An essential part of America’s turning away from protectionism since the Great Depression has been the signing of free trade agreements (FTAs) with other nations. Those agreements, while imperfect, have led to lower tariffs and other barriers to trade, in the United States and abroad. They also have provided incentives for compliance through dispute settlement while discouraging mutually damaging trade wars. Although the impact of trade agreements has often been exaggerated by both their advocates and opponents, decades of experience and economic analysis confirm that the benefits for most Americans have been positive. The United States today is a richer and freer nation, and the world is a more hospitable place for economic activity because of those trade agreements.
The most straightforward and preferable path to trade liberalization for any country is the unilateral reduction of trade barriers without regard for other countries’ trade policies. Unilateral liberalization allows a country to realize the gains from openness—mainly lower prices for consumers, lower-cost inputs for businesses, and a more favorable exchange rate for exporters—without the need for complicated negotiations with other countries. Many nations have followed this route with success, from Great Britain in the mid–19th century to China and India and other emerging economies since the 1980s. As discussed in a separate Defending Globalization essay, however, unilateral liberalization is politically difficult, so governments have turned to reciprocal trade agreements, which offer reduced trade barriers at home in exchange for similar liberalization among participating governments abroad. The best approach to trade agreement liberalization is multilateral—the lowering of barriers to goods, services, and investment in a nondiscriminatory way by almost all countries through such forums as the World Trade Organization (WTO). A next-best option is bilateral and regional FTAs among two or several governments, respectively.
The United States is a partner in bilateral and regional FTAs with 20 other nations, including such major trading partners as Canada, Mexico, South Korea, Singapore, and Australia. The United States was a founding member of the General Agreement on Tariffs and Trade after World War II and is a member of its successor institution, the WTO, a multilateral agreement with 165 other countries that covers 98 percent of world trade. The United States is also party to narrower bilateral investment treaties with about 40 other nations that protect American investment assets abroad.
The 20 bilateral and regional FTAs that the United States has signed have virtually eliminated tariffs on US exports to those countries. Those FTAs have achieved what even trade populists claim as a goal: reciprocal tariff rate reductions. By definition, FTAs set virtually all tariffs between the signatory nations at zero. The reductions, as well as liberalizing components (restrictions on nontariff barriers, services, and investment disciplines, for example), can be phased in over time, and a few politically sensitive sectors can be excluded, but substantially all trade under the 20 FTAs that the United States has signed occurs duty-free.
A Brief History of US Trade Agreements
To better understand why trade agreements have become so important to US trade policy, we need to step back to the early 1930s, to the passage of the Smoot–Hawley Tariff Act and the beginning of the Great Depression.
In response to low prices in the farm sector, Congress began drafting the Trade Act of 1930, better known as the Smoot–Hawley tariffs after its sponsors Rep. Willis C. Hawley and Sen. Reed Smoot. The bill quickly morphed from raising agricultural tariffs to hiking tariffs on thousands of other products—some of which were not even produced in the United States—as it moved through Congress. The result of this congressional logrolling was the largest tariff increase in US history, signed by President Herbert Hoover in June 1930.
The consequences of the unilateral tariff hike were a disaster. Instead of saving jobs and promoting industry, the tariffs accelerated the US economy’s slide into depression. Major US trading partners retaliated with tariffs of their own aimed at US exports. Global trade dropped dramatically. By 1933, real US gross domestic product had dropped by a third, and the unemployment rate hit 25 percent. Republicans lost the White House and control of Congress in 1932 as Franklin Roosevelt swept into office in a landslide.
Reciprocal Trade Agreements Act of 1934
America’s historic turn away from protectionism began with the passage of the Reciprocal Trade Agreements Act (RTAA) in 1934. The bill gave the administration authority to negotiate agreements with other nations to reduce tariffs by up to 50 percent. Tariff reductions negotiated with one country were automatically applied to imports from all other countries that treated US trade on a nondiscriminatory, or “most-favored nation,” basis. By 1940, the United States had effectively reversed the Smoot–Hawley tariffs through agreements done pursuant to the RTAA.
The General Agreement on Tariffs and Trade
At the end of World War II, the United States joined with noncommunist, “free world” trading partners to establish the General Agreement on Tariffs and Trade (GATT). Beginning in 1947 and under successive rounds, the US president under RTAA authority negotiated multilateral agreements with an expanding club of countries that significantly reduced tariffs in the United States and around the world. Global trade expanded sharply, as did the post-war economic expansion. The initial Geneva Round in the GATT committed its members to reciprocity, unconditional most-favored nation treatment, and opposition to quantitative restrictions on trade. The GATT also served a vital foreign-policy role by assisting Western Europe’s recovery after the devastation of World War II. It also knit NATO allies closer together economically during the Cold War in the face of the military threat from the Soviet Union.
The Carter administration negotiated the Tokyo Round Agreement in 1979, which resulted in average tariff reductions of 34 percent by the United States, the European Economic Community, and Japan. For the first time in the GATT, the round curbed the use (and abuse) of nontariff barriers in government procurement, technical barriers to trade, subsidies and countervailing duties, customs valuation, import licensing procedures, and anti-dumping.
The Uruguay Round and the WTO
The GATT process culminated in the Uruguay Round Agreement of 1994, which further reduced global tariffs and established the WTO to administer the agreement and resolve disputes. Like the Tokyo Round, the Uruguay Round reduced global tariffs by an average of one-third. It phased out the Multi-Fiber Arrangement, a system of rich-country quotas on imports of clothing and textiles dating back to 1974. “Voluntary” export-restraint agreements were banned, requiring nations to rely on existing anti-dumping and safeguard laws to address politically sensitive imports. Farm subsidies were reduced and constrained. For the first time, the round established rules governing the treatment of foreign investment, intellectual property, trade in services, and technical issues in trade (such as abusing sanitary and phytosanitary measures to restrict imports). The agreement also established a more robust dispute settlement mechanism to encourage better compliance, a key goal of US negotiators.
The Uruguay Round Agreement achieved major US objectives. It reduced global barriers to US exports of goods and services and established the “rule of law” in global trade and commerce. For the export-oriented sector of US agriculture, the agreement created a more open and market-friendly global market. For American consumers, the Multi-Fiber Arrangement’s abolition allowed for more trade in clothing, delivering lower prices to millions of American households, especially lower-income families, while helping to reduce poverty domestically as well as abroad.
NAFTA and Other Regional and Bilateral Agreements
Beginning in the 1980s, the US government signed a series of regional and bilateral trade agreements with specific trading partners. As noted, those agreements have eliminated virtually all tariffs on trade between these partners, liberalized trade in services, and created rules for intellectual property and direct investment that are more stringent than those in the WTO agreements. The agreements have been a bipartisan project, negotiated by Republican and Democratic presidents alike and approved with bipartisan majorities by Congress.
The most important and controversial of those FTAs has been the North American Free Trade Agreement (NAFTA) between the United States, Canada, and Mexico. The agreement first went into effect in 1994 and was renegotiated by the Trump administration and renamed the United States-Mexico-Canada Agreement (USMCA) in 2019. Although USMCA tightened the automotive rules of origin and beefed up the labor-enforcement provisions, it did preserve the core NAFTA benefit of zero tariffs on virtually all goods trade between the three North American neighbors. Since NAFTA, the United States has signed and implemented 12 agreements with 17 countries, using the basic NAFTA framework that subsequent administrations have updated and expanded
Beyond its economic impact, NAFTA proved to be a valuable foreign-policy initiative. It helped to institutionalize Mexico’s move away from a protected economy under one-party rule, thus improving US relations with its southern neighbor. As trade historian Douglas Irwin concluded, “NAFTA’s biggest impact may have been political: It contributed to the modernization drive that helped diminish the power of the Institutional Revolutionary Party (PRI) that had ruled the country for decades, and move the country towards multi-party democracy.”
In addition to FTAs approved by the United States, it’s also worth noting a major opportunity missed. Under President Barack Obama, US negotiators helped reach an agreement known as the Trans-Pacific Partnership (TPP) that would have expanded those reciprocal zero-tariff benefits to an even wider circle of nations. President Donald Trump, however, withdrew the United States from the TPP shortly after taking office in 2017. The remaining members went ahead and ratified the agreement without the United States. Now dubbed the Comprehensive and Progressive Trans-Pacific Partnership, the agreement includes six current US FTA partners—Canada, Mexico, Peru, Chile, Australia, and Singapore—plus Japan, Malaysia, Vietnam, Brunei, and New Zealand. The United Kingdom also negotiated entry into the agreement and will soon join as its 12th member. South Korea, China, and Taiwan have also applied to join CPTPP. Failure to join the agreement has placed US exporters at a competitive disadvantage and means an added burden for US businesses and consumers importing goods from CPTPP members with whom the United States does not have FTAs.
Why Does the United States Sign FTAs?
Supporters of free trade can raise the objection that trade agreements only complicate the goal of trade liberalization. Why engage in the protracted and sometimes arduous process of negotiating agreements with other countries when the United States could simply pursue free trade on its own by unilaterally liberalizing its own tariffs?
But there are practical as well as historical reasons why trade agreements have played a leading role in American trade policy for much of the past century. As Simon Lester explains, trade agreements make trade liberalization more attractive politically by enlisting US exporters on the side of liberalization. This allows trade liberalization to overcome the opposition of protected industries that would resist any decrease in US tariffs. And trade agreements magnify the benefits of domestic trade liberalization by combining it with trade liberalization abroad. Americans are better off when their government imposes fewer barriers on the freedom to trade—and they are even better off when other governments do the same.
The US International Trade Administration notes that US FTAs address a wide variety of foreign government actions that can affect US businesses, large and small. Besides reducing tariff rates on US exports, FTAs
- enhance the ability of US exporters to participate in the development of product standards in the FTA partner country;
- expand the ability of US companies to bid on certain government procurements in the FTA partner country;
- open opportunities for US service suppliers to sell their services in the FTA partner country; and
- guarantee that US investors are treated the same as the FTA partner country treats its own investors or those of any third country.
One of the most important advantages of trade agreements is that they lock in trade liberalization gains and prevent backsliding during times of economic stress and political tensions, whether abroad or here at home. In other words, agreements protect us against ourselves and against destructive trade wars that often result when trade barriers are raised unilaterally. During the Great Recession of 2008–2009, a web of trade agreements among advanced economies prevented governments from seeking the politically tempting but economically foolish option of raising trade barriers to “protect” domestic employment. Instead, barriers remained relatively low while governments sought to address the root causes of the downturn.
The Benefits and Downsides of FTAs
Negotiating, approving, and implementing FTAs have both costs and benefits for the United States—and all countries. The impact of these trade agreements on the US economy and employment has been positive, but that impact has also tended to be exaggerated by both sides in the trade debate.
Economic Benefits
Trade agreements’ fundamental purpose is to encourage people to engage in cross-border trade by lowering government barriers thereto, and this liberalization generates significant economic benefits. For example, American families and import-using producers can access a wider variety of imports at lower cost, while American exporters enjoy easier access to markets abroad. Because US trade barriers tend to be lower than most (but far from all!) other nations, the cumulative effect of the trade agreements that the United States has signed has been to lower foreign trade barriers more steeply than US barriers.
As a result, by 2023, 47 percent of US goods exports were bound for countries committed to accepting all exports from the United States duty-free. In return, 38 percent of goods imports to the United States in 2023 came from countries where the US government has committed to accepting their exports duty-free. This marks an important expansion of free trade, and even by the populists’ own logic, this should be the essence of “fair trade.” Almost all US exports to FTA countries are subject to exactly the same tariff rate—0 percent—as the imports we buy from those same countries. What could be more “fair” than that?
Historical experience also helps make the case for FTAs. Presidential candidate H. Ross Perot famously warned in the early 1990s that passage of NAFTA would unleash “a giant sucking sound” of jobs and investment flowing south to lower-wage Mexico. Nothing of the kind happened. In fact, in the five years immediately after the agreement went into effect (1994 through 1998), the US economy grew robustly, the unemployment rate fell to below 4 percent, and a net half a million new manufacturing jobs were created.
Studies by the US International Trade Commission (USITC) and the Peterson Institute for International Economics have found that the overall impact of NAFTA, like other trade agreements, has been modestly positive. While some proponents of the agreement may have overstated its positive impact on jobs, opponents such as Perot and the AFL-CIO were even guiltier of misstating feared negative impacts. According to the USITC, annual outflows of manufacturing foreign direct investment to Mexico during the period examined grew only slightly faster (11.7 percent) than outflows to the rest of the world (9.6 percent). In recent years, annual outflows of manufacturing foreign direct investment to Mexico have averaged less than 2 percent of total annual domestic investment in US manufacturing, and the United States has consistently been the top destination for foreign investment.
Unfortunately, proponents of FTAs have at times oversold their impact with unreasonably precise and optimistic projections of net job creation, export growth, and changes in bilateral trade balances. For example, export growth was disappointing after the signing of FTAs with Mexico and South Korea because of unrelated macroeconomic factors in the partner countries, such as recession. Proponents can also overstate the nontrade impact of agreements on the other country’s domestic political and economic reform. And they can ignore disruptions—lost jobs, for example—that inevitably arise from new foreign competition. It’s a simple fact that politicians are more inclined than professional economists to engage in exaggerated rhetoric to “sell” an agreement. That said, that an agreement may deliver benefits smaller than what proponents promise is not an argument against ratifying the agreement. The net benefits are still positive.
Numerous economic analyses have confirmed these benefits. In a comprehensive 2021 study of the economic impact of trade agreements, for example, the USITC concluded that trade agreements signed by the United States “have had a small, positive effect on the US economy.” The study weighed the economic impact of 16 bilateral and regional agreements with 20 other nations as well as the multilateral 1994 Uruguay Round Agreement that established the WTO.
The USITC analysis determined that the cumulative impact of those agreements has been to boost total US gross domestic product by $88 billion (0.5 percent), average real wages of US workers by 0.3 percent, and total employment by 485,000 full-time equivalent jobs (0.3 percent). Those gains are not spectacular, but they are real, and they refute the dire warnings that enactment of FTAs would lead to slower growth, fewer net jobs, and lower real wages. The opposite is true. The USITC said the gains were driven by economic efficiency gains, higher US employment, and growth in domestic investment, which expands the productive capital stock of the US economy.
The gains were not equally distributed across sectors or income groups, but they were widespread. College-educated workers enjoyed the biggest employment gains, but employment also grew for workers with only a high-school education. The service sector enjoyed most of the economic gains from trade agreements, but the manufacturing sector also grew by $3.5 billion compared to the baseline scenario of no trade agreements. Some manufacturing sectors, such as textiles, did lose jobs because of trade agreements, according to the USITC analysis, but that was caused by efficiency gains within manufacturing and not by an overall decline in output.
Many economists have also noted that the USITC’s methodology tends to understate the economic gains from trade agreements. The USITC analysis focuses on one-time “static gains” as resources shift from less-competitive US sectors to those that are more competitive. Understated are the “dynamic gains” from trade liberalization—such as the new products and production efficiencies stimulated by increased competition and the long-run (if modest) increases in productivity that compound over decades.
Geopolitical Benefits
Aside from more concrete economic benefits, FTAs provide less tangible but still important geopolitical benefits. The enhanced economic interdependence formed by FTAs helps foster stronger diplomatic ties and incentivizes other forms of cooperation among FTA member nations to tackle challenges that transcend political borders. Likewise, FTAs strengthen alliances with like-minded nations and can help counterbalance the geopolitical influence of rival countries such as China. Finally, FTAs are a tool of soft power to influence foreign countries to adopt American-style rules and norms—classic standard setting. For example, Phil Levy analyzed the US-Peru FTA and found that for Peru, the agreement was primarily about locking in the country’s economic liberalization in order to encourage investment, not about tariff reductions.
China’s Entry into the WTO
One of the most misunderstood “trade agreements” in recent US history is technically not a trade agreement at all: the granting of permanent normal trade relations (PNTR) and China’s entry into the WTO. As part of China’s WTO accession, the United States negotiated a bilateral agreement with China in 1999. However, all the obligations to liberalize were on China, and the bilateral agreement did not finalize China’s WTO accession (which entailed bilateral negotiations with several other governments, a multilateral “Working Party Report,” and final consent from all WTO members). In joining the WTO, China agreed to numerous domestic and trade policy reforms, including lowering tariffs on goods imported from all other WTO members—benefits the United States could only access by granting China PNTR. (Without PNTR, China would still enter the WTO but grant additional market access to all members except the United States.)
As a result of the accession and PNTR, Chinese tariffs on US exports were reduced from an average of 25 percent to 7 percent, and the Chinese government relaxed restrictions on US service exports and direct foreign investment while committing to additional protections for US intellectual property. Bilateral trade predictably increased thereafter. From 2001 to 2017 (before COVID-19 and the Trump trade wars), US exports of goods and service to China grew almost eight-fold, from $25 billion to $188 billion; sales by US-owned affiliates in China grew 10-fold, from $33 billion to $345 billion. China is now the top market for US agricultural exports. China’s membership in the WTO has allowed the US government to challenge China’s trade practices in more than 20 cases.
As Scott Lincicome and Arjun Anand detail in a separate essay for this project, PNTR likely did accelerate Chinese imports into the United States, and this heightened import competition likely did result in some US manufacturing job losses. However, economists strongly disagree about the magnitude of this so-called China Shock, which—by even the most severe of estimates—accounted for only about a fifth of the net reduction in manufacturing jobs and only about 5 percent of involuntary job losses between 2000 and 2007. Economists also generally agree that the China Shock produced small but significant economic benefits for American consumers and the US economy as a whole, that Chinese imports remain a small part of Americans’ overall consumption, and that, whatever the China Shock’s impact, it was a one-time, transitory event that will not (and cannot) be repeated.
China’s WTO accession and PNTR also helped to usher China into the system of global trade rules and allowed the US government to pursue several cases through the WTO’s dispute settlement mechanism that resulted in improved Chinese compliance. And opening China’s economy not only increased the sale of US goods and services there (through exports and affiliates) but also helped to lift tens of millions of Chinese people out of abject poverty. China’s WTO membership, especially its post-accession backsliding on protectionism and industrial policy, is certainly not without problems, but few if any of those would be solved by refusing PNTR in 2000 or repealing it today. Instead, China’s economy would have continued to grow, and Chinese goods would have still entered the US market (directly or indirectly), but US companies would have lacked access to China’s market, and the US government would have lacked multilateral mechanisms to negotiate or challenge Chinese economic malfeasance.
Downsides
As noted, even free traders acknowledge that trade agreements are imperfect. For example, the proliferation of FTA trading blocs and customs unions outside of the WTO creates inefficiencies and complications in the multilateral global trading system—setting back the cause of nondiscriminatory multilateral trade. By lowering tariffs on trading bloc members, FTAs can divert trade from a more efficient nonmember exporter to less efficient member exporters—what economists call “trade diversion.” This can concentrate production in a country with higher opportunity costs and lower comparative advantage. Such trade diversion imposes costs not only on the broader global economy but can also harm the importing country because the increased imports may be suboptimal due to price discrimination against a third country’s products.
Beyond tariffs, FTAs create additional rules and regulations, above and beyond what are required under baseline WTO rules.
As trade economist and evangelist for free trade Jagdish Bhagwati wrote in his 2008 book Termites in the Trading System: How Preferential Agreements Undermine Free Trade:
Crisscrossing [preferential trade agreements (PTAs)], where a nation has multiple PTAs with other nations, each of which then had its own PTAs with yet other nations, was inevitable. Indeed, if one only mapped the phenomenon, it would remind one of a child scrawling a number of chaotic lines on a sketch pad … [or a] spaghetti bowl.
This “spaghetti bowl” of rules and rules and regulations make the trading system more complicated to navigate for consumers and businesses.
Trade agreements can also reinforce mercantilist views of trade—exports are a benefit and imports a “concession”—or even lock in protectionism. For example, under the terms of the USMCA, 40 percent of the manufacturing labor incorporated into a passenger vehicle (45 percent for trucks) must have a base wage rate of $16 per hour for an auto to qualify for preferential tariff rates. Given that this rate is substantially above the average auto manufacturing wage in Mexico, it serves as a protectionist tool to ensure a larger share of production of automobiles takes place in the United States, which has higher wages. Other FTA “rules of origin” are similarly protectionist, reducing interparty trade instead of expanding it. In his essay, Lester cites several other examples of such measures, such as intellectual property.
Finally, there is the issue of opportunity cost. Negotiating FTAs is a technical and time-consuming matter, which can divert attention—and negotiators’ and diplomats’ time—away from unilateral liberalization or multilateral negotiations through the WTO system, which is a forum that is more likely to establish nondiscriminatory, near-universally accepted trade rules.
Given these risks, each FTA should not be rubberstamped but instead judged on its merits following a detailed review of its actual provisions (see, e.g., the Cato working paper “Should Free Traders Support the Trans- Pacific Partnership? An Assessment of America’s Largest Preferential Trade Agreement”). In general, however, US FTAs have each liberalized trade on net, and their benefits have substantially outweighed their downsides.
As the United States Dithers, the Rest of the World Is Moving Forward
It has been more than a decade since the United States entered into an FTA with new trading partners and is not currently negotiating any. In fact, the current US trade representative, Katherine Tai, has said that FTAs are “tools of the 20th century,” which is probably news to most of the rest of the world.
As mentioned, CPTPP went into effect without the United States. Today, American consumers pay higher prices for imports from CPTPP nations than they would otherwise; meanwhile, American exporters face higher barriers than competitors within the trading bloc. Though less ambitious than CPTPP, the Beijing-led Regional Comprehensive Economic Partnership was implemented in 2022. By sitting on the sidelines, the United States is ceding the ability to shape the rules and norms of international commerce in the Asia Pacific region to others, including China.
The African Continental Free Trade Area, which includes 47 African nations, went into effect in 2018. A more comprehensive deal, the East African Community expanded in 2022 to include the Democratic Republic of Congo and now covers about a quarter of Africa’s population.
The European Union (EU), likewise, has continued to move forward with FTAs with dozens in force, provisionally applied or in negotiation. Following the United Kingdom’s decision to leave the EU, it has entered into a number of FTAs and is negotiating more. The British government is taking the final steps necessary to enter the CPTPP.
India and China—two traditionally protectionist countries—are moving forward with liberalization. India has pursued a robust, liberalizing agreement with Australia and inked an FTA with Norway, Switzerland, Iceland, and Lichtenstein. India is also engaged in FTA talks with the EU. China is negotiating or implementing eight FTAs, on top of the Regional Comprehensive Economic Partnership and applying to join the CPTPP. In other words, even notoriously protectionist countries are moving forward with liberalization.
As of 2024, the WTO’s database shows there are nearly 370 regional FTAs in force worldwide. The rest of the world continues to move forward with liberalizing FTAs even if the United States does not. Over the long term, a nonexisting trade agenda is a recipe for economic stagnation and a loss of influence around the world. In short, it’s time for Washington to get its act together and get back in the FTA game.
Conclusion
Americans are broadly supportive of US efforts to expand trade with the rest of the world. In its annual polling of public attitudes toward trade, Gallup has found that a solid majority of Americans—more than 60 percent—see foreign trade more as an opportunity compared to 35 percent who view it more as a threat. While trade agreements are hotly debated in Congress, they are seldom a central issue in elections. Despite ever-present political pressure from protectionist interest, US politicians enjoy ample political space to do the right thing by negotiating and enacting further trade agreements.
The rest of the world is even keener on FTAs. The WTO has counted more than 300 FTAs in effect; this includes 100 negotiated in the past decade, while over the same period, the United States has signed none. US dawdling on the sidelines means that US exporters increasingly face discriminatory tariffs in those countries while their competitors in FTA countries enjoy duty-free access to those markets. US businesses that rely on imported inputs are similarly placed on the backfoot in a competitive global market. The United States and its most competitive producers are being left behind as the world moves ahead in lowering trade barriers.
Trade agreements have played an important and positive role in expanding the freedom of Americans to engage in commerce with the rest of the world. Those agreements have opened markets for hundreds of billions of dollars of US exports and foreign investment while lifting the standard of living for millions of American families through lower consumer prices and better jobs. Those agreements have brought the rule of law and equal treatment to global commerce while discouraging politicians from retreating into destructive trade wars during times of economic challenge.
To read the essay as it was published on the Cato Institute webpage, click here.