Yes, US trade agreements led to economic gains, especially in services, new report says

July 20, 2021 11:15 AM
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REUTERS/Eduardo Munoz

With a flair for timing, the United States International Trade Commission (USITC) released an assessment of some of the agreements negotiated under Trade Promotion Authority (TPA)—fast-track negotiating ability delegated to the executive branch by Congress—on June 29, days before TPA expired on July 1. The report arrived just in time to add fuel to conversations about TPA’s benefits or evils, or whether powers exercised under TPA have much effect at all on the US economy. The USITC is an independent agency that provides data and analyses related to trade for both the executive and legislative branches and houses some judicial processes related to trade and multinational firms. Its internal processes are generally unbiased and its staff holds some of the top US experts in trade agreements and policy. The results were eagerly anticipated.

The USITC reported that 12 bilateral free trade agreements (FTAs), plus two regional FTAs (the North American Free Trade Agreement [NAFTA] and the Dominican Republic-Central America-United States Free Trade Agreement [CAFTA-DR]), all negotiated and implemented under TPA, resulted in the US economy being one half of a percent bigger than what it would have been without the agreements in place. The growth was accompanied by almost half a million additional jobs and $133 billion in additional two-way US trade with the world.

Are these numbers large? Do they account for the big story in US agricultural and services exports stemming from agreements negotiated under TPA? The report sparked immense interest, but the answers to these questions are contingent upon technical details and the rigorously reported methodology and results.

Context is important. First, the USITC’s number is substantial. Averaged over all US households, half of a percent of GDP works out to more than $800 per US household in 2017.[1] This is large if one considers that even before the pandemic, 40 percent of US households did not have $400 available to cover an emergency expenditure.

Second, it is important to consider the coverage of the USITC’s estimate—both the timing and the set of FTAs included. Congress mandates that the sample period of USITC’s report “on the economic impact on the United States of all trade agreements with respect to which Congress has enacted an implementing bill under trade authorities procedures” start on January 1, 1984. The earliest of the agreements that were included (US-Israel) went into force in 1985 (see figure 1.1 in the report), when the average US effective tariff had already fallen to 3.8 percent. By 2004, when a rapid spate of agreements were signed over a three-year period, the average effective tariff was 1.5 percent. As such, the agreements covered emerged when a large chunk of available tariff gains already had been achieved.

The report misses the full story of trade agreements since 1984

The estimation of economic impacts on the economy as a whole covers only those 14 agreements (listed in table 3.4 of report). The Uruguay Round (1986-1994), a series of negotiations under the General Agreement on Tariffs and Trade (GATT), from which the World Trade Organization (WTO) agreements were born, also was negotiated and adopted under TPA but is excluded from the analysis due to uneven availability of historical data.[2]

As an example of what excluding the Uruguay Round agreements means, consider the WTO Agreement on Agriculture and the WTO Agreement on the Application of Sanitary and Phytosanitary Measures (SPS)—both negotiated in the Uruguay Round under TPA. These two agreements enter into the economywide estimate only insofar as their provisions were adopted into later agreements negotiated under TPA, which together constitute about one-quarter of US trade.[3] Given this constraint, the USITC’s estimated impact naturally misses the majority of the story on TPA and US agricultural trade.

Low existing tariffs and exclusion of the Uruguay Round negotiations mean the benefits of the agreements that are covered in the assessment lay largely in other areas. The agreements reduced uncertainty by eliminating the possibility that tariffs might fluctuate between their upper and lower bounds under GATT/WTO agreements, reduced nontariff barriers, reduced barriers to services, facilitated investment, and addressed strategic geopolitical considerations. All of these are difficult to measure. The USITC report applies souped-up workhorse models to measure as much as it can, but due to technical limitations at the frontier of economics as a discipline, it is immensely challenging to capture the full economic impact of these factors for all of the FTAs that must be covered in the report.

But captures the impact of agreements on US trade in services

The analysis is still informative. The main story that the USITC is able to capture given these technical constraints is the impact of TPA-related agreements on US trade in services. And there we do see some fireworks. Table 3.5 of the report shows that agreements negotiated under TPA generated an average reduction in one-way trade frictions of 10 percent for financial services, 12 percent for business services, and 18 percent for communications services. Increased integration of markets for services under TPA-negotiated agreements led to an increase in US domestic service sector output of nearly $100 billion (core and noncore services in table 3.8) and created over 440,000 jobs, more than 90 percent of the net employment gain found in the study. The boost in services production is 40 percent of the size of the overall US trade surplus in services with the world as a whole.[4]

Separate, standalone analyses in the report provide a closer look. Deeper integration of markets for services is associated with almost a doubling of US services trade under agreements with the most extensive provisions (table 3.10) and can have an even greater impact on sales by foreign affiliates of US-owned companies (table 3.12). Large increases in trade in a range of services from construction to finance are also associated with digital trade provisions (table 3.13).

And provides clues on geopolitical considerations in trade

Finally, although the USITC does not explicitly analyze strategic geopolitical considerations, the report provides some clues. Table 3.7 shows gains in US trade flows with US FTA partners, with a nontrivial fraction of the increase in two-way flows with FTA partners occurring due to diversion of US trade away from non-FTA partners. A recent study of the Korea-US FTA (KORUS) shows that trade diversion was large enough to account for the entire increase in the US bilateral trade deficit with South Korea in the years following the agreement’s implementation. Half of this trade diversion occurred at China’s expense: US importers purchasing from suppliers in China were compelled by the new tariff preference under KORUS to switch their purchases to suppliers in South Korea. KORUS switched US imports away from a strategic rival toward a US treaty ally.

In summary, the USITC report is limited in its breadth by constraints in available data and frontiers in the field of economics. Even so, it provides valuable insight into the role of increasing integration in the services sector, including digital trade, in the US economy. It also provides a glimpse of how trade can be used to strengthen geopolitical alliances.

Notes

1. Calculated by dividing half of a percent of 2017 US GDP of $19,542.98 billion (annual figure) by 120.8 million US households (2015-19 figure). 2017 is the benchmark year for the USITC’s whole-economy estimate.

2. The USITC writes that although the agreements coming out of the Uruguay Round were negotiated under TPA, it could not include them in its estimate of benefits of agreements for the whole US economy, due to data constraints (see the second paragraph on page 87 of report, as well as footnotes 10, 419, and 449). Note, however, that the executive summary (footnote 2) and introduction (paragraph 2 on page 19, "Scope") could be erroneously interpreted to suggest that the Uruguay Round agreements are included in the estimates, as the USITC says they are "covered" in the report as having been negotiated under TPA.

3. Calculated by adding together reported bilateral trade with covered FTA partners in 2017 (listed in column 1 of table 3.4 in the report) totaling $1.45 trillion, and dividing that by total US trade, which, using data from the US Bureau of Economic Analysis, was $2.4 trillion in exports plus $2.9 trillion in imports in 2017.

4. Percentage calculated by dividing total of $97.67 billion (last two rows of column 1 in table 3.8) by $242.8 billion services surplus in 2017 reported by the US Bureau of Economic Analysis.

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Katheryn (Kadee) Russ Senior Research Staff

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