New Opportunities from Free Trade

The United States is negotiating two trade agreements that have the potential to expand U.S. exports to a billion global consumers. The U.S.-EU Transatlantic Trade and Investment Partnership (TTIP) and the Trans-Pacific Partnership (TPP) would liberalize trade between the United States and 39 countries across five continents, which collectively account for almost two-thirds of global economic output.  

The passage of both treaties would be a boon for the U.S. economy.  The competitiveness of domestic firms would rise dramatically in partner markets, as lowered trade barriers would make the price of American merchandise drop abroad. Opening up trade would also benefit American consumers, who would gain increased choices in the marketplace.  

The United States began negotiations for entry into TPP in 2008 and TTIP in 2013. Both agreements have strong support from the White House and the House of Representatives. However, the Senate, under Majority Leader Harry Reid, never granted President Obama the ability to make legitimate negotiations for free trade agreements, known as Trade Promotion Authority. Mr. Reid allowed Trade Promotion Authority expire under President George W. Bush in 2007 and it was never reinstated.

President Obama needs Trade Promotion Authority in order to speed up the agreements.  Negotiating free trade agreements presents a conundrum—Congress has authority over regulating foreign trade, while the president is responsible for negotiating treaties.  Trade Promotion Authority resolves the ambiguity by allowing Congress to set the objectives and rules for the United States during negotiations. In return, Congress must hold an up-down vote on the treaty when it is finalized. 

This balance prevents members of Congress from slipping in special interest favors or using certain procedural tricks to prevent the agreed-upon treaty from becoming law.  It also prevents a president from favoring his environmental and organized labor base in negotiations and ending up with a treaty that will be vetoed by Congress.

Our partners will not take trade negotiations seriously if there is a chance that one disgruntled congressman could derail a painstakingly crafted treaty that has been years in the making.  The UK’s House of Lords has noted as much in a recent report, stating, “[w]ithout Trade Promotion Authority, the United States cannot make serious offers as part of the TTIP negotiations.”

With Senator Mitch McConnell as Majority Leader, trade agreements will have another chance in America. However, there is still the possibility that rising protectionism abroad, particularly in economically-anemic Europe and Japan, could make it politically impossible to complete work on the negotiations. This underscores the need for Congress to act swiftly when it convenes in January.  

The figure below shows that the United States has substantial exports to countries in the trade negotiations. TPP countries import 44 percent of total U.S. exports, and the EU accounts for another 17 percent.  By reducing anti-free trade practices in other countries, U.S. exports to these countries will increase at a much faster rate, but the more technical aspects of the treaty-regulations could be the most valuable for cutting export costs.

If TTIP is passed, U.S. exports to the European Union are predicted to grow by 37 percent. The increase in U.S. exports would total $300 billion, increasing GDP by $125 billion annually and adding 13 million jobs to the economies by 2027.

Approving TPP would lower trade barriers to an alternative set of economies—Japan, Australia, Brunei, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam. Though the countries differ, the economic benefits do not. TPP would increase U.S. national income by an estimated $77 billion per year, potentially leading to an additional $123.5 billion in U.S. exports by 2025. 

There is no question that a massive influx of income would result from the passage of both agreements. The increase to America’s export sector alone would be larger than the entire economy of Denmark.  The U.S. economy would benefit from an additional $200 billion in income, in addition to consumers’ access to superior goods at lower cost.  

The signatories’ large economies and high share of international trade ensure that the proposed agreements will be felt globally.  The European Union, United States, and TPP economies account for 61 percent of the world’s GDP, and import 43 percent of all goods exported in 2013. 

The development of high-standard, comprehensive trade agreements under the direction of the U.S. would create the template for global trade and regulatory policy. To remain competitive in the world’s largest consumer markets, export-dependent countries such as China would have to adapt to the standards agreed upon by the European Union and United States, and among the TPP countries. 

China is attempting to influence the outcome of the trade agreements’ by promoting an alternative plan with different set of standards, termed the Free-Trade Area of the Asia Pacific (FTTAP).  This trade agreement would include the 12 TPP countries, as well as China, Russia, and 7 other countries located in the Pacific region, as illustrated below: