As the Bush Administration and Congress gird for battle this fall
over four newly signed free trade agreements, one could be forgiven for
thinking that these FTAs must be economically momentous to merit the
looming conflict. But one would be wrong. While the global political
stakes are huge, the domestic economic stakes are penny ante.
The agreements with Panama, Peru, and especially Colombia and South
Korea are immensely important for U.S. foreign policy. They can also
play an important role in spurring economic development in these U.S.
allies. But the debate in the United States has largely focused on how
the U.S. economy and U.S. workers will fare. By that measure, these
agreements are trivial.
How can it be that FTAs' impact is so badly misconstrued? There are
multiple layers of confusion. To begin with, there is a general
tendency to see trade as affecting workers more than research really
supports. Technological change and domestic competition have both had a
large impact on workers in recent decades, but they are much harder to
protest than trade agreements.
Whatever one thinks about trade's effects on workers in general,
there are two reasons to think that the impact of the FTAs under
discussion would be much more muted. First, these FTA partners are
small relative to the size of the United States. South Korea is the
most significant of the bunch, with an economy just under 10 percent
the size of the United States, but it's a developed economy with an
average income of roughly $25,000 per year. Colombia's economy is less
than 3 percent of the size of the U.S. economy. Peru and Panama are
The second key point is that the United States is already open to
trade with these countries. Colombia, for example, already gets special
access to the U.S. market through existing preference programs. In
2006, 92 percent of U.S. imports from Colombia entered duty-free -
that's before any agreement is adopted! The new liberalization that
occurs under such agreements is thus lopsided in favor of U.S.
exporters. Given the countries' small size, though, even these benefits
One needn't be steeped in the mysteries of international economics
to discern all this. Congress requires that before the Administration
submits an FTA, it must first get an assessment of the agreement from
the independent non-partisan U.S. International Trade Commission
(USITC). Those publicly-available reports make for rather repetitive
reading. The USITC found that the Peru agreement might increase U.S.
output by more than $2.1 billion. If that sounds impressive, remember
that U.S. annual output exceeds $13 trillion. So we're talking about an
increase of less than 0.02 percent. The positive effects of the
Colombia FTA were estimated to be a bit larger, but still less than
0.03 percent. In the case of Panama, the USITC found that "U.S. imports
would not likely grow significantly since most Panamanian products
already have duty-free access to the U.S. marketas a result of trade
liberalization under the TPA because most Panamanian products already
enter the U.S. market duty free."
In other words, the likely economic effects of these agreements are
positive, but so small that they would be wiped out as rounding errors
in ordinary newspaper reports on U.S. economic progress.
One might ask why we should bother with such agreements, if we can
barely discern their effects on the U.S. economy. The answer is that
FTAs can have an enormous political and economic impact on our trading
partners. In the case of Peru, for example, President Alan García
barely beat a staunch opponent of the United States in the last
election. He did so promising economic reform and trade. An FTA between
the United States and Peru would cement those reforms in place and
reward Peru's allegiance.
Colombia is even more significant politically. As Hugo Chavez in
neighboring Venezuela has attempted to rally Latin America against the
United States, Colombia has remained steadfast in its support. To repay
them with the public repudiation of a negotiated FTA would leave the
United States' reputation in the region in tatters.
As bad as this would be, at least the United States' commitment to
the Western Hemisphere is clear. If the United States were to forsake
South Korea, that would likely be read as the U.S. abandonment of Asia.
China has already been maneuvering to arrange regional Asian groupings
that exclude the United States. To spurn the Koreans would almost
certainly further U.S. exclusion in the region.
True enough, these are political arguments for economic agreements.
But if the economic effects of the FTAs in the United States are
negligible, why not focus on the political impact? If these agreements
have enormous foreign policy benefits coupled with very small economic
benefits (not costs!) it is hard to fathom how anyone looking out for
the United States' best interests could oppose them.