2018Free Trade Agreements Are Cause for Hope

4536930

On October 21, three bilat- eral trade agreements have passed the US House of Representatives and Senate. But the votes came with a sense of relief rather than celebration from their supporters, and resignation rather than anger from their opponents. Very occasionally, common sense soars above political partisanship and economic short-termism to inspire hope even in the most jaded investor. The passing by US Congress of free trade agreements between America and Colombia, Panama and South Korea would be cause for celebration at the best of times. A serious lobbying effort for the pacts with South Korea, Panama and Colombia, formally called “free trade agreements”(FTAs), has been mounted over the years by business organizations, particularly those representing multinational firms, who professed themselves delighted. The muted response may reflect the fact that industries and their lobbyists, including the auto lobby, cars were one of the main sticking points in the South Korea deal, have been ambivalent about the pacts. The increasing complexity of global supply chains means that the concept of US companies competing with, say, Korean companies has become blurred. Whereas the US car industry and its trade unions united ferociously to oppose Japanese car imports in earlier decades, the Big Three automakers were initially divided on the Korea pact. General Motors’s link-up with Daewoo made it an early supporter of the agreement, while Ford and Chrysler were previously opposed, Ford ran aggressive newspaper ads against the deal in November, and only became supportive when aspects of the deal were revised in December. Similarly, the United Auto Workers’ union broke ranks with most of the rest of the labor movement last year, including the umbrella AFL-CIO organization, to back the pact. But the UAW, aware that trade in general is not popular within the union movement, where it is blamed for sending jobs abroad, has not campaigned aggressively for the deal. In the governments of the partner countries, the general attitude is one of relief in Colombia and Panama, which have looked on in increasing frustration at the policy paralysis in their traditional trading partner. But in South Korea, where the legislative wrangling has been as intense as in the US, the bill could still face a bumpy ride through parliament. While Lee Myung-bak, president, urged South Korea’s parliament to ratify the deal as soon as possible, Sohn Hakkyu, leader of the opposition, called the bill an “unfair contract with too many benefits for the United States”. “The more the US speeds things up with this ratification, the more we need to be prudent,” he said. His Democratic party, which is seeking to build support before next year’s presidential election, argues that 10 clauses in the trade deal need to be revised. This poses a challenge for the ruling conservative party because South Korean lawmakers traditionally seek to forge a consensus with the opposition rather than ramming legislation through by using their majority. In this economic climate, that countries are prepared to sacrifice some local markets in the hope of gaining new ones is extraordinary. The three new members will bring the number of countries with which America has FTAs to 20. Last year 40 per cent of US exports went to FTA countries and the benefits to exporters from freer trade are real enough. According to the International Trade Administration, export growth rates to FTA countries were 3 per cent higher last year than to those with no agreement. And given that almost a third of US manufacturing jobs are export-related, anything that might boost overseas demand is particularly welcome, given America’s unemployment level. Of course, free trade does not help everyone; that is part of the point. For example, a reduction in the 80 per cent import tariff on US beef may have an impact on Colombia’s beef industry, the world’s seventh largest by head of cattle. Investors can often tell where the pain is going to be felt by the length of phase-in periods. Korean truck makers are not going to see a fall in US tariffs for eight years, and even then they will be phased out over another two. Since the financial crisis, America has lost some of the economic high ground. But if emerging countries can still copy one thing from the US, it is readiness, even when jobs are scarce and politics are hot, to open up trade and trust that fighting for bigger markets against greater competition will only make domestic industries healthier.