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Free trade pays off

United States' positive track record on FTAs should factor in to current debate, argues former Caterpillar exec

By: Eric Kulisch
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Photo: Eric Kulisch
   President Donald Trump’s nationalist approach to trade policy portrays an America that always gets the short end of the stick in multilateral trade agreements.
   But the reality is that the United States enjoys a net surplus among countries with which it has free trade agreements, Bill Lane, a former lobbyist for Caterpillar, said at an industry conference earlier this month in Washington.
   Caterpillar, which manufactures large construction, mining and farm equipment, is one of the largest net exporters in the United States.
   Lane presented data showing that trade with Mexico and Canada has been hugely beneficial to Americans, contrary to Trump’s position that Mexico has taken advantage of North American Free Trade Agreement (NAFTA) rules to attract U.S. manufacturers with lower costs and the ability to export back into the U.S. market, at the expense of domestic jobs and wages.
   Canada is the largest U.S. export market and Mexico is the second largest, followed by China. On a per capita basis, Canadian and Mexican consumers buy many more products from the United States. China has a population of 1.4 billion people. The combined population of Canada and Mexico is 156 million people, but the average NAFTA consumer bought 36 times more American products than a Chinese consumer in 2016, Lane said.
   Trade has received negative publicity because the benefits haven’t been spread evenly to all parts of the country for various reasons, but Lane said trade supporters shouldn’t “ever apologize for free trade agreement outcomes.”

On a per capita basis, the average NAFTA consumer buys more than $3,000 in American products, and consumers in nations belonging to free-trade agreements average about $700 to $800 in purchases from the United States.

   Lane pointed out that the United States exports more to Canada and Mexico ($500 million) than to the 13 biggest economies combined, including China, Japan, Germany, the United Kingdom, Italy and Russia. The United States is at near parity with Canada ($10 billion deficit, mostly due to oil imports), while the deficit with Mexico is about $50 billion, according to U.S. Census Bureau statistics. The deficit with Mexico is relatively small given the amount of two-way trade involved, Lane insisted.
   Most of the free trade agreements in which the United States participates are with small countries. The combined population of those 20 FTA partners is 400 million, but those countries account for half of U.S. exports.
   “When trade is truly free and truly fair, we do really well,” Lane said. “When you put all those countries together, we have a slight trade surplus and trade is also balanced.”
   On a per capita basis, the average NAFTA consumer buys more than $3,000 in American products, and consumers in nations belonging to free-trade agreements average about $700 to $800 in purchases from the United States. Purchasing activity from people in other countries is minimal by comparison, Lane said.
   “We sell a lot to our neighbors and a lot to our FTA partners, and then it drops off,” he said. “It takes a lot of work to develop an export market.”
   Lane agreed with the Trump administration that the rules of engagement over trade with China need to change.
   Trump threatened China with a host of aggressive measures, including higher tariffs on its goods, during the campaign if it didn’t stop manipulating its currency and cheating in other ways, although his tone softened after meeting Chinese President Xi Jinping last week. Administration officials have signaled their intent to ratchet up enforcement by launching more antidumping/countervailing duty investigations and bringing complaints against China to the World Trade Organization.

There is no reason why an industrial powerhouse like China needs the kinds of protections it may have needed in 1990s.

   China joined the WTO in 2000 based on its development level in the late 1990s and terms that made sense 17 years ago, but China is a major economy now and doesn’t need to maintain double-digit tariffs anymore, Lane said.
   “There is no reason why an industrial powerhouse like China needs the kinds of protections it may have needed in 1990s,” he said.
   The world’s nations used to revise trade rules every eight years or so under the pre-WTO General Agreement on Tariffs and Trade, but now multilateral deals have become too difficult to open up, he acknowledged.
   Trump has implied as much with free trade agreements such as NAFTA, saying he wants to renegotiate it to get better terms for the United States. There is consensus in the business community that the 23-year-old deal needs to be modernized to address new market conditions, technologies and other factors that have changed over time. The Trump administration says it will look at all free trade agreements and says it may want to pull apart multi-party deals and negotiate separate deals with each partner.
   Countries like China got the greatest benefit from trade liberalization because they started with less developed economies with greater growth opportunities, but now that they have reached parity with more developed nations they shouldn’t have the same ability to protect their domestic industry from competition, Lane said.
   “So when people say we need a more modern relationship with China, this doesn’t have to be a trade war. But there does need to be a recognition that we need to modernize the relationship,” he said, adding that change should be brought about in a constructive way without sabre rattling.