World Trade Organization, “Tariff Profiles: United States,”

[4] During the mid-1970s, I was responsible for managing the industry advisory process for the Tokyo Round negotiations. The United States had twenty-seven advisory committees that were co-chaired by the Commerce Department and the Office of the U.S. Trade Representative. Early in the negotiations, the United States submitted an offer that would have led to large reductions in U.S. tariffs while other countries might have made only minimal offers. All but one of the advisory committees—that of the retailers—were adamantly opposed to any such package and would have surely blocked its approval by Congress. The United States then advised its trade partners that it would withdraw its offer unless it received reciprocal concessions.  By the end of the negotiations, the United States’ major trade partners had agreed to concessions similar to those made by the United States, and almost all twenty-seven advisory committees supported the package.

[5] Information on U.S. preferential programs is available on the Office of the U.S. Trade Representative’s Web site at

[6] These data are from the U.S. International Trade Administration, “TradeStats Express,”

[7] Independent Evaluation Office of the International Monetary Fund, IMF Involvement in International Trade Policy Issues (Washington, D.C.: International Monetary Fund, 2009), 6.

[8] Ibid., 106.

[9] Drezner, U.S. Trade Strategy, 16.

[10] Theo S. Eicher and Christian Henn, In Search of WTO Trade Eff ects: Preferential Trade Agreements Promote Trade Strongly, but Unevenly, Working Paper 09/31 (Washington, D.C.: International Monetary Fund, 2009), 3.

[11] J. F. Hornbeck, NAFTA at Ten: Lessons from Recent Studies (Washington, D.C.: Congressional Research Service, 2004), 2.

[12] This information is from the U.S. Government Accountability Office’s report on the commercial impact of the Chile, Jordan, Morocco, and Singapore FTAs: U.S. Government Accountability Office, An Analysis of Free Trade Agreements and Congressional and Private Sector Consultations under Trade Promotion Authority (Washington, D.C.: U.S. Government Printing Office, 2007).

[13] Croatia is expected to join the EU in July 2013, bringing the number of EU member nations to twenty-eight.

[14] United Nations Industrial Development Organization, Trade Capacity-Building Background Paper: Supply Side Constraints on the Trade Performance of African Countries, Background Paper 1 (Vienna: United Nations Industrial Development Organization, 2006), 7.

[15] Denis Audet, “Government Procurement: A Synthesis Report,” OECD Journal on Budgeting 2, no. 3 (2002): 149–94, at 151.

[16] World Trade Organization, “The General Agreement on Trade in Services (GATS): Objectives, Coverage, and Disciplines,”

[17] John Whalley, Assessing the Benefits to Developing Countries of Liberalization in Services Trade, NBER Working Paper 10181 (Cambridge, Mass.: National Bureau of Economic Research, 2003), 6.

[18] Organization for Economic Cooperation and Development, OECD in Figures 2008 (Paris: Organization for Economic Cooperation and Development, 2008), 16–17.

[19] Jennifer Koncz and Anne Flatness, “U.S. International Services: Cross-Border Trade in 2007 and Services Supplied through Affiliates in 2006,” U.S. Bureau of Economic Analysis, October 2008, 16.

[20] It is easier to collect data on the export of services, because generally these are provided by large firms that can provide information on their sales. Import data are harder to compile and probably understate the actual amount because services are generally purchased by multiple consumers. The reliability of data for goods trade tends to be the opposite; import data are more reliable than export data because governments collect tariffs on imports and accordingly closely monitor imports coming into the country.

[21] Whalley, Assessing the Benefits, 29.

[22] Constantinos Stephanou, Including Financial Services in Preferential Trade Agreements: Lessons of International Experience for China, Policy Research Working Paper 4898 (Washington, D.C.: World Bank, 2009), 4.

[23] The ITC studies considered here are those on Chile, Singapore, Australia, Morocco, CAFTA-DR, and Bahrain—all available on the ITC’s web site

[24] The program that provides temporary visas to highly skilled workers is known as the H1B program.

[25] Data on U.S. patents issued are available at the U.S. Patent and Trademark Office Web site,

[26] See Carsten Fink and Kimberly Elliott, “Tripping over Health: U.S. Policy on Patents and Drug Access in Developing Countries,” in The White House and the World: A Global Development Agenda for the Next U.S. President, edited by Nancy Birdsall (Washington, D.C.: Center for Global Development, 2008), 217.

[27] Cohen, Blecker, and Whitney, Fundamentals, 64.

[28] Daniel Ikenson, Protection Made to Order: Domestic Industry’s Capture and Reconfiguration of U.S. Antidumping Policy (Washington, D.C.: CATO Institute, 2010), 8.

[29] Joseph E. Stiglitz, Making Globalization Work (New York: W. W. Norton, 2006), 253.

[30] Martin Johnson and Chris Rasmussen, “Jobs Supported by Exports 2012: An Update,”

[31] Some economists argue that the United States’ deficits should be of little concern.  E.g., Daniel Griswold at the Cato Institute examined data on the U.S. current account deficit and GDP growth between 1980 and 2006. He concluded that “economic growth has been more than twice as fast, on average, in years in which the current account deficit grew sharply compared to those years in which it actually declined. . . . Trade deficits tend to be pro-cyclical, growing when the economy expands and contracting when the economy slows or slips into recession.” Daniel Griswold, “Are Trade Deficits a Drag on U.S. Economic Growth?” Cato Institute, March 27, 2007. This is true, but the real issue is cause and effect. Trade deficits do not cause economic growth; instead, if the United States is growing more rapidly than its trade partners, that will tend to lead to a trade deficit. The real issue with U.S. deficits is that they are structural and too large.


Chapter Updates



Chapter 1: U.S. Trade Policy in Crisis

Chapter 2: America's Trade Agreements

Chapter 3: Trade Agreements and Economic Theory

Chapter 4: Trade Agreements and U.S. Commercial Interests

Chapter 5: Foreign Policy: The Other Driver

Chapter 6: Economic Development: A Missed Opportunity

Chapter 7: Uneasy Neighbors: Trade and the Environment

Chapter 8: The Labor Dilemma

Chapter 9: The Way Forward

For more information or questions contact William Krist at