America's economy thrives on trade. The
United States has seen its economy and per capita income grow
strongly as trade has become an ever greater portion of the
country's gross domestic product (GDP). It is in America's economic
interest to continue to expand trade by lowering barriers to goods
and services in the U.S. and in other countries. Traditionally,
America has focused on multilateral efforts to liberalize trade,
through the General Agreement on Tariffs and Trade (GATT) and the
World Trade Organization (WTO). More recently, the Bush
Administration has increased U.S. emphasis on bilateral and
regional free trade agreements to supplement multilateral
negotiations. Although all of these options are valuable components
in a strategy to pursue free trade, the Administration should
consider a fourth option--a Global Free Trade Alliance (GFTA)--to
supplement bilateral, regional, and multilateral free trade
negotiations.
The
GFTA would not be a treaty: It would be a legislative initiative
offering free trade between the U.S. and other nations that have a
demonstrable commitment to free trade and investment, minimal
regulation, and property rights. Congress would authorize GFTA
members access to the U.S. market--with no tariffs, quotas, or
other trade barriers--on the single condition that they reciprocate
this access to the U.S. and to other members of the GFTA. As
proposed, the GFTA offers advantages that complement existing
options for trade liberalization. Specifically:
- The GFTA would
involve minimal negotiation. Membership in the GFTA would
be based on existing policies and a common commitment to free
trade, not negotiated concessions.
- It would be
faster than existing trade options. Without the need for
specific congressional approval, new members would gain GFTA
privileges immediately, subject to legislative requirements.
- Sovereignty
would be unaffected. The GFTA would be voluntary, and
nations would be free to adopt policies that violate the GFTA at
any time--with the understanding that such actions would cost them
privileged access to the U.S. and other GFTA members' markets.
- The GFTA would
be a carrot-based approach that, in itself, makes the alliance more
attractive over time. As membership grows, the
organization would become increasingly attractive. States would
have an incentive to maintain property rights and open their
markets further to qualify for the GFTA, providing a virtuous cycle
of freer trade.
- The GFTA would
offer a speedy means for global free trade. Unlike
bilateral or regional free trade agreements, the GFTA could include
all nations in an alliance based on true free trade.
Rather than being seen as a substitute for
other initiatives that further free trade, the GFTA should be
viewed as a complementary part of America's existing trade agenda
of promoting free trade by any means. It is a creative addition to
current approaches in an era in which the advance of global free
trade hangs precariously in the balance.
How the U.S. Benefits from Free Trade
Despite occasional protectionist
tendencies, America has long been an advocate for free trade.
Indeed, America's most significant departure from liberal trade in
the past century was the enactment of the U.S. Tariff Act of
1930--commonly known as the Smoot-Hawley Tariff Act--widely seen as
a key contributing factor to the Great Depression. America saw its
trade halved between 1929 and 1933, while unemployment increased
from 3.2 percent in 1929 to 24.9 percent in 1933. Following this hard
lesson, America has been a proponent of free trade, including being
a founding member of the General Agreement on Tariffs and Trade
after World War II and driving the major efforts to liberalize
global trade.
During the 50-plus years under GATT (and
later the WTO), trade barriers have been reduced substantially,
with a commensurate increase in global economic growth both in
developed countries and in developing countries that embraced trade
liberalization. The United States and its citizens have
overwhelmingly benefited from this policy, which has paved the way
for six decades of economic expansion and increased living
standards. (See Chart 1.) Some specifics are:
- The average U.S. tariff rate on all goods
has fallen from over 19 percent in 1933 to 1.6 percent in 2003. The
tariff rate on dutiable imports has fallen from nearly 60 percent
to 4.9 percent today.
- Trade (as a percentage of the GDP) has
climbed from single digits in the 1930s to nearly one-quarter of
the U.S. GDP in 2003.
- During this period of increased trade
liberalization and reliance on trade, real per capita GDP in the
U.S. (in constant 2000 dollars) has climbed from a low of $5,061 in
1933 to $35,726 in 2003.
How
does free trade increase standards of living? For one, free trade
contributes to job growth by increasing efficiency in the U.S.
economy. Tariffs and
other trade barriers are, in effect, hidden taxes on U.S. consumers
and businesses. These trade barriers harm the American economy by
allocating resources inefficiently, thereby reducing growth and
costing jobs in the long run. Moreover, barriers raise prices for
every consumer, reducing the purchasing power of each paycheck. As
noted by the U.S. Trade Representative (USTR), the costs of trade
barriers are staggering:
Last year alone, hidden import taxes cost
American consumers $18 billion. Duty-free trade would eliminate
these hidden costs and lower prices for consumers. While this
proposal would offer substantial benefits to all Americans, it
would particularly help low-income families. A recent study by the
Progressive Policy Institute found that cutting U.S. import taxes
especially benefits single-parent, low-income families, who
typically pay a higher proportion of their income on import taxes
than other households. A University of Michigan study found that
the U.S. economy would expand by $95 billion as a result of
tariff-free trade--contributing to job-creation and higher wages.
America's experience is not unique.
Countries that embrace economic freedom--including freedom of
trade--experience stronger economic growth than those that seek to
thwart the market through regulatory hurdles and policy
restrictions.
Numerous economic studies confirm the benefits of free trade,
including a 2003 study by Michael W. Klein, Scott Schuh, and Robert
K. Triest, which found that the benefits of trade outweigh its
costs by 100 percent, or two to one. The bottom line is that free trade is a
net boon for economic growth because it increases productivity,
lowers costs, and bolsters living standards.
Routes to Free Trade
There are three traditional routes for
pursuing trade liberalization: bilaterally, regionally, and
multilaterally. Each option has strengths and weaknesses.
Bilateral Trade
Agreements
Bilateral trade negotiations have the virtue of
flexibility. They allow the U.S. to pick and choose among
prospective trade partners and customize individual agreements
based on the needs and concerns of individual countries. Moreover,
negotiating bilaterally allows each agreement to move at its own
speed, rather than being held hostage to the slowest moving party
(as in a multilateral or regional agreement).
Unfortunately, the flexible nature of
bilateral negotiations is also a weakness in that it permits
countries to exclude entire economic sectors, such as agriculture,
from the scope of the agreements. These negotiations are also
limited in that they extend free trade incrementally, one nation at
a time, rather than broadly (as is the case through regional and
multilateral agreements). Another weakness is that the individual
nature of bilateral agreements means that each must run the
gauntlet of congressional approval. Even with trade promotion
authority--which restricts Congress to either an up or down vote
without amendment--this process can be tedious and fraught with
delays. For instance, Congress is unlikely to vote on a free trade
agreement with Bahrain prior to the U.S. election this
November.
Regional Trade
Agreements
Regional free trade agreements counter some of the
weaknesses of bilateral negotiations, but sacrifice some of the
strengths. On the positive side, negotiating with multiple
countries broadens the impact of the agreement to more economies,
sets common rules for trade among the agreement partners, and
streamlines congressional consideration to one agreement instead of
several.
However, these negotiations can proceed
only as quickly as the slowest member. This can substantially delay
the process, as evidenced by negotiations on the Free Trade
Agreement of the Americas, which has made little tangible progress
despite years of effort. Additionally, a greater number of
negotiating partners means that more diplomatic problems could
constrain portions of the agreement, thereby undermining its
effectiveness.
Multilateral
Trade Agreements
The ideal means for pursuing free trade is multilaterally.
The original forum for such negotiations was the General Agreement
on Tariffs and Trade, agreed to in 1948, which eventually formed
the core of the World Trade Organization, founded in 1994. With 147
members accounting for 97 percent of the world's trade, successful
negotiations in the WTO would apply liberalization across most of
the world in one stroke. During the past five decades, the GATT/WTO
framework has dramatically reduced global barriers to trade.
Regrettably, while GATT/WTO has
effectively lowered trade barriers, its members are not required to
engage in actual free trade. Members merely agree to lower existing
barriers on specified products, not eliminate them. Moreover, the large
membership and rules that require adopting changes through
consensus mean that negotiations in the WTO are difficult, slow,
and often avoid controversial aspects of trade liberalization. Each
of the successive (and completed) GATT negotiation rounds has taken
longer to complete than the preceding round. The Uruguay Round--the most recent
completed round, which led to the creation of the WTO--lasted
nearly a decade, from 1986 to 1994. The current Doha Round began in
2001, and the prospects for reaching a final agreement by the 2005
deadline are dubious.
Since World War II, America's main focus
on trade liberalization has been through multilateral negotiations
using GATT and its successor, the WTO. Only in the past two decades
has the United States focused on other options for pursuing free
trade. Unsurprisingly, the United States had free trade agreements
with only three countries through two agreements before the current
Bush Administration.
The
Bush Administration has recognized the unrealized potential of free
trade outside the WTO and sought to forge numerous bilateral and
regional agreements. This commonsense approach to trade has enabled
the Administration to pursue trade liberalization through the most
effective means. When one means of pursuing free trade is slowed,
such as the current WTO negotiations, the U.S. can pursue free
trade bilaterally or regionally.
This
agile approach to trade has resulted in a flurry of agreements and
negotiations. Congress has already approved free trade agreements
with Australia, Chile, Morocco, and Singapore. Seven other free
trade agreements, encompassing 17 countries, are either currently
being negotiated or waiting for congressional approval. Moreover, the Bush
Administration has continued to pursue the Free Trade Agreement of
the Americas (started under the Clinton Administration), the
U.S.-Middle East Free Trade Agreement, and the Doha Round of the
WTO.
The
Bush Administration deserves praise for revitalizing America's
trade agenda by pursuing bilateral and regional trade alternatives.
However, the Administration still seems bound by traditional
notions of trade agreements. Yet there is no reason to restrict
trade liberalization to existing models, particularly when a
complementary alternative--a voluntary Global Free Trade
Alliance--offers advantages unavailable through traditional
strategies.
A Global Free Trade Alliance
A
Global Free Trade Alliance offers an alternative option for
pursuing free trade that avoids the weaknesses of bilateral,
regional, and multilateral free trade agreements. First, the GFTA
would not be a treaty; it would be a legislative initiative similar
to Normal Trade Relations (formerly Most Favored Nation) status. The legislation would
offer free trade between the U.S. and other nations that have
demonstrated a commitment to free trade and investment, minimal
regulation, and property rights. As former British Prime Minister
Margaret Thatcher has noted, "Not only would this [GFTA]
arrangement work to stimulate the members' prosperity: it would
also act as a beacon and an example to others."
To
create a GFTA, Congress would simply need to pass legislation
giving GFTA members access to the U.S. market with no trade
restrictions--on the one condition that they reciprocate this
access to the U.S. and the other members of the GFTA. As standing
legislation, admitting new members would not require additional
votes. The USTR would simply need to certify that a qualifying
country has granted U.S. goods and services free access to its
markets.
The
legislation should include an enforcement mechanism rescinding
special access to U.S. markets if a country ever imposes trade
barriers against U.S. goods or services in violation of the GFTA
legislation or if the country enacts policies that would cause it
to fall short of the qualifying criteria. When members join the
alliance, they would stipulate that if they fail to meet the
numerical targets in the future, they would agree to leave the
alliance unless they corrected the lapse within one year. This
action could be triggered by congressional act or USTR
notification.
Rather than having a standing secretariat,
the GFTA would merely be a formalized meeting of the member
countries' trade ministers, staffs, and technical experts. Any
specific technical working group would exist only so long as its
specific task was being addressed (e.g., agreeing on common
accounting standards). Further decisions on trading initiatives
would be made on a consensual basis, in areas such as codifying
uniform standards on issues such as capital flows, subsidies, or
regulations to further minimize barriers within the alliance.
As
proposed, the GFTA offers advantages that complement existing
options for trade liberalization. Specifically:
- As a coalition
of the willing, the GFTA would involve minimal
negotiation. Membership in the GFTA would be based upon
existing policies, not negotiated concessions. It would secure the
benefits of increased trade and investment among members without
necessitating any new major policy reforms. It would reward nations
for their commitment to economic freedom by securing a coalition of
the willing determined to maximize trade liberalization.
- It would be
faster than existing options. Because new members would
become eligible based on their own existing policies and
willingness to open their markets to the U.S., the only delay to
admission would be a short period of consideration prior to USTR
notification to Congress. Without the need for specific
congressional approval, new members would gain GFTA privileges
immediately, subject to legislative requirements.
- Sovereignty
would be unaffected. GFTA membership would be voluntary,
and nations would be free to adopt policies in violation of the
GFTA at any time--with the understanding that such actions would
cost them privileged access to U.S. and other GFTA markets. Its
numerical target methodology would allow for self-selection and
would give the whole policy initiative a self-governing aspect. The
GFTA is not an example of an American fiat.
- The GFTA would
be a carrot-based approach that, in itself, makes the alliance more
attractive over time. There is a tipping point here: As
membership grows, the organization would become increasingly
attractive. Such an opportunity for momentum has long been missing
in trading regimes. Without American finger-pointing about the
merits of liberalization, states would have an incentive to open
their markets further to qualify for the GFTA. It would thus give
non-member countries an incentive to make market-friendly reforms
in order to qualify for membership.
- The GFTA would
offer a speedy means for global free trade. Unlike
bilateral or regional free trade agreements, the GFTA would not be
bound to a finite number of partners or a specific region. In
theory, it could include all nations. However, unlike the WTO, it
would be based on true free trade rather than an incremental
reduction in trade barriers.
The
GFTA would have the potential to encompass every nation, if it
meets the criteria and wishes to open its markets to goods and
services from other GFTA members. However, this is unlikely to
occur, at least in the near future, because only three dozen
countries are currently within sight of GFTA membership. This means
that the U.S. should not abandon bilateral, regional, or
multilateral options for pursuing free trade with countries that
are not eligible or willing to take advantage of the GFTA. Instead,
the U.S. should treat the GFTA as an attractive supplement to these
efforts.
Conclusion
The
Bush Administration is committed to pursuing free trade by any
means. As stated by U.S. Trade Representative Robert Zoellick, the
Bush Administration has "a strategy of trying to move
liberalization ahead globally, regionally, bilaterally, and to
create a competition on liberalization." The Global Free Trade Alliance offers
a new, innovative means for pursuing this strategy.
The
GFTA can change the very way that people and countries think about
free trade. Further global trade liberalization will no longer
require wrangling over "concessions." Instead, free trade will be
seen for what it is--a policy that gives countries that embrace it
a massive economic advantage. As the advantages of an alliance
become apparent, the GFTA would serve as a practical advertisement
for the enduring global benefits of free trade.
Edwin J. Feulner, Ph.D., is President
of The Heritage Foundation. John C. Hulsman, Ph.D., is
Research Fellow for European Affairs in the Kathryn and Shelby
Cullom Davis Institute for International Studies and Brett D. Schaefer
is Jay Kingham Fellow in International Regulatory Affairs in the
Center for International Trade and Economics at The Heritage
Foundation.