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The Pros and Cons of Pursuing Free-Trade Agreements 1 (July 2003)

handle is hein.congrec/cbo10418 and id is 1 raw text is: A series of issue summaries from the Congressional Budget 0f/ice JULY 31,2003 The Pros and Cons of Pursuing Free-Trade Agreements Since the end of World War II, U.S. policy has gener- ally supported the liberalization of international trade -that is, the elimination of artificial barriers to trade and other distortions, such as tariffs, quotas, and subsi- dies, that countries use to protect their domestic indus- tries from foreign competition. The United States has pursued the objective of trade liberalization primarily by seeking agreements among large numbers of coun- tries in successive rounds of multilateral negotiations under the General Agreement on Tariffs and Trade (GATT) and later the World Trade Organization (WTO). In recent years, however, the United States and other countries have also begun to negotiate free- trade agreements (FTAs), which eliminate almost all trade restrictions and subsidies, with various individual countries and groups of countries. A number of such agreements are on the policy agendas of the Adminis- tration and the Congress. Like the North American Free Trade Agreement -which was examined in a recent Congressional Bud- get Office (CBO) paper, The Effects ofNAFTA on U.S.- Mexican Trade and GDP-the new FTAs should have a net beneficial effect on the U.S. economy. In most cases, all of their effects-good and bad-should be extremely small. However, the arguments for and against FTAs extend beyond their net economic effects on the United States to considerations of foreign policy and tactics for achieving multilateral free trade. The Recent Increased Emphasis on Free-Trade Agreements The first U.S. free-trade agreement, which was with Israel, went into effect on September 1, 1985; the second, with Canada, took effect on January 1, 1989. Exactly five years later, NAFTA went into effect, creating a free-trade area encompassing the United States, Canada, and Mexico. The net effects of the new FTAs on the other countries involved should also be beneficial but much more sig- nificant than the effects on the United States because of the much smaller size of those countries' economies. FTAs thus provide a way for the United States to help various countries for foreign policy reasons while hav- ing little effect on the United States. They also offer a way to continue making headway toward the goal of free trade in the face of difficulties that have slowed progress in the Doha Round of WTO negotiations. In fact, they may help stimulate progress in that round because countries not party to the FTAs may fear being left behind while countries that are party to such agree- ments expand trade with the United States. Critics worry, however, that the pursuit of free-trade agreements could divert the world from multilateral negotiations and lead to the development of rival trad- ing blocs centered on the United States, the European Union (EU), and Japan. Indeed, the EU has negotiated a number of FTAs in recent years. Critics also argue that because of differences in negotiating dynamics, FTAs between small developing countries and such large entities as the United States or the EU are likely to leave in place some trade barriers that multilateral negotiations in the absence of FTAs would eliminate. Foreign-policy and tactical considerations must be weighed alongside the economic arguments in deter- mining whether the pursuit of FTAs is an advisable path to the goal of multilateral free trade. More recently, the United States' pursuit of FTAs has intensified. A free-trade agreement with Jordan went into effect on December 17, 2001. Negotiations for free-trade areas with Singapore and Chile, begun in December 2000, have been completed, and the resulting agreements are awaiting final approval and implementation by the respec- tive governments. Negotiations were recently launched for

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