We Can’t Stand Still: The Benefits of Trade Agreements in America

What are the benefits of America’s trade agreements? It’s been a decade since the United States added to the list of 20 countries with which we have trade agreements in force. Meanwhile, other countries around the world are racing to enter into new trade pacts of their own.

In that context, it’s worth examining the track record of our free-trade agreements (FTAs). The first of these 14 agreements, the U.S.-Israel FTA, entered into force on September 1, 1985. Since that time, the U.S. has entered into additional FTAs covering 19 more countries. The 20 U.S. FTA partners are Australia, Bahrain, Canada, Chile, Colombia, Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Jordan, Mexico, Morocco, Nicaragua, Oman, Panama, Peru, Singapore, and South Korea.

The rationale for bilateral and regional FTAs is simple: While the United States receives substantial benefits from trade, the international playing field is sometimes tilted unfairly against American workers, farmers, and companies. The U.S. market is largely open to imports from around the world, but many other countries continue to levy steep tariffs and other barriers against U.S. exports. FTAs are negotiated to level the playing field and create reciprocity in key trade relationships.

While U.S. FTA partners represent just 6% of the world’s population outside the United States, in recent years they have regularly purchased nearly half of all U.S. exports, according to data from the U.S. Department of Commerce.

In fact, on a per capita basis, the citizens of these 20 countries buy 14 times the volume of American-made goods and services as other countries. It should come as no surprise that eliminating tariffs and other trade barriers enables trade to expand—often turning small economies into major export markets.

Further, U.S. exports to new FTA partner countries have grown roughly three times as rapidly on average in the five-year period following the agreement’s entry-into-force as the global rate of growth for U.S. exports, as U.S. Chamber of Commerce research shows.

In some cases, the FTA premium has been much larger: U.S. exports to Chile and Morocco quadrupled in the five years after FTAs entered into force. This boost to U.S. export growth is especially pronounced with more recent FTAs, which are front-loaded to eliminate tariffs rapidly, open services markets, and eliminate nontariff barriers more comprehensively than earlier FTAs.

U.S. trade agreements have eliminated duties on approximately 99% of all tariff lines in almost every case (and 100% in some instances). In this regard, U.S. FTAs are often far superior to those negotiated by other countries.

U.S. manufacturers have been among the principal beneficiaries of FTAs. Consumers and businesses in the 20 partner countries purchased $661 billion of U.S. manufactured goods in 2019 (a useful pre-pandemic baseline)—a sum representing 48% of all the exports produced by the 12.8 million Americans employed in manufacturing that year. These figures represent export revenue of more than $50,000 for each American factory worker.

Compare this with the average annual earnings—including pay and benefits—of an American manufacturing worker: $88,000 in the same year. U.S. manufacturers could not make their payrolls without the revenues they earn by exporting to FTA markets.

For American farmers and ranchers, America’s FTAs have been a bonanza. As USDA reported: “The current 20 U.S. FTA partner countries represent 10 percent of the world’s GDP and 6 percent of global population, yet they account for 43 percent of U.S. agricultural exports to the world, up from 29 percent in 1990, before the majority of U.S. FTAs were implemented.”

In the U.S. Chamber’s experience, FTAs are especially important to small business exporters. More than 98% of the nearly 300,000 American companies that export are small and medium-sized businesses. They account for one-third of U.S. merchandise exports.

It comes as no surprise that FTA markets are top export destinations for small business exporters. More U.S. small and midsized businesses export to Canada than to any other market; by value, American small and midsized businesses export more to Mexico than to any other country (data).

The trade balance is an inappropriate measure of the success of these agreements: As economists explain, the U.S. current account deficit (most of which is the trade deficit) is the mirror image of the U.S. capital account surplus, which simply signifies that U.S. domestic investment exceeds domestic savings. Nonetheless, the trade deficit is often cited as a principal reason why the U.S. should not negotiate additional FTAs.

Even so, U.S. trade in goods and services with these 20 countries as a group has been near balance over the past decade, recording surpluses in most years and deficits in others. In the context of America’s international accounts—whose headline figures are in the trillions of dollars—the U.S. trade balance with these countries is of no consequence.

Finally, the substantial increase in foreign investment in the U.S. that has followed new trade agreements has also fostered the creation of high-skill, high-wage jobs. About 8 million Americans are employed directly by the U.S. subsidiaries of foreign-headquartered companies—and perhaps twice that number of jobs are supported indirectly by those foreign investments in the United States.

According to research by the Organization for International Investment, U.S. affiliates of foreign-headquartered companies pay wages that average 26% higher than the U.S. average (though this appears to reflect the fact that FDI is concentrated in high-wage sectors).

The logical conclusion is that the U.S. needs more trade agreements. In fact, leveling the playing field and opening markets abroad to the products of American workers, farmers, and companies should be a higher priority than ever before. The best way to do so is to enter into strong, new trade agreements based on openness, accountability, and fair play.

Story by John G. Murphy, US Chamber of Commerce