America and Global Trade: Free Trade and Strategy

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Introduction

The United States has historically been a strong proponent of free trade and the benefits that open trade, free of most significant tariffs and barriers, can have on economic growth. However, while free trade itself is largely seen as beneficial, the impact it can have on domestic interest groups is certainly palpable (Epstein, 2013). Free trade has the benefits of imposing a “diffuse but insistent set of institutional pressures on all nations with inefficient domestic policies”, thereby creating a context in which unions “consistently oppose market liberalization” that would result in them being weak with regards to the import and export markets internationally (Epstein, 2005, p. 207). Despite the danger free trade poses to certain sectors of the economy of the United States, the argument is made that free trade, overall, is beneficial and wholly needed for the United States to retain a position of economic eminence in the globalizing world. Moreover, the United States has history of free trade agreements that are increasingly superseded by the implementation of bilateral trade agreements that lend themselves to the establishment of preferential trading associations hostile to change. Lastly, the American system of competitive liberalization is not without its drawbacks and does not represent the best hope for the future of American trade policy. 

American and Global Trade Policy: Exceptions to Free Trade

The American sentiment towards free trade has, in recent years, shifted dramatically. The United States today, sadly, has a trade policy that is “moribund […] the president has no trade authority from Congress to negotiate trade agreements, protectionist sentiment has risen dramatically, and prospects for continued trade liberalization are grim” (Aggarwal, 2009, p. 1). The United States has, with regards to its international trade policy, fallen from a position of authority and initiative to one of decline and regression. Much of this sentiment against free trade found voice and authority in the aftermath of the global financial crisis that began in 2008. However, the shift away from bilateral free trade agreements (BTA) towards preferential trade agreements (PTA) is a significant and momentous shift in American trade policy. Indeed, it has become increasing clear “in recent years […] we have seen a sharp turn toward a rapid proliferation of bilateral preferential trade agreements”, actions that deeply “undermine the coalition for free trade in the United States” (Aggarwal, 2009, p. 2). It is important, however, to note the presence of significant lobbies in the United States, particularly labor unions, that strongly support the erection of trade barriers and PTAs in order to further their own interests and, in the eyes of unions, protect American workers from cheap foreign labor. 

The turnaround of American trade policy can be traced back to the Bush administration and the way the federal government dealt with trade issues from the year 2000 on. In 2002, the steel industry came under congressional inquiry; the administration “initiated an investigation of steel imports, imposed tariffs of up to 30 percent” and “launched an effort to organize global steel production” (Bergsten, 2002, p. 86). Lumber, too, became the focus of tariffs when the United States ordered the establishment of lumber control tariffs against Canada. Not unsurprising, in 2002 the United States Congress signed off on a bill that continued massive subsidies to American agriculture, “even though the United States has railed for years against such practices abroad” (Bergsten, 2005, p. 87). Aggarwal (2009) notes the increasing strength of trade barriers in the United States as a mixed bag of domestic lobbying interests and national concern to stem the tide of American economic decline (p. 2). Indeed, the most potent sign of this rising wave of protectionism has been the “rise of unilateral protectionist measures […] or what some have labeled ‘murky protectionism’” (Aggarwal, 2009, p. 2). Thus, while American trade policy is far from complete protectionism and is still largely based on free trade principles, the increasing number of exceptions and preferential bilateral trade deals struck with nations across the globe is indicative of the extent to which domestic protectionist concerns are beginning to exert more and more influence over the conduct of America’s foreign trade policy. 

American trade policy, moreover, is more than merely a synthesis of free trade and a small smattering of protectionism. It is reflective of the intricacies of the global marketplace, meaning that American trade policy is hardly decided in a vacuum of free trade internationally. Instead, the United States responds to significant developments overseas and abroad with actions of its, thus obfuscating the original chain of causality that led to the development of particular actions on behalf of economic leaders. China, for example, “tightened imports on food and banned Irish pork imports” while the Indians “banned Chinese toys” and Argentina increasing “licensing requirements on textiles, auto parts, and leather goods” (Tavernier, E. M., & Yadavalli, 2012, p. 190).  These industries are largely unrelated to each other and, moreover, represent certain critical economic sectors in individual countries. 

Thus, it is clear that the adoption of particular tariffs, quotes, and other associated trade barriers are hardly massive international agreements that dominate the trade relationship between major producers, but rather are often piecemeal and disjointed barriers that are more reflective of domestic lobbying and individual concerns. As there are no “enforcement costs” to trade barrier policies, they are easy to implement and simple to justify (Epstein, 2005, p. 207). Protectionism in the modern sense is haphazard and subject to the vagaries of economic pressures, states do not utilize these pseudo-mercantilisms and the basis for their economic policies. It is important to note, then, that the “baseline of analysis is a sound account of the principles of free exchange within domestic markets”, while simultaneously  acknowledging the presence of industrial exceptions and overall sense of the rejection of certain aspects of free trade in favor of protectionist policies in certain sectors (Epstein, 2005, p. 208). 

Policy Shifts:  Mid 1990s to Present

In the aftermath of the Second World War, the primary driver of the global economy was the American insistence of free trade agreements and unilateral declarations of tariff and quote rejection. However, this began to change after third-odd years of continued free trade agreements with the signing of what Aggarwal (2009) notes as the “first bilateral trade agreement with Israel” in 1985, which was overlooked with regards to the signing of the 1987 trade deal with Canada that established a free trade region with the northern state (p. 10).  The significance of the bilateral deal with Israel was additionally hidden under the fanfare that accompanied the passing of the North American Free Trade Agreement (NAFTA) in 1994, which was heralded as a landmark achievement of the development of free trade in the North American region. 

NAFTA as a subject of history, is critically important to understand the analysis of American trade policy. It is easily the most well-known trade agreement in American history and “grants trade preferences to the United States, Mexico, and Canada” (Tavernier, E. M., & Yadavalli, 2012, p. 191).  NAFTA resulted in an “increase of trade of 245 per cent over the six-year period” from the start of the agreement until the early part of 2001 (Mzumara, M., Chingarande, A., & Karambakuwa, R., 2012, p. 92). Strangely enough, while trade increased substantially as a result of NAFTA, and the tangible benefits of the economic system as whole are apparent, the trade agreement did not result in an even distribution of benefits for all member nations. Mzumura et. al. (2012) argue that NAFTA, while it benefited all the regional members, tended to favor Mexico and to a lesser extent Canada over the United States, as the vast number of products the United States economy produced overshadowed the considerably weaker economy of Mexico and the strong, but still vastly smaller, domestic economy of Canada. Therefore, it can be said, while NAFTA benefited all the members, the very nature of free trade between a wealthy nation like the United States and a relatively poorer state like Mexico can result in substantial trade imbalances that benefit certain members of the agreement more. 

The new policy adopted by the United States, then, consisted of “open sectoral multilateral agreements” in specific industries that opened specific markets (Aggarwal, 2009, p. 10). Contrary to simple unilateral or multilateral trade agreements irrespective of sectors, open sectoral multilateral agreements primarily took place in information technology industries. This stands as a break from previous policy options, as it stands in opposition to the previous method of “giving only temporary relief to strong protectionist interests to remove their opposition to broader liberalization” (p. 10). In essence, this new policy meant that industries opposed to the liberalization of their respective corner of the domestic economy would receive temporary agreements by their government in order to gradually win them over to supporting the implementation of free trade agreements. 

However, this plan shifted from a temporary solution to reticent sectors towards a complete acquiescence on behalf of national governments and trade organizers in favor of what seem to be permanent exceptions to the free trade rule. Mexico, in particular, witnessed “growth in the border states [and] has been attributed to increased border business due to the establishment of free-trade zones” (Tavernier, E. M., & Yadavalli, 2012, p. 191). The establishment of NAFTA, then, had a clear and tangible benefit to Mexico. Moreover, “NAFTA has not had a significant impact on growth of Mexican exports to the United States” (p. 191). This trade imbalance, then, comes as a result of differences in the nature of the economic systems of Mexico and the United States, where the former has far more unskilled labor and the latter more expensive and skilled workers. These differences “allow resources to move from less productive enterprises” to areas that are more productive, thereby allocating resources more appropriate for their respective sectors (Tavernier, E. M., & Yadavalli, 2012, p. 192). 

By the time of the Bush administration in early 2001, the United States opted to follow a trade policy termed “competitive liberalization”. Competitive liberalization has three primary policy objectives: first, “induce competition for access to the large US market”; second, “to encourage the adoption abroad of US-style market-friendly business laws and regulations”; third, “to encourage other nations to support US foreign policy and military objectives” (Evenett & Meier, 2008, p. 31). This new trade policy is indicative of the new approach in global trade that the United States would adopt and is largely a cause of the infamous “spaghetti bowl” of bilateral trade ties that have come to dominate the international marketplace in recent years. This network of individual trade agreements between states can lead, however to “discrimination against outsiders” but can be offset by the “increased trade that follows from economic growth within the preferential trading area” (p. 50). In essence, this policy of competitive liberalization promotes the idea that it, naturally, forces other states to engage in competitive liberalization, lest they lose out on the potential benefits of bilateral preferential trade agreements. 

Competitive liberalization, therefore, represents an alternative to the system of multilateral free trade between nations that occurs when competing regional economic powers come to proverbial blows regarding the status of their import and export industries. The United States, for example, utilizes this new policy method in order to gain preferential access to specific sectors of foreign markets, yet this access is not an appropriate long-term solution. Instead, three major objections can be raised against competitive liberalization as the basis of trade negotiations. 

First, the benefits of preferential bilateral agreements can entrench themselves into the economies of the two states, meaning that they will oppose any future reform that would disrupt the singularly beneficial relationship between the two partners” (Evenett & Meier, 2008, p. 51). Here, the danger exists that member states may refuse future trade reform on the off chance that such reform will ruin the existing preferential arrangement between the two states. This fear is particularly potent when one considers the importance of certain trade sectors, particularly information technology and petroleum, with regards to preferential bilateral trade agreements (” (Evenett & Meier, 2008, p. 52). Certain high-demand industries not only benefit the host nation dramatically, but by restricting trade options with outside states, tensions are likely to increase and the possibility of future reform declines as states become accustomed to preferential treatment. 

Secondly, there is a very real danger that the continuing spread of bilateral trade agreements will result in regional trade blocs that create and assemble their own internal beneficial networks of trade and organization. Here, we see that the concerns about individual entrenchment are then subsequently extrapolated to entire geographic regions of trade. It is not unlikely that certain regions such as North America or the United States and Latin America could form enough individual, bilateral bonds that the region takes on a different “form of capitalism” that grows to dominate trade relations in that particular area. (Evenett & Meier, 2008, p. 51). This would result in regional blocs that protest change.

Lastly, competitive liberalization suffers from the danger of regional blocs assuming a cohesive approach to their trade relations with the outside world. In essence, these “regional groupings may develop strong incentives to raise trade barriers against third parties”, lest the introduction of foreign trade groupings negatively impact the bottom line of trade within the domestic group” (Evenett & Meier, 2008, p. 51). Bound by a complex web of internal bilateral agreements, any disruption via the introduction of a substantial foreign force may complicate the domestic matters of the internal trade arrangements and result in the reduction of profitable trade for all domestic members. These regional groupings, then, may erect tariffs and policies “against third parties” (Evenett & Meier, 2008, p. 52). Thus, the drawbacks of competitive liberalization are clear—there is a significant danger of bilateral trade agreements creating preferential relationships that neither partner will want to disrupt, even if the introduction of outside influences would benefit the collective, and that such bilateral ties may lead to the creation of regional trade groupings that refuse to negotiate with their counterparts in other geographic and economic regions 

Status of Global Trading System and the Future of United States Trade Policy

The global system of international trade, then, is fundamentally accepting of the idea of free trade as the basis of the modern system of exchange of goods. However, many powerful exceptions to the rule of free trade exist and viewing the world economic system as one where free trade is the assumed basis of interaction would be a falsity. American “trade retaliation against Europe”, for example, is still “in place from a previous dispute over beef [and] Europe is considering up to $4 billon of counteraction against U.S. tax subsidies for exports”, which would violate World Trade Organization (WTO) rules regarding the regulation of import and export industries (Bergsten, 2002, p. 89). Here, we see actions taken by the United State and the European Union that are effectively backtracks and reactions against the principles of free trade and only contribute to increasing the pressure of the competing economic systems. Instead of promoting free trade as a solution to global marketplace demands, the United States in particular is preferring to side on behalf of protectionism and it is this “backtracking on liberalization” that does little to help the resolution of economic conflict (Bergsten, 2002, p. 90).  Moreover, this rise of protectionism is intrinsically linked with the development of competitive liberalization, in which certain sectors of the economy are granted specific preference in trade with foreign nations.

The future, then, of American trade policy is a matter of debate. Sullivan (2013) argues that “should the United States embark upon a protectionist course” through the use of an inflationary monetary policy and “currency depreciation”, the outcome would surely be negative for all parties involved (p. 8). However, in the event that protectionist tides continue to rise, “one could reasonably argue that the U.S. economy might fare better than the heavily trade-dependent economies of China and other nations” (p. 9). Sullivan goes on to state that the United States, strong as it is relative to the position of other states with regards to trade, primarily due to its high rate of return on foreign investments and the “relatively low importance of gross trade flows to U.S. GDP”, does not need to pressure other states in continuing economic policies that would detract from global prosperity (p. 9). States like China benefit greatly from the massive trade imbalance that defines the economic relationship between the United States and China, and having the United States spark trade wars or otherwise escalate tensions in the global marketplace by implementing continual preferential bilateral trade agreements with individual states is not an effective way of ensuring the success of the American import and export business in the future. Moreover, as Tavernier & Yadavalli (2012) argue, the United States should continue favoring free trade agreements of the multilateral kind whenever possible, so long as American market sectors remain competitive in their respective export industries. 

Conclusion

The United States, while historically a strong proponent of free trade, has recently experienced a shift in the direction of signing off on preferential bilateral trade agreements instead of the classically successful multilateral trade agreements. Though initially designed as a way to ensure that individual sectors of the domestic market would be guaranteed some protection upon the advent of free trade, these preferential agreements have instead expanded to become a hallmark figure of a new age of economic protectionism in the United States. Foreign countries, in response, have begun the creation of their own individual networks of preferential trade agreements and the global principle of free trade seems to be challenged by the development and implementation of these deals. Though American economic policy remains in a state of flux, it is clear that there is a definite favoring of these sorts of agreements which can be reasonably argued to threaten the future of free trade in the global marketplace. While the drawbacks to the American system of competitive liberalization are clear, it remains to be seen whether the United States will continue this policy or return to a more open system that focuses on multilateral free trade agreements as the basis of the international economy. 

References

Aggarwal, V. (2009). Reluctance to Lead: U.S. Trade Policy in Flux. Business & Politics, 11(3), 1-21. 

Bergsten, C. F. (2002). A Renaissance for U.S. Trade Policy? Foreign Affairs, 81(6), 86-98. 

Ehrlich, S. D. (2008). The Tariff and the Lobbyist: Political Institutions, Interest Group Politics, and U.S. Trade Policy. International Studies Quarterly, 52(2), 427-445. 

Epstein, R. A. (2013). Free Trade and Free Immigration: Why Domestic Competitive Injury Should Never Influence Government Policy. University of Chicago Law Review, 80(1), 201-223. 

Evenett, S. J., & Meier, M. (2008). An Interim Assessment of the US Trade Policy of ‘Competitive Liberalization’. World Economy, 31(1), 31-66.

Mzumara, M., Chingarande, A., & Karambakuwa, R. (2012). An Analysis of Comparative Advantage and Intra-North American Free Trade Agreement (NAFTA) Trade Performance. Journal of Sustainable Development, 5(11), 103-117. 

Sullivan, R. N. (2013). Rebalancing Global Trade: No Quick Fix. Financial Analysts Journal, 69(1), 6-9. 

Tavernier, E. M., & Yadavalli, A. (2012). Should the United States continue to pursue free trade agreements? A socio-economic perspective. Journal of Tropical Agriculture, 89(3), 189-198.