Trade agreements: impact on the U.S. economy.(Congressional Research Service)(Report)

 Contents  Background An Overview of the Major Agreements    Multilateral Agreements    Regional Trade Agreements    Completed Bilateral Trade Agreements    Signed Bilateral Trade Agreements Requiring Congressional Approval    Pending Bilateral Trade Agreements Trade Liberalization and the Gains From Trade    Production Gains    Adjustment Costs    Consumption Gains    Economic Growth Estimating the Economic Impact of Trade Agreements    Overview    The Michigan Model and Estimates    Investment and Capital Flows    Data on Barriers to Trade in Services Implications for Congress 

February 4, 2010

Summary

The United States is in the process of considering a number of trade agreements. In addition, the 111th Congress may address the issue of trade promotion authority (TPA), which expired on July 1, 2007. These agreements range from bilateral trade agreements with countries that account for meager shares of U.S. trade to multilateral negotiations that could affect large numbers of U.S. workers and businesses. During this process, Congress likely will be presented with an array of data estimating the impact of trade agreements on the economy, or on a particular segment of the economy.

An important policy tool that can assist Congress in assessing the value and the impact of trade agreements is represented by sophisticated models of the economy that are capable of simulating changes in economic conditions. These models are particularly helpful in estimating the effects of trade liberalization in such sectors as agriculture and manufacturing where the barriers to trade are identifiable and subject to some quantifiable estimation. Barriers to trade in services, however, are proving to be more difficult to identify and, therefore, to quantify in an economic model. In addition, the models are highly sensitive to the assumptions that are used to establish the parameters of the model and they are hampered by a serious lack of comprehensive data in the services sector. Nevertheless, the models do provide insight into the magnitude of the economic effects that may occur across economic sectors as a result of trade liberalization. These insights are especially helpful in identifying sectors expected to experience the greatest adjustment costs and, therefore, where opposition to trade agreements is likely to occur.

This report examines the major features of economic models being used to estimate the effects of trade agreements. It assesses the strengths and weaknesses of the models as an aid in helping Congress evaluate the economic impact of trade agreements on the U.S. economy. In addition, this report identifies and assesses some of the assumptions used in the economic models and how these assumptions affect the data generated by the models. Finally, this report evaluates the implications for Congress of various options it may consider as it assesses trade agreements.

Background

Congress plays a direct role in formulating and implementing U.S. international trade policies. During the 108th, 109th, and 110th Congresses, this role gained increased importance as the United States negotiated an unprecedented number of trade agreements. The 111th Congress may also address the issue of trade promotion authority (TPA), which expired on July 1, 2007. Under this authority, Congress grants the President the authority to enter into certain reciprocal trade agreements. (1) Currently, the United States is involved in multilateral negotiations in the Doha Development Agenda under the auspices of the World Trade Organization (WTO). On a regional level, the United States signed an agreement on the Dominican Republic-Central America-United States Free Trade Agreement (CAFTA-DR), and has at times been involved with countries in southern Africa. In addition, the United States has pursued bilateral trade agreements with Malaysia, the United Arab Emirates, and Thailand. It has concluded agreements with Australia, Bahrain, Canada, Chile, Dominican Republic, Israel, Jordan, Mexico, Morocco, Oman, Peru, and Singapore, and the five countries of the Central American Common Market (Guatemala, Honduras, Nicaragua, El Salvador, and Costa Rica). (2) The United States has signed free trade agreements with South Korea, Columbia, and Panama, but Congress has not enacted legislation to approve and implement these agreements. The Bush Administration concluded agreements with Panama, Peru and Colombia, separately from Ecuador and Bolivia, the other members of the proposed Andean-U.S. Free Trade Agreement.

Building a broad-based public consensus on international trade issues often has proven to be difficult, especially as certain industries and labor groups within the economy have been adversely affected by international competition. Based on previous experiences with international trade agreements, Members of Congress and the public may view these agreements with varying degrees of support and opposition. While few critics are likely to oppose outright all of the trade agreements being negotiated, critics will oppose some aspects of the agreements, because certain groups within the economy will incur a disproportionate share of the adjustment costs associated with each trade agreement. Economists and others have developed economic models that utilize advanced techniques to assess the economic impact of trade agreements on the economy as a whole and on specific sectors within the economy. To help Congress evaluate the potential economic effects, this report examines a sampling of these studies and offers an assessment of the estimates they have generated.

An Overview of the Major Agreements

Multilateral Agreements

In November 2001, trade ministers from 142 member countries of the World Trade Organization met in Doha, Qatar to launch the 4th WTO ministerial. The Doha meeting succeeded primarily by agreeing to begin a new round of multilateral trade negotiations. (3) These negotiations are intended to build on agreements reached under the Uruguay Round of negotiations on trade in agriculture and trade in services, part of the WTO's already-established work program. For the United States, the chief goal of the negotiations is to improve market access in agricultural trade, primarily by eliminating agricultural export subsidies; easing tariffs and quotas; and reducing other forms of trade-distorting domestic support. In addition, the United States hopes to expand negotiations on trade in services and to reduce tariffs on industrial goods.

A framework agreement on future negotiations was concluded in Geneva on August 1, 2004, but a new deadline for the completion of the talks was not set and the talks stalled in 2005. This framework was viewed hopefully, because it provides a blueprint for future negotiations on agriculture, non-agricultural market access, services and trade facilitation. The 6th Ministerial, which occurred in Hong Kong in December 2005, was seen by many as the last opportunity to settle key negotiating issues that could produce an agreement by 2007, the de facto deadline for the negotiations before the U.S. trade promotion authority expired. On April 21, 2006, WTO Director-General Pascal Lamy announced that WTO negotiators would not meet the April 30, 2006, deadline for reaching an agreement on a framework for further negotiations and that he had committed negotiators to six weeks of continuous talks to reach an agreement. Trade negotiators failed to reach an agreement during talks in Geneva from June 30-July 1, 2006, and the talks were indefinitely suspended. On January 1, 2007, however, Lamy announced that the talks were back in "full negotiating mode." Chairs of the agriculture and industrial market access negotiating groups offered draft modalities texts on July 17, 2007, that are serving to keep the differing parties to the negotiations engaged in the talks despite criticism from nearly all quarters over the texts.

Regional Trade Agreements

Free Trade Area of the Americas (FTAA)

At the second Summit of the Americas in April 1998, 34 nations of the Western Hemisphere agreed to initiate formal negotiations to create a Free Trade Area of the Americas by 2005. (4) The negotiations initiated efforts in five areas (market access, agriculture, services, investment, and government procurement), but the negotiations have stalled. The United States and Brazil attempted to broker a compromise by moving the negotiations away from a comprehensive, single undertaking toward a two-tier framework comprising a set of "common rights and obligations" for all countries, combined with voluntary plurilateral arrangements with country benefits related to commitments. This approach, however has proved elusive and five of the participants--Brazil, Argentina, Uruguay, Paraguay, and Venezuela--have blocked an effort to restart the negotiations.

U.S.-Southern African Customs Union Free Trade Agreement

In November 2002, the Bush Administration announced that it was pursuing negotiations for a free trade agreement with the Southern African Customs Union (SACU), comprised of Botswana, Namibia, Lesotho, South Africa, and Swaziland. (5) These negotiations reflect congressional interest in strengthening U.S. trade with Africa as expressed in the African Growth and Opportunity Act (P.L. 106-200). U.S. negotiators hope to gain reductions in tariffs and in non-tariff barriers in such areas as telecommunications, financial services, legal services, and the movement of personnel. The Southern African members had pressed for increased market access for goods not already covered by the Africa Growth and Opportunity Act, especially for textiles and apparel, footwear, and agricultural products. After six rounds of talks, negotiations stalled and the December 2004 deadline for concluding the talks passed. The talks were deadlocked over differing views over the objectives of the talks and what sectors should be included for negotiation. Currently, the United States and SACU are continuing talks for a Trade, Investment, and Development Cooperation Agreement, which may lead to an eventual FTA. The United States has signed Trade and Investment Framework Agreements with Ghana, Liberia, Mauritius, Mozambique, Nigeria, Rwanda, and South Africa, as well as several regional groups. Also, the United States has signed Bilateral Investment Treaties with several Sub-Saharan African countries, including: Cameroon, Republic of the Congo (Brazzaville), Democratic Republic of the Congo (Kinshasa), Mozambique, and Senegal.

The Enterprise for ASEAN Initiative

On October 26, 2002, President Bush announced that the United States had begun negotiations with the Association of Southeast Asian Nations (ASEAN) under the Enterprise for ASEAN Initiative (EAI). (6) The initiative offered the prospect of bilateral trade agreements with the 10 ASEAN members (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar (Burma), Philippines, Singapore, Thailand, and Vietnam). Since the EAI was announced, the United States concluded FTAs with Singapore and initiated agreements with Thailand and Malaysia. The United States concluded a Trade and Investment Framework Agreement (TIFA) with ASEAN in August 2006. In addition, the …