Trade Initiatives and Domestic Policy

1. Trade Initiatives and Domestic Policy Bob Koopman USITC

2. The Setting • “The best way to eradicate poverty is to encourage trade between nations.” • “Trade is the most certain path to lasting prosperity.” • “Corporate-driven globalization under the WTO has sharply increased income disparity, which the WHO has identified as one of the key correlates of a country’s health status.  Trade liberalization is producing greater income inequality between and within nations, which in turn, has led to greater disparities in public health conditions and outcomes.”  • “A large increase in the volume of international trade has failed to produce better jobs or higher wages for most Americans.”

3. The Current Trade Agenda • It’s ambitious • It’s surprising – given complaints about lack of political support from key constituencies • Does recent history help us understand the role of the current trade agenda with respect to domestic support? • Not really?

4. The approach… • List the agenda – negotiations and coverage • Summarize estimates of the net economic effects of past trade agreements • Summarize trends in trade and economic growth • Implications for Doha and the upcoming FTA’s. • Challenges in measuring the potential economic effects means challenges in knowing the economic value of trade offs. • What might all this mean for domestic support?

5. The Trade Agenda • What’s being negotiated and being considered for negotiation - Competitive Liberalization • FTAA • Australia • CAFTA – Nicaragua, Guatemala, El Salvador, Honduras, Costa Rica and (Dominican Republic) • Morocco • Panama, Columbia, Bolivia, Ecuador, Peru • SACU – Botswana, Lesotho, Namibia, South Africa, and Swaziland • Bahrain • Thailand • …and more • Did I mention Doha?

6. “By moving forward on multiple fronts, the United States is exerting its leverage for openness, creating a new competition for in liberalization, targeting the needs of poorer developing countries, and creating a fresh political dynamic by putting free trade on a global offensive.” - The Presidents Trade Policy Agenda for 2003 - http://www.ustr.gov/reports/2003Annual/overview.PDF, downloaded 1/6/04.

7. When making the case for passage of Trade Promotion Authority the Administration noted that there “were more than 130 trade agreements in force around the world, and that the US was a party to only 3. There are 30 free trade agreements in the Western Hemisphere and the United States is a party to only one.” http://www.ustr.gov/new.2001-12-03-tpa-leadership.htm.

8. The U.S. negotiating agenda as described by USTR, is focused on • market access for consumer and industrial goods, agricultural products, and services. • intellectual property rights • rules governing unfair trade practices • e-commerce • government procurement • trade facilitation • environmental and labor issues • and capacity building.

9. Trade agreements signed under fast track… • Tokyo, U.S. Israel FTA, U.S. Canada FTA, NAFTA, and Uruguay Round. • See USITC publication 3621 – The impact of above agreements… • Includes concise summaries of the setting and coverage of each negotiation

10. The Welfare Impacts of the Agreements URA

11. Chile and Singapore FTA’s • Welfare estimates • for Chile FTA -.001 to +.003% of GDP (-$92 mi to + $280 mil) • for Singapore FTA -.002 to -.001% of GDP (-$184 mil to - $92 mil) • Points to consider • All partners have fairly open trade regimes • FTA’s most important benefits likely not reciprocal tariff elimination – but in things difficult to quantify… • General improvement of business climate • Specific obligations in • Intellectual Property • Services • Investment • Temporary entry of businesspersons • Telecoms • Note rules of origin…

12. Some caveats – and important ones • Estimates are likely lower bounds • Tariffs and tariffied NTB’s only • No indirect effects – trade and productivity, scale economies, etc. • Still – not exactly earth shattering numbers, nor do they explain why trade has grown so fast vis a vis GDP growth • Note the difference in magnitude for multilateral vs. preferential…

13. Traditional welfare estimates are the tip of the iceberg • Steel tariffs example • Estimated welfare impact – the tip • Central case (Es = 10) -$41.6 million • Underlying est. income changes – in mil. – rest of iceberg • Tariff revenue $649.9 • Labor income -386.0 • Capital income -294.3 • Iron and steel ind. 239.5 • Other pos. affected ind. 67.4 • Indus where K income declines -601.2 • Net GDP - 30.4 • Another bad analogy • All the political action surrounded how the pie was carved up – not by how much bigger the pie might have been.

14. Remaining significant import restraints

15. Trade and economic growth

16. What explains trade growth? • Partly trade policy…empirical research indicates maybe only 15% to 20% of growth. • Tariff reductions • 1974 applied tariff of 4.64% • 2001 applied tariff of 1.59% • other U.S. trade policy changes • reductions in foreign trade barriers • growing incomes • improved transportation and communication technologies • increased real value of trade in goods and services from$0.5 tril. To $2.5 tril.

17. What else contributed? • In last 3 decades • Substantial technological progress • Deregulation of several large service industries • Sizable increases in workers average education levels • Substantial growth in K stock and population • So what was the role of trade policy? • Political message on both sides pro- and con seems to over attribute trade changes to trade policy changes

18. Real private gross domestic product, exports and imports by industry sector, 1980 and 2001 Real Priv GDP Exports Imports 1980 2001 1980 2001 1980 2001 Sector In percent Services 68.3 78.6 18.7 32.1 15.1 16.8 Machinery and equip. 6.5 6.7 20.7 21.9 10.8 22.6 Agriculture 4.4 2.7 16.7 6.0 6.4 3.3 Chem. and allied prod. 2.5 2.6 9.6 9.8 4.4 7.7 Minerals & metals 4.5 2.4 8.8 5.4 10.8 6.3 Transportation equip. 2.0 2.0 11.5 12.5 10.9 15.7 Forest and fishery prod. 2.9 2.0 4.0 2.9 4.6 3.7 Energy and fuels 4.7 1.3 3.2 1.2 28.2 8.7 Miscellaneous products 3.0 1.2 5.2 6.4 5.6 9.4 Textiles and apparel 1.3 1.0 1.6 1.7 3.1 5.1 Total 100.1 100.5 100.0 100.0 100.0 100.0

19. Services • Note the shift to services as a share of GDP (HH and businesses have shifted demand towards services) and exports (a trade policy focus in later and current rounds.) • Also note that other policies – significant deregulation in • Banking • Transportation • Communications • And energy • Cliff Winston estimates welfare gains from this deregulation at $50 million in 1996 – all 5 trade agreements for all sectors of the economy estimated at $56 billion.

20. Growth and Productivity • Labor supply NFE 78.3 mil 1974, 131.9 mil in 2001 • K stock – • Total value of private fixed assets up 109% in real terms from 1974 to 2001 - $11 trillion to $22.1 trillion. • TFP – BLS estimates TFP rose by 24.5% between 1974 and 2000. • If size of L and K remain unchanged Q up nearly 25% just from doing things better.

21. Recent estimates of possible welfare gains of Doha for U.S. Francois, van Meijl, van Tongeren (North America) $12 - $23 billion Agric $2.7 bil.; Manuf. $.5 bil to $13.2 bil.; Services $7.0 bil. Fontagne, Guerin, and Jean $9 – 18 billion Brown, Deardorff and Stern (URA est. $19.7 billion) $144 billion Agric - $11.1 bil; Manuf. $23.6 bil; Services $131.4 bil A lot of interest in domestic support disciplines by partners. US says multilateral setting is the place it will deal with agriculture Do overall welfare gains look big enough for negotiators to take on the political cost of domestic support? Will services and manufacturing put pressure on for agreement? Who really knows how much protection for services, or even how to go about really lowering it? Doha estimates

22. Upcoming FTA’s • Other than FTAA generally small – look for impacts similar to Chile and Singapore. • U.S. in the “drivers seat” • In sensitive ag products – likely slow phase ins, and limited quota increases. • Other sensitive products – rules of origin • Think MFA with a longer time frame. • Not a lot of pressure from FTA’s for changes in domestic support • But a lot of negotiating resources going into FTA’s.

23. What does this all mean for domestic support? • Political tradeoffs in negotiations • Empirics aren’t clear • Other economic policies and developments • Budget deficit – large role in Freedom to Farm • Economic growth and tax policy • Tight budgets call clear attention to on-budget expenditures – not much attention to off-budget (consumer borne) support