Nearly five years after the Bush administration first negotiated free trade agreements with South Korea, Colombia and Panama, revised versions of those pacts finally will be implemented this year. Although many trade analysts reacted with an anti-climactic sense of relief, they also welcomed the opportunities the pacts will open for U.S. exporters and importers — and emphasize the positive psychological impact the pacts could have on U.S. trade policy.
Rob Mulligan, senior vice president for the U.S. Council for International Business, calls the agreements “a big accomplishment” that will have an important impact on U.S. exporters “across several sectors.” South Korea is by far the largest of the three export markets affected by a new agreement. Nearly 95 percent of South Korean trade with the United States in consumer and industrial products will become duty-free within five years of the treaty’s enactment, and most of the remaining tariffs will be eliminated within 10 years.
The Koreans purchased $34 billion worth of U.S. goods in 2010, the sixth-highest total in the world. In the first 10 months of 2011, the U.S. exported $35.9 billion of goods to Korea, up from $32.1 billion in the comparable period a year earlier. Colombia, which imported $11 billion worth of U.S. goods in 2010, and Panama, which purchased $6 billion, lag well behind Korea in size and economic importance, but they are also growing markets with a positive financial outlook.
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“Overall, U.S. companies will export more and invest more money in those markets” as a result of these agreements, Mulligan said.
How quickly U.S. exporters will be able to enjoy the impact of lower tariffs and improved access depends on how quickly the three governments complete the legal and regulatory changes that will allow those agreements to be implemented by their own bureaucrats. The changes in foreign law are important, noted Shaun Donnelly, the USCIB’s vice president for investment and financial services. “You want to make sure that partner countries change their laws so that U.S. exporters really get the benefits” written into these free trade agreements.”
In the case of Colombia, 23 specific legal guarantees by that country’s government need to be made before the pact can be enacted. According to a group of Colombian legislators, only six of those requirements had become law by mid-November. After the U.S. Congress approved the free trade agreement with Peru in December 2007, it took 18 months for the implementation process to be completed because the Peruvian government had to implement legal provisions for protecting intellectual property rights and change its customs- clearance procedures.
Few trade analysts expect the implementation process to take nearly as long now. Doug Goudie, director for international trade policy at the National Association of Manufacturers, said there are a lot of similarities between the new laws Colombia must pass and the laws it passed when it enacted its bilateral trade pact with Canada last August. Goudie expects the process to be completed soon, perhaps by spring.
A lot of the legal documents needed by the Koreans already have been drafted and translated for use in Korea’s FTA with the European Union, which took effect last July 1.
Panamanian lawmakers are expected to finish their work within the first few months of 2012.
In the best-case scenario, U.S. exporters could make up some of the ground they lost last year when Canada and the EU implemented their FTAs with Korea and Colombia. EU exports to South Korea have increased much faster than U.S. exports to South Korea since the EU-Korea FTA took effect.
“No one can argue that we are not at a disadvantage” against the Europeans until the new pacts are actually implemented, Goudie said. U.S. and EU manufacturers, for example, produce the same kinds of goods, but South Korean buyers of European goods have been enjoying a 10 percent discount compared with prices of U.S. goods. “If you can get a 10 percent discount, you take it,” Goudie said.
“We are sort of playing catch-up,” Donnelly agreed. “I am afraid that there is a price to pay for this timeout. We did lose the potential to get in (these markets) earlier.”
While those FTA details are worked out, there’s more on the horizon for U.S. trade policy. Trade analysts are particularly optimistic about the long-term potential of the Trans-Pacific Partnership, an ambitious multilateral arrangement that will “enhance trade and investment” among its nine Pacific Rim members, as well as “promote innovation, economic growth and development, and support the creation and retention of jobs,” Donnelly said.
Unveiled in mid-November, the TPP brings together several countries with which the U.S. already has bilateral free trade agreements — Australia, Chile, Peru and Singapore — as well as some countries, such as Brunei, Malaysia, New Zealand, and Vietnam, that haven’t negotiated U.S. FTAs. Collectively, these countries purchased $84.2 billion in U.S. exports in 2010.
“The TPP picked up momentum partially because other countries realized that the U.S. is serious about trade” after the U.S. Congress finally approved those three long-delayed free trade pacts, Mulligan said.
Although its goals have yet to be detailed, this much seems clear: First, the TPP will attempt to expand and deepen existing U.S. bilateral trade partnerships. When the U.S. negotiated its 2005 FTA with Australia, that country rejected the inclusion of an “investor state-dispute settlement” clause, according to Frank Vargo, vice president of international economic affairs policy at NAM. Under the auspices of the TPP, such a clause now could be negotiated.
Second, the TPP is expected to open new market opportunities for U.S. exporters in some countries that previously have stopped short of making the full range of commitments required for forging a U.S. free trade agreement.
One example is rapidly growing Malaysia, which purchased $14 billion in U.S. goods last year, but still has fairly high tariffs. During George W. Bush’s presidency, the U.S. attempted to negotiate an FTA with Malaysia, but talks faltered when the Malaysian government was “unwilling to make some commitments,” Goudie said. By signaling its willingness to join the TPP, Malaysia “now apparently is willing to make” those specific sorts of commitments, he added.
Third, in an effort to address the increasing complexity of today’s global supply chains, the TPP will attempt to address various trade facilitation issues, including antiquated country-of-origin regulations, which can make it needlessly time-consuming and costly for companies to move products across numerous borders. The complex rules-of-origin provisions of FTAs often have discouraged companies from taking advantage of opportunities to improve the productivity of their global supply chains, said Stephen Lande, president of Washington-based consultant Manchester Trade.
In a sign of how deep and wide the TPP could become, Canada, Japan and Mexico already have announced they would like to participate at some point. Whether there will be a “second tranche” in the membership process is unclear, Goudie said.
When all is said and done, 2011 one day could be remembered as a turnaround year for U.S. trade policy. Although it took several years for the Obama administration to push through the Bush administration’s three orphan FTAs, Lande said President Obama deserves credit for setting the political foundations for congressional approval of the three pacts by sending U.S. Trade Representative Ron Kirk to address the concerns U.S. labor unions and automakers had with these agreements.
“These agreements passed the Congress in the right way,” he said. “The political system operated correctly, and you did not have the backlash that you had after NAFTA. On both sides of the political aisle in Washington, “The political structure is now more accommodating to free trade.”
“Remember how CAFTA passed the Congress by only one vote” in 2006? These three trade agreements passed by a lot more,” Mulligan said, in part because Obama and Kirk made a strong case to Democrats that these pacts could help the U.S. meet the goal of his National Export Initiative, and create jobs.
Trade specialists also credit Kirk for his strong support of the TPP agenda, initially devised by Susan Schwab, U.S. trade representative under President Bush. Ironically, one of the most lasting legacies of the Obama administration could be the growing consensus that free trade is part of the solution to slow economic growth, not part of the problem. If that turns out to be true, strong support for further free trade agreements, the TPP and other ambitious initiatives could survive into the next U.S. administration, whoever the president turns out to be.
Contact Alan M. Field at email@example.com.