Freeing Up Free Trade

One of the best things about social media is that it allows trade nerds like me to debate topics with people all over the world without ever leaving the comfort of my mom’s basement or changing out of my pajamas.

OK, I may not have been in my parents’ basement, but I do find myself on Twitter and Facebook daily discussing matters of international trade and the global economy with my counterparts in the industry and academia. The slow global recovery coupled with the uncertainty of European and Chinese economies have markets, corporations and consumers on edge. The blogosphere and the traditional media are abuzz with proposed remedies for the stumbling economy. 

Lately, the role of free trade agreements in the recovering economy seems to be one of the most discussed topics. Given the state of the American political debate, it’s no surprise that focus has been more toward domestic issues than on expanding duty-free treatment overseas. Issues such as high unemployment, revenue shortfalls and the general adversarial state of Congress have taken the lion’s share of energy from our “body politic.” 

As an economist, I usually look at what we need to foster export growth and expand our economy. Time and again, that analysis has me evaluating our stance on FTAs. My recent conversations with other policy geeks tend to fall into two discussions: working on improving existing agreements and emphasizing the need to create new FTAs.

Focusing on existing FTAs is a great place to start. Given rising labor, energy and transportation costs, more of our clients are taking a second look at Mexico and the duty-free treatment afforded by the North American Free Trade Agreement. In the course of one day this December in China, I counseled four companies on the intricacies of unbolting their production machinery in Shanghai in order to export them to Mexico, where they would be reassembled and put into operation to near-source duty-free goods for the U.S. auto market.

Given the reduced transportation costs, reduced cycle times, lower duties and merchandise processing fees, and faster speed to market, the only surprise is that it took so long for this to happen. Most clients consistently point to the dramatic increase in Chinese labor costs over the past five years as the biggest reason for the move. 

Of course, there was just as much caution as exuberance in my discussions. NAFTA is one of the most misused and incorrectly claimed FTAs we see in the course of auditing our clients’ import processes. Issues related to cartel-driven violence and the need to cross-dock U.S.-bound cargo from Mexico complicate the opportunity. Although it isn’t all rosy on the southern border, the news is improving, and a fresh light is being cast on opportunities in Mexican manufacturing for the U.S. market.

We also learned how devastating letting the Generalized System of Preferences slip could be. Because the GSP is a special trade program and not an FTA, it requires periodic congressional approval. Our political process and constituent pressure recently resulted in months of U.S. importers not being able to employ this duty-minimization strategy available on imports of thousands of commodities from 127 countries.

Imagine if a similar fate befell NAFTA every few years? It might be time to make the GSP permanent while expanding the number of products provided duty-free treatment.

When it comes to the really heated arguments, though, we tend to foam at the mouth on the direction of new FTAs.

The prospect of a U.S.-European Union FTA dazzles the imagination. The thought of the world’s two most dominant economies entering a duty-free agreement where each side exports similar products and competes for the same business seems too good to be true. Aside from the economic opportunities it could present for both, it would set the stage for developing numerous rules on global issues facing both regions, including climate change, banking, energy shortages and infrastructure.

How likely are we to see a deal  in the near term? That’s difficult to say. The EU and Canada have been working on a Comprehensive Economic and Trade Agreement for some time, and, although they’re close, significant gaps remain. Many people believe the EU doesn’t want to give up too much, fearing this agreement will become the blueprint for the U.S. and Europe. Moreover, we can look at how hotly contested the U.S.-South Korea FTA passage was for insight into the difficulties this pact might face. Disagreements on agriculture and automotive exports alone would be problematic to navigate.

Questions remain about why the U.S. wouldn’t push harder for an FTA with other large economies. Japan is the most common example. The U.S. and Japan have had a long, slow road to recovery, and both could benefit from further promoting bilateral trade. While we’re at it, why not continue to explore a comprehensive Pacific Rim deal to make the largest impact possible?

For now, the debate will rage on. With so much at stake, the issues will be hotly contested. If you need me, I’ll be in the basement.   

Pete Mento is director of global customs and trade policy at C.H. Robinson. Contact him at pete.mento@chrobinson.com.

 

 

For the full story: Log In, Register for Free or Subscribe