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News Release

The United States Should Pursue Fewer but Larger Free Trade Agreements

May 7, 2004

Contact:    Jeffrey J. Schott    (202) 328-9000

Washington, DC—The United States should recast its trade negotiating priorities to pursue fewer but bigger trade deals. First priority should continue to be the Doha Round of World Trade Organization (WTO) negotiations, which provide the biggest bang for the negotiating buck. In addition, new free trade proposals should be advanced with large trading partners, particularly South Korea and Brazil. In both cases, recent trade talks have been difficult because of resistance on agriculture and other sensitive sectoral reforms, but US policymakers need to recalculate the pros and cons of such deals in light of recent developments in both countries.

Both countries are now pursuing free trade agreements (FTAs) with other major trading nations—Korea with Japan, Brazil with the European Union—that would discriminate against US firms (and investors) that supply many of the same goods and services to those important markets. US industries and farmers will demand that US trade officials “level the playing field” by negotiating similar preferences. New US initiatives could also prompt agricultural and service-sector reforms in those countries, reforms that will have to be pursued in any event to fulfill the likely demands of the WTO talks. Moving forward with such FTAs in 2005 thus could prove more fruitful than in previous years.

These are the major policy proposals in Free Trade Agreements: US Strategies and Priorities, a new Institute for International Economics study edited by Senior Fellow Jeffrey J. Schott. The book examines the almost 20-year US experience with FTAs and assesses the economic and political costs and benefits of pursuing new trade initiatives in the Asia Pacific, Latin America, and Africa and the Middle East. It also analyzes the implications of these regional arrangements for the global trade policy of the United States and the WTO through the process of “competitive liberalization.”

The study examines why US officials pick particular FTA partners and assesses how the policy has been implemented to date. Except for Canada and Australia, all of the current and prospective FTA partners are developing countries. US initiatives seek to promote myriad, and sometimes conflicting, US political, economic, and security interests with those countries. Schott classifies US selection criteria under four broad and somewhat overlapping categories:

  • Impact on domestic politics
  • Economic policy objectives
  • Commitment of partner country to domestic, regional, and WTO trade reforms
  • Foreign policy objectives

Schott concludes that such an approach is basically valid, though he raises questions regarding the priority accorded to economic and political factors in each case and whether the current lineup of FTA partners reflects the best use of limited US negotiating resources. He argues that the FTAs in the Western Hemisphere meet US economic and political objectives and broadly complement parallel talks in the WTO. However, too much effort has been invested in low-risk, low-reward negotiations with small countries elsewhere around the globe. Such deals often yield only temporary advantage to those countries—mostly by disadvantaging other developing countries—and provide very modest gains for US firms and workers.

Most US free trade initiatives to date have involved Western Hemisphere countries with which the United States is also negotiating the Free Trade Area of the Americas (FTAA). Pacts already concluded with Canada and Mexico, Chile, the five members of the Central American Common Market, and the Dominican Republic, as well as new talks with Panama and some Andean Community countries, can be seen as way stations to the larger hemispheric agreement (which will cover about 40 percent of total US merchandise trade).

However, this incremental approach to building the FTAA does not cover Brazil and other countries that account for more than 50 percent of Latin America’s GDP and to date has not spurred progress in the hemispheric talks. Election-year politics have constrained US and Brazilian offers to reduce their main trade barriers, but new efforts should be made later this year—starting at the next FTAA ministerial in Brazil—to reengage negotiations on liberalization of goods and ser/vices in the hemisphere.

Other US talks involve countries that also are engaged in regional integration arrangements in their own neighborhood. In both Southern Africa and Southeast Asia, and to a lesser extent in North Africa and the Middle East, US initiatives seek to both create new bilateral trade and investment opportunities with and deepen the integration among the partner countries. In these cases, the US FTA strategy receives mixed grades.

Talks with the Southern African Customs Union (SACU) involve countries not yet able to integrate among themselves or to commit to the types of reforms required in other US FTAs. US trade and investment in that region is small. Similarly, US initiatives in the Middle East are impeded by inadequate political commitment by prospective US partners to domestic economic reform and regional integration with their neighbors. Over the near term at least, an FTA with the SACU will disadvantage other African countries seeking more US trade and investment that are even less ready than the SACU members to enter into FTAs with the United States.

By contrast, US merchandise trade and investment with the Association of South East Asian Nations (ASEAN) is substantial (more than $140 billion of trade in 2002) and intra-ASEAN integration is more advanced than in Africa or the Middle East. FTAs with Singapore and soon with Thailand will establish a framework for similar deals with Indonesia, Malaysia, and the Philippines once those countries are ready to undertake and enforce the requisite obligations.

In sum, Schott argues that “big stakes” FTAs yield the largest payoff for US firms, workers, and farmers, while also providing strong support for ongoing WTO negotiations. He cautions, however, that some of the US gains come from reductions in US trade barriers and subsidies and thus entail significant US adjustment. To garner support at home for such changes, FTAs need to provide substantial new access to foreign markets for US goods, services, and investment in return for reductions in longstanding US trade restrictions.

Schott also addresses the impact of FTAs on the Doha Round negotiations and the WTO. His analysis suggests that regional pacts can help or hinder WTO initiatives, depending on how they are crafted and the broader economic conditions in which they are applied. While critical of some US FTAs for containing overly restrictive origin rules and product exemptions (e.g., sugar in the FTA with Australia), Schott concludes that FTAs can contribute to the success of WTO talks through a process of competitive liberalization “if their coverage is comprehensive, if origin rules are kept to a minimum, and if the members are committed to work together to advance most favored nation trade reforms in the WTO.” Properly constructed, FTAs can complement and catalyze world trade reforms in the WTO.

About the Editor

Jeffrey J. Schott, senior fellow, was a senior associate at the Carnegie Endowment for International Peace (1982–83) and an international economist at the US Treasury (1974–82). He is the author, coauthor, or editor of Prospects for Free Trade in the Americas (2001), Free Trade between Korea and the United States? (2001), The WTO after Seattle (2000), NAFTA and the Environment: Seven Years Later (2000), Launching New Global Trade Talks: An Action Agenda (1998), Restarting Fast Track (1998), The World Trading System: Challenges Ahead (1996), WTO 2000: Setting the Course for World Trade (1996), The Uruguay Round: An Assessment (1994), Western Hemisphere Economic Integration (1994), NAFTA: An Assessment (rev. ed. 1993), North American Free Trade: Issues and Recommendations (1992), Economic Sanctions Reconsidered (2d ed. 1990), among others.

List of Chapters

1 Free Trade Agreements: Boon or Bane of the World Trading System?
Jeffrey J. Schott

Comment
Richard N. Cooper

Comment
Renato Ruggiero

Comment
Guy de Jonquières

2. Lessons from NAFTA
Gary Clyde Hufbauer and Ben Goodrich

3. Free Trade Agreements as Foreign Policy Tools: The US-Israel
and US-Jordan FTAs
Howard Rosen

4. Lessons from the Chile and Singapore Free Trade Agreements
Sidney Weintraub

5. Australia and US Free Trade: Benefits and Costs of the Agreement
Andrew L. Stoler

6. US Free Trade Agreements with ASEAN
Dean A. DeRosa

7. Korea-US Free Trade Revisited
Inbom Choi and Jeffrey J. Schott

8. US-Taiwan Free Trade Agreement Prospects
Nicholas R. Lardy and Daniel H. Rosen

9. The US–Central America Free Trade Agreement: Opportunities
and Challenges
Jose M. Salazar-Xirinachs and Jaime Granados

10. Brazil: FTA or FTAA or WTO?
Albert Fishlow

11. Egypt, Morocco, and the United States
Ahmed Galal and Robert Z. Lawrence

12. Competitive Liberalization and a US-SACU FTA
J. Clark Leith and John Whalley

13. Assessing US FTA Policy
Jeffrey J. Schott

Technical Appendix: Quantitative Estimates of the Economic Impacts of US Bilateral Free Trade Agreements
Dean A. DeRosa and John P. Gilbert

About the Institute

The Institute for International Economics, whose director is C. Fred Bergsten, is the only major research center in the United States that is devoted to global economic policy issues. The Institute's staff of about 50 focuses on macroeconomic topics, international money and finance, trade and related social issues, and international investment, and covers all key regions—especially Europe, Asia, and Latin America. The Institute averages one or more publications per month; holds one or more meetings, seminars, or conferences almost every week; and is widely tapped over its popular Web site.

Free Trade Agreements: US Strategies and Priorities
Jeffrey J. Schott, editor
April 2004. 472 pp. $26.95
ISBN paper 0-88132-361-6