I just heard on CNBC that the U.S. is beginning negotiations with South Korea to establish a free trade agreement. The Bush Administration, for all the things that they’ve done wrong (and about which I’ve complained fervently) in the past five years, has been doing one thing right — promoting free trade. During Bush’s first term, he was able to get Congress to reinstate presidential trade promotion authority (TPA), which lapsed in 1994 (because the Republican Congress wanted to stick it to Clintion; every president since Gerald Ford was granted TPA by Congress). When Bush came into office, we had free trade agreements with four countries — Canada and Mexico under NAFTA, Israel, and Jordan. Currently, we’re at sixteen. This includes the six CAFTA countries — Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua. I’m in favor of free markets and free trade; however, we need to be careful.
I approve of promoting free trade, but we need to be careful how we “implement free trade.” Why would we have to implement free trade? Well, when the United States goes into any free trade agreement negotiations (sidenote: agreement, not treaty; the formers needs only a simple majority; the latter requires 2/3rds), we have to worry about losing GDP to the country or countries with which we’re making the agreement. So we have to protect ourselves by imposing regulations, standards, etc. The ultimate purpose of free trade is for all countries involved to increase their respective GDPs by opening up new markets without restrictions. To achieve this, there must be protections put in place. We force other countries to set higher standards — environmental, wage, human rights, etc. — so we don’t lose capital in the agreement. So free trade is a tricky business. We want superior U.S. goods to be purchased abroad, but we don’t want capital, human and otherwise, to go also.
So what’s the price of free trade? Regulation, bureaucracy, and political independence. Yes, political independence. Free trade agreements don’t just hold the agreeing countries accountable to us; the accountability goes both ways. Further, with the amount of regulation and bureaucracy that free trade agreements require (NAFTA is over 1700 pages long), how “free” is all this new trade? Is it worth all the effort that such agreements require before and after they go into effect? Ideally, yes. In reality, it’s not so clear cut.
There are two main free trade issues right now. And both require more investigation by me before I can form a more concrete opinion on them. The first is free trade in the Americas. NAFTA and CAFTA are steps towards establishing the Free Trade Area of the Americas (FTAA), which would enable free trade amongst all countries in the region. The second is Asia. We have a free trade agreement with Singapore. We’re in negotiations with Thailand, and, as I wrote at the beginning of the article, we’re just starting negotiations with South Korea. Asia is booming, and we need to not be left behind.
One thing I will say is that free trade with South Korea has huge potential benefit. Currently, there’s $72.5 billion of trade between us. Our current account deficit with them is approximately $15 billion, half of that from the automotive industry. South Korea is relatively closed off to U.S. goods. 6% of U.S. goods are duty free in South Korea. In the U.S., 30% of South Korea’s goods are duty free. A free trade agreement could do good things for our current account, but, again, we must be wary of the cost. On the surface, however, this looks like it will be an excellent arrangement that could result in increased sales for the U.S. automotive and agricultural industries while we get cheaper electronics, cars, and consumer goods. But only time will tell.
And, as I implied earlier, expect more posts regarding free trade after I do more research into current and potential agreements.