The U.S. Congress recently passed free trade agreements (FTAs) with South Korea, Columbia and Panama, which were pending since the Bush era. The stated goal of these FTAs has been to increase exports to these countries and therefore create more jobs in the U.S. It sounds like a cogent argument, but these FTAs have been lauded and loathed alike – and not without good reason.
Free trade lobbyists, led by the U.S. Chamber of Commerce, argue that failure to implement these would cause the loss of a whopping 383,400 jobs. On the other hand, the trade unions, especially those representing workers in the automotive industry, and some sections of academia have been very critical of the these FTAs. You do not need to rack your brains to guess who is right; neither do you have to be a pro at economics to understand what is good or bad for the U.S. job market. Let us look at some facts and figures, country by country.
Let's talk of South Korea first. Despite being a small nation – half the size of Minnesota – it is the world's fifteenth largest economy in terms of GDP. The main focus of the FTA with Korea, popularly called KORUS FTA, is to make inroads for U.S.-made automobiles, agricultural products and value-added meat products in the Korean market. In regards to the automotive sector, Korea has a very competitive home-grown auto industry. Its Big Three – Hyundai, Kia and Ssangyong – are pitted against the U.S. Big Three – General Motors, Ford and Chrysler.
Being a mechanical engineer and an automotive enthusiast, I believe that U.S. cars do not stand a chance in the Korean market. Fuel inefficiency, larger size and high cost of production owing to high domestic labor costs will only add to the unpopularity of U.S.-made cars in the Korean market. Although the Korean government has softened its stance on U.S.-made cars not meeting the emission and safety standards, it is not likely to be of much help to the U.S. automakers.
To me, this KORUS FTA seems like a desperate attempt to catch up with the E.U., which also signed a similar FTA with Korea that became fully functional in July. If the Korea Herald – a leading English newspaper of the country – is to be believed, German automakers witnessed a 27.4 percent increase in sales in Korea since the ratification of the KOR-EU FTA. The bottom line here is that to flourish in the Korean car market, U.S. automakers need to be competitive, which in turn requires them to set up factories there and hire local labor, and hence clearly implies shipping out U.S. jobs to Korean shores. As for the argument of profits earned overseas trickling down to the U.S. workers back home, it is simply never going to happen.
On the other hand, the U.S. has a much larger agricultural and poultry output than Korea and enjoys the edge on Korean agriculturalists. Also, industries manufacturing medical instruments, aerospace equipment and organic chemicals might flourish in the Korean market.
Moreover, during the last decade, the balance of U.S.–South Korea trade has been tilted in the favor of South Korea. The U.S. has incurred an average trade deficit of about $8 billion each year, which means imports have exceeded exports by that amount. In this scenario, a free trade agreement between two unequal partners tends only to accelerate the downward free fall of the U.S. economy.
Shifting the focus to Columbia, it is one of the fastest growing economies in Latin America. It primarily exports oil, coffee, textiles and footwear to the U.S. In turn, it imports machinery and equipment, grains, chemicals, transportation equipment, mineral products, consumer products, paper products, oil and gas industry equipment and electricity.
The FTA with Columbia might result in cheaper oil and consumer goods, which is good news, but may not fully serve its intended purpose of creating a good number of American jobs by increasing exports. A total of 45.5 percent of the Columbian population still lives below the poverty line and may not be the best place in the world to sell goods and services. But, interestingly, the balance of trade with Columbia has been unfavorable to the U.S., with the trade deficit rising from $137 million in 1985 to about $3.6 billion in 2010, owing to the burgeoning oil imports. This FTA is not likely to bring down the deficit anytime soon.
Next, speaking of Panama, which geographically occupies an important trade transit location on the world map, extending a hand of friendship in the form of an FTA is not a bad idea. But it might not be the best time to do so, given the frail state of the U.S. economy. The positive aspect of this FTA is that it will deal with a small, though rapidly growing, economy, which means that U.S. markets will not be flooded with "Made in Panama" goods.
Also, since Panama is not quite self-sufficient as far as food is concerned, U.S. exporters may have a good time there, but it is still unclear if it will lead to any significant job creation back in the U.S. Since much of Panama's economy revolves around its secretive financial and banking services, skeptics argue that the fat cats (i.e. the rich) may use it as a tax haven after the ratification of this FTA. Other than that, the balance of trade with Panama has always been in the favor of the U.S., so there still is not any compelling argument for the ratification of this FTA.
I would say that free trade benefits only the party that has the capability to innovate and get an edge on the other. In other words, it is a double-edged sword. It can be immensely useful, but given the current scenario, these FTAs might actually backfire by shipping jobs to foreign shores.
Published in Washington State University's Newspaper, The Daily Evergreen on October/19/2011.
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