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Author: Caleb Bray

  • The Impact of Trade Agreements on US International Trade

    The Impact of Trade Agreements on US International Trade

    Introduction to Free Trade and Comparative Advantage

    Because of the economic principle of comparative advantage, free trade between countries is typically beneficial for all parties involved. One nation has a comparative advantage over another if it is able to carry out economic activity in a specific field at a lower opportunity cost in comparison to another country. For example, if country A can produce either 100 loaves of bread or 400 t-shirts in an hour, while country B can produce either 200 loaves of bread or 300 t-shirts in an hour, country B has a comparative advantage in the production of bread while country A has a comparative advantage in the production of t-shirts. In this scenario, and oftentimes in the real world, trade between country A and country B is mutually beneficial as country B can specialize in the production of bread, country A can specialize in the production of t-shirts, and they can each trade the good they produce for the other good that they do not.

    Methods for Industry Protection

    Sometimes free trade runs counter to a nation’s economic or political goals, like when an industry in one country is out-competed by an industry abroad. In these instances, the home country of the struggling industry may take a variety of actions to try to maintain their stake in the industry, such as:

    1. Applying a tariff, a common trade restriction. Tariffs are taxes that are placed on certain imports on a product from another country, which typically increase the price of the good in markets in the importing country, encouraging consumers to buy products domestically rather than abroad. 
    2. Applying a quota, or placing a restriction on the quantity of goods that are imported. This limits the supply of the good and can increase the cost of making the product within the exporting country. 
    3. Providing home industries with subsidies, or monetary assistance. Rather than taking action against another country’s goods, the importing country can assist their industries by using government money to cover a portion of the cost of production. Subsidies can decrease the cost of supplies for the production of goods and thus allow the struggling industries to sell their goods at a lower price and still remain profitable.

    Trade Agreements

    Leaning too heavily on these protectionist measures can often escalate to countries using increasingly harsh trade restrictions, crippling foreign economies and decreasing economic efficiency. In order to avoid this outcome, countries will often establish trade agreements which outline rules of international trade that all members can agree upon and allow for fair competition. Established by the United Nations in 1947, the General Agreement on Tariffs and Trade (GATT) is an example of such an agreement. To resolve internal issues regarding dispute resolution, the GATT was replaced by a trade governing body known as the World Trade Organization (WTO) in 1995. The formal organization structure of the WTO and its amended rules were largely viewed as an improvement over the GATT. Currently the WTO consists of 164 member states, including the United States, meaning that it governs the vast majority of international trade.

    The United States is also involved in numerous trade agreements with specific countries. The US establishes many Free Trade Agreements (FTAs) or Trade Promotion Agreements (TPAs) which allow for the free flow of trade between nations with minimal restrictions. In many of these agreements the US maintains a significant trade surplus, meaning that the US exports more to the other nation than it imports from them. Even in trade agreements where the US has a trade deficit, importing more than it exports, the US still gains valuable commodities and foreign investment in the economy. For example, in the US-South Korea FTA, the US has a trade deficit of $7.6 billion, but the volume of trade is valuable. The US exports $56.5 billion worth of goods while importing $77.5 billion. This trade agreement also creates about 358,000 jobs in the US economy. It is important to remember in these examples that trade is not a “zero-sum” game where the more you export the better. Imports can provide lower prices for consumers, greater variety, and an influx of materials necessary for the production of other goods.

    Another type of trade agreement the US establishes with other countries are Trade and Investment Framework Agreements (TIFAs). These agreements outline the framework for future discussions on trade and investment between the two countries. These agreements allow for annual council meetings between the countries involved to negotiate on a wide range of trade issues without the agreement setting any explicit trade rules. The US also partakes in many Bilateral Investment Treaties (BITs) with countries where investor rights are not already protected through other trade agreements. These treaties are designed to encourage the countries involved to adopt free-market policies that allow for more open investment by private companies. 

    BITs require that those who sign onto the agreement:

    • Treat US investments as favorably as domestic investments.
    • Have clear limits on foreign governments claiming investments (including repayment for any investments that are seized)
    • Don’t use performance requirements for operating an investment
    • Allow investors to work with the top managerial personnel of their choice when negotiating an investment. 

    Most importantly, BITs allow for investors of either party to advocate for their rights by submitting an investment dispute with the government of the other party to be settled by an international court.

    NAFTA and US Trade

    One of the most important US trade agreements in the last decades has been the North American Free Trade Agreement (NAFTA). NAFTA facilitated a large increase in goods trade between the US, Canada, and Mexico. In NAFTA’s first ten years, trade in goods increased from $293 billion in 1993 to $627 billion in 2003. By 2016, this value had increased to nearly $800 billion. Created in 1994, NAFTA was the world’s largest free trade agreement until it was replaced in March of 2020. Due to the Trump administration perceiving a disadvantage in America’s production of different industries relative to Mexico and Canada, namely in agriculture and automobile production, the United States-Mexico-Canada Agreement (USMCA) was established. Most concerning to the Trump Administration were trade deficits of $101 billion to Mexico and $27 billion to Canada as of 2019. The USMCA introduced several rule changes to automobile manufacturing, labor standards, the Canadian dairy and wine market, intellectual property, pharmaceuticals, and dispute resolution. This agreement went into effect on July 1, 2020. As of June 2021, the US trade deficit with Mexico has decreased to $52.9 billion and the trade deficit with Canada has decreased to $19.4 billion.

  • Introduction to the World Trade Organization

    Introduction to the World Trade Organization

    The World Trade Organization is an international organization dedicated to liberalizing rules of trade between nations. Trade liberalization refers to removing and reducing restrictions to the free movement and trade of goods between countries. Trade liberalization seeks to minimize the role of governments in the resource allocation process to increase economic efficiency globally. The WTO does this by requiring member states to (1) convert all barriers to trade into tariffs (taxes on certain imports or exports) and subsequently reduce these tariffs, and (2) reduce the amount of support and subsidies they offer to exporting industries. It also works to settle trade disputes and promote the economic growth of developing countries. The organization is composed of 164 member states who govern its activities.  

    Forming the World Trade Organization

    The WTO was born out of the General Agreement on Tariffs and Trade (GATT) which was initially created in 1947 by the UN. Members of the GATT decided a new trade organization was necessary in 1995 due to the lackluster dispute settlement system of the GATT. The GATT required positive consensus in both the creation of a dispute resolution panel and adopting of the panel’s report. This positive consensus involved all contracting parties to the decision including the parties to the dispute itself and thus required that every party including the party subject to complaint agree to establish the panel and uphold its report. While most parties subject to complaint did not abuse their veto power, it did create a problem where many disputes went unsolved as those with complaints did not petition to create a panel due to the risk of a veto. The creation of the WTO and subsequently, the Appellate Body within the organization would solve these issues, while presenting new ones. 

    Structure

    The Ministerial Conference is the highest decision-making body. Ministerial Conferences involve all member states meeting every 2 years to make decisions concerning multilateral trade agreements. The General Council has representatives of all member states with the authority to act on behalf of the Ministerial Conference. Since the Ministerial Conference only meets once every 2 years, the General Council carries out day to day functions of the WTO. Sometimes the General Council may meet under a different set of rules as the Dispute Settlement Body or as the Trade Policy Review Body to solve specific issues. 

    The Council for Trade in Goods, the Council for Trade in Services, and the Council for Trade-Related Aspects of Intellectual Property Rights, all report to the General Council. Each of these councils covers a broad area of trade and handle WTO agreements within their specific area of trade. These councils have committees below them governing more specific areas of trade—for example, the Goods Council has a committee on agriculture. Agreements among some, but not all, member countries are managed by committees composed of the only members to those agreements. Lastly, informal meetings such as Heads of Delegations meetings are where member states meet and make compromises and agreements. Informal meetings are often where breakthroughs and compromises are made in trade agreements.

    Dispute Resolution

    Similar to the original GATT of 1947, the WTO also faces issues with dispute resolution. Currently, there is a crisis with the Appellate Body, as there are not enough members remaining on the body to reach quorum. Without enough members to reach quorum, they are not legally allowed to deliberate on issues. Appellate Body member terms end, and the US has consistently blocked attempts to fill the vacant seats. The Obama, Trump, and Biden administrations have all blocked recent appointments to the body. The US objects to the operations of the Appellate Body for three reasons: 

    1. The US claims that the Appellate Body is engaging in judicial activism by often going beyond resolving a singular dispute. Article 3.2 of the Dispute Settlement Understanding, which governs the activities of the Appellate Body states, “recommendations and rulings of the Dispute Settlement Body cannot add to or diminish the rights and obligations provided in the covered agreements.” The Appellate Body is allegedly doing this by clarifying and interpreting provisions found in general WTO agreements such as the General Agreement on Trade in Services. 
    2. The US claims that the Appellate Body creates “binding” precedent that oversteps its role and once again steers into the area of “making law.” The Appellate Body has a system of “persuasive” precedent rather than binding precedent which means that previous reports may be relevant in similar cases, but the Appellate Body is not legally bound to consider previous reports. In a system of binding precedent, the judicial body would be legally obligated to consider a previous report in deciding a current case. The US views this usage of precedent as affecting the rights of member states without the member states themselves able to participate due to precedent. 
    3. The US has concerns with case backlog in the Appellate Body as Rule 15 states that former members of the Appellate Body may remain as a member to finish working on an appeal, but this sometimes leads to a delay in issuing a report on an issue longer than 60 days which is forbidden by Article 17.5 of the Dispute Settlement Understanding. The US argues that to avoid this, members should rather take no new cases during this time.

    Other Controversies

    Members of both the Republican and Democratic parties have threatened to withdraw from the WTO over the key issues of China’s trade policy, globalization, and a rapidly changing global economy. Critics of the WTO point out that the Chinese government’s increasing involvement in their economy is creating unfair competition for other WTO members. China uses state subsidies to gain a competitive advantage in multiple industries such as steel and aluminum. Many feel that the WTO has been too slow to address China’s rule violations, as well as regulate and adjust to new global economic trends and markets such as ecommerce. Lastly, many attribute problems caused by globalization to the WTO, such as the loss of manufacturing jobs in the US to overseas manufacturers.

  • Caleb Bray, University of Iowa

    Caleb Bray, University of Iowa

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    Caleb Bray is a rising junior studying mathematics, economics, and public policy with at the University of Iowa. He is from West Des Moines, Iowa where he was born and raised. As an Iowan, he has been exposed to politics at an early age due to the significance of the Iowa Caucuses. He would later become directly involved, working with the both Bernie 2020 Campaign and Sunrise Movement in Iowa City. He joined ACE to continue his work analyzing and advocating for responsible economic and environmental policy. He is interested in most interested in the intersection between environmental and economic policy such as carbon pricing. In his free time he enjoys biking, camping, hiking, travelling, and spending time with friends.