NAFTA, The TPP, and 13 of Their Friends

On January 23, 2017 the United States withdrew from the Trans-Pacific Partnership, or TPP for short. The TPP was a contractual agreement set up between the United States and 11 other Pacific Rim countries allowing for a more free flow of goods between designated countries. Likewise, it is not uncommon to hear the word ‘NAFTA’ (North American Free Trade Agreement) tossed around in the news, but it is only one of the 14 trade agreements that the United States involves itself in, and includes only two of 20 nations we have such agreements with.

The goal of a trade agreement is simple: reduce (if not completely remove) barriers to trade. What are these barriers? Mainly tariffs, duties, and subsidies. There are numerous economic benefits that come along with the reduction of trade barriers to all parties involved, which are highly sought after by businesses, investors, and consumers. An example may be a business being able to import cheaper raw materials, produce a cheaper final product, and therefore pass cost savings along to consumers or investors.

So this is all about economics, right?

Well, you haven’t exactly received the full story yet. Trade agreements may also be strategic in terms of global influence. For example, the United States currently has a trade agreement with Israel. There is not a whole lot that makes sense about this, as last year Israel had a $9 billion trade surplus with the U.S., and is on pace for similar numbers in 2017. So why do we have it? It’s beneficial for the United States to support an ally in the Middle East, as they provide us with valuable information about the region, but this should be no surprise. A trade deal with Israel may be all about economics for one party, but very strategic for the other. It is also for strategic reasons, agreements with other countries may not exist.

If the United States wins economically and strategically, then why do they only have 14 agreements?

First, it is easy for a country to walk away from the negotiating table when it feels conditions may be unfavorable. To say a trade agreement is simply the reduction of barriers by all parties (as I did earlier) over simplifies what actually takes place.

Recent discussions around NAFTA illustrate this well. Take the United States $64 billion trade deficit with Mexico in 2016. This is a situation where the U.S. is caught in an unfavorable position and would benefit greatly if terms were renegotiated. What could be renegotiated? Lesser known are the ‘rules of origination’ and the large role they play in what may or may not be traded under agreed upon terms. For example, if a manufacturing firm in Mexico imports raw materials from Asia and creates a finished product, should they be allowed to export that product to the U.S. with no added tariffs or duties? Rather, should they be obligated to import raw materials from the country or countries they export finished products to? Could Mexico be a middle man between the U.S. and other countries, and if so are they exploiting their involvement in a regional economy created by NAFTA at the United States expense?

Second, there are also situations where the United States is not willing to enter into agreements with other countries. Take farming as an example. Most farmers in the U.S. receive subsidies from the federal government on portions of their crops. This is a behavior other countries negotiating with the United States want them to stop before an agreement would be possible. Why? By subsidizing farmers, the federal government allows farmers to sell their products cheaper abroad, as they may be able to rely on these subsidies to support their bottom line. This makes it harder for farmers in other countries to produce. As the American product becomes cheaper, foreign competitors become less profitable. A favorable agreement would allow their farmers to compete on the same field as everyone involved.

Hopefully now various aspects of trade agreements may seem slightly clearer. As stated earlier, the United States has 14 current trade agreements with 20 countries, as follows:

(trade surplus or deficit in millions, 2016 data source: https://www.census.gov/foreign-trade)
  • North American Free Trade Agreement
    • Canada (-$10,958.30)
    • Mexico (-$64,354.10)
  • Central American Free Trade Agreement
    • Costa Rica ($1,538.20)
    • El Salvador ($437.00)
    • Guatemala ($1,903.20)
    • Nicaragua (-$1,814.2)
    • Honduras ($212.40)
    • Dominican Republic ($3,076.50)
  • Korean Trade Agreement
    • South Korea (-$27,571.80)
  • Australian Free Trade Agreement
    • Australia ($12,649.80)
  • Bahrain Free Trade Agreement
    • Bahrain ($131.10)
  • Chile Free Trade Agreement
    • Chile ($4,124.80)
  • Columbia Free Trade Agreement
    • Columbia (-$726.20)
  • Israel Free Trade Agreement
    • Israel (-$9,006.90)
  • Jordan Free Trade Agreement
    • Jordan ($95.80)
  • Morocco Free Trade Agreement
    • Morocco ($911.30)
  • Oman Free Trade Agreement
    • Oman ($678.70)
  • Peru Trade Promotion Agreement
    • Peru ($1,702.50)
  • Panama Free Trade Agreement
    • Panama ($5,717.50)
  • Singapore Free Trade Agreement
    • Singapore ($8,891.50)

Trade with these listed countries accounts for approximately 50 percent of the United States total trade, and despite withdrawing from the TPP, negotiations are currently taking place to add additional agreements, such as one with the European Union.

It is also important to note that trade balances are influenced by things other than trade agreements as well. Currency exchange rates, inflation, and future expectations all play large factors, but trade was the only factor covered today.

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