SELA Antenna in the United States SELA Permanent Secretary No. 74 4 th Quarter 2004 1 SUMMARY: U.S. FREE TRADE AGREEMENTS WITH SELA MEMBER STATES The Coverage of FTAs The Importance of MFN Tariff Reductions Differing Impact of FTAs on Partners and Products Concluding Observations U.S. FREE TRADE AGREEMENTS WITH SELA MEMBER STATES SELA Member States enjoy varying degrees of access to the U.S. market. At one end of the spectrum are Chile and Mexico, both of which have free trade agreements (FTAs) with the United States. At the other end is Cuba, which is subject to strict trade sanctions. The rest of the countries enjoy preferential access to the U.S. market under one or more programs, including the Andean Trade Preferences Act (ATPA), the Caribbean Basin Initiative (CBI), and the Generalized System of Preferences (GSP). 1 All countries in the region are engaged in trade negotiations with the United States through the Doha Round of multilateral negotiations in the World Trade Organization (WTO), and all but Cuba are parties to Free Trade Area of the Americas (FTAA) negotiations. Another ten SELA Member States have either completed or are engaged in FTA negotiations with the United States. These include the parties to the Central American- Dominican Republic FTA (CAFTA-DR), which is now under consideration in the U.S. Congress, as well as the FTA talks with Panama and Andean countries. 2 Just how valuable are these FTAs? This note seeks to take stock of SELA Member States current and prospective access to the U.S. market by reviewing the data on FTAs and their relationship to multilateral negotiations and preferential trade programs. One of the main points that emerges from this analysis is that viewed narrowly as tariff agreements the FTAs may be less significant than they at first appear. An FTA 1 Note that the CBI and ATPA programs are further enhanced by additional preferences enacted in 2000 and 2002, respectively. 2 The Andean FTA negotiations currently include Colombia, Ecuador, and Peru. Bolivia is an observer and may join at a later stage. does not necessarily mark a dramatic break with the past patterns of trade as one might suspect, given the preexisting preferences, nor does it necessarily offer a wide margin of preference vis a vis other countries. The tariffs applied to a few products may drop sharply, and in these sectors the FTAs may indeed offer a significant boost to trade, but these are usually the exceptions rather than the rule. Two caveats must be stated before examining these points. One is that the focus here is exclusively on tariffs. Other analyses in this series have examined the strategic use to which the United States has put FTAs in recent years, both as an instrument of foreign policy and as a means of influencing other negotiations (see Antennas numbers 71 and 72). It may also be the case that FTAs can encourage greater trade and investment in the partner countries by providing a more stable and inviting business climate. Those broader questions are outside the scope of the present analysis. Another caveat is that this analysis assumes, for the sake of simplicity, that preferential trade programs are a fixed feature of U.S. trade. That is not necessarily the case, insofar as both the ATPA and the GSP programs are currently scheduled to expire at the end of 2006, while some of the CBI preferences will expire in late 2008. While there is good reason to believe that the United States would renew these programs if they were to expire before FTAs are in place, that is not inevitable. If in fact these programs were to disappear, the relative value of FTAs would increase. The Coverage of FTAs How much U.S. trade is now covered by the existing and planned FTAs? The answer to this question depends critically upon the countries that one examines and the yardstick against which they are measured. More than any other region, U.S. trade with the Americas is now dominated by FTAs. But while the United States conducts a great deal of trade with the FTA partners, not all of it falls within terms of these agreements.
2 Let us start by reviewing the global patterns for U.S. trade. Both for imports and exports, the share covered by FTAs has risen steadily since the early 1990s. The data shown in Figure 1 suggest that FTAs may soon account for over half of U.S. trade. This certainly appears to be the case for U.S. exports, where 46.1 percent of shipments in 2004 were sent to FTA partners and candidates. 3 Just over onethird of U.S. imports came from these countries. The data for SELA Member States, as shown in Table 1, tell a similar story. These countries represent 17.0 percent of U.S. imports and 19.9 percent of U.S. exports. Mexico is the most important U.S. partner in this group, being the second-largest destination for exports (after Canada) and the third-largest source of imports (after Canada and China). Because Mexico accounts for well over half of all U.S. trade with SELA Member States, FTAs already cover the majority of U.S. trade with this group. The data in Table 1 offer more precise figures. The FTAs that are already in place with Chile and Mexico account for just over two-thirds of U.S. exports to SELA Member States, and nearly as high a proportion of U.S. imports. The FTAs that are now pending with ten other SELA Member States cover a further 15.5 percent of exports to the group, and 12.6 percent of imports. The remaining 14 countries in the group collectively account for only 18.1 percent of U.S. exports to SELA, and 23.1 percent of imports. Both the global and the regional data suggest that the FTAs cover a great deal of trade. One gets a very different impression from Figure 2, which illustrates U.S. imports according to tariff treatment. These numbers underline the point that not all trade with FTA partners is conducted under the terms of an FTA. Some of the imports from FTA partners will enter duty-free on a most-favored-nation (MFN) basis; 4 for example, this was the case last year for one-third of U.S. imports from Mexico, and nearly half of U.S. imports from Canada. Moreover, any imports that fail to meet the FTA s rules of origin will enter on an MFNdutiable basis. With only about half of all imports from the FTA partners entering under the terms of FTAs, just 16.0 percent of all U.S. imports last year came under the terms of these agreements. 5 Surprisingly, this actually represented a decline from the 17.5 percent of U.S. imports that entered under FTA terms in 1994. 50% 40% 30% Figure 1 Share of U.S. Trade with FTA Partners and Candidates Imports From and Exports to FTA Partners and Candidates as a Share of Total U.S. Imports and Exports U.S. Exports U.S. Imports 20% 10% 0% 1990 1992 1994 1996 1998 2000 2002 2004 Source: Calculated from data in tables 1 and 2. 3 The term candidates is used here to include all countries with which the United States is either formally engaged in FTA negotiations, or for which negotiations have been completed but the results have not yet been ratified or implemented. The term does not encompass countries that are merely under consideration for such negotiations. 4 In official U.S. usage, the term MFN was replaced in 1998 by normal trade relations (NTR). 5 Because the United States does not keep data on partner countries tariff treatment of its exports, we cannot know what share of the U.S. exports to the FTA partners were conducted under FTA terms.
3 TABLE 1: U.S. TRADE WITH SELA MEMBER STATES, 2004 Millions of Dollars, Imports for Consumption (Customs Value), Domestic Exports (FAS Value) U.S. Exports U.S. Imports Balance Average Tariff Percent Preferential FTA Partners 96,252 159,964-63,712 Chile 3,235 5,006-1,771 0.4 42.1 Mexico 93,017 154,958-61,941 0.3 62.0 FTA Candidates 22,470 31,392-8,922 CAFTA-DR 13,166 15,608-2,442 Costa Rica 3,028 3,297-269 0.4 35.8 Dominican Republic 4,116 4,529-413 1.1 59.5 Guatemala 2,436 3,156-720 6.7 39.7 Honduras 3,019 3,636-617 2.4 64.7 Nicaragua 567 990-423 7.1 33.5 Andean 7,662 15,487-7,825 Bolivia 177 260-83 0.2 52.5 Colombia 4,145 7,360-3,215 0.4 55.4 Ecuador 1,483 4,183-2,700 0.2 66.9 Peru 1,857 3,684-1,827 0.1 46.4 Panama 1,642 297 1,345 0.1 13.1 Other SELA Members 26,185 57,492-31,307 Argentina 3,022 3,772-750 1.2 14.9 Bahamas 1,121 632 489 0.4 14.7 Barbados 303 36 267 0.1 11.9 Belize 143 107 36 0.6 42.6 Brazil 12,462 21,097-8,635 1.8 15.1 Cuba 399 <0.1 399 0.0 0.0 Guyana 129 119 10 0.1 19.5 Haiti 649 370 279 2.0 59.3 Jamaica 1,320 308 1,012 0.6 55.7 Paraguay 563 51 512 2.1 34.5 Suriname 172 140 32 <0.1 0.1 Trinidad and Tobago 1,150 5,842-4,692 <0.1 28.7 Uruguay 270 579-309 11.8 10.4 Venezuela 4,482 24,439-19,957 0.2 3.3 SELA Total 144,907 248,848-103,941 Source: Calculated from U.S. International Trade Commission data. Percent Preferential = Share of U.S. imports from a country that enter under the terms of either an FTA or a preferential trade program.
4 Figure 2 U.S. Imports by Tariff Treatment Imports for Consumption, Billions of Current Dollars $1400 $1200 $1000 Preferences FTAs $800 $600 MFN Duty-Free $400 $200 MFN Dutiable $0 1990 1992 1994 1996 1998 2000 2002 2004 Source: Calculated from U.S. International Trade Commission data. The Importance of MFN Tariff Reductions The trends shown in Figure 2 suggest that multilateral tariff cuts have been a more important influence on total U.S. imports than the FTAs. The Uruguay Round of multilateral trade negotiations cut MFN tariffs on many products, and eliminated them altogether for some items. The cuts were phased in during 1995-2004. MFN tariffs were also cut under some post-uruguay Round negotiations, notably the Information Technology Agreement (ITA). The ITA has eliminated almost all tariffs on computers and related items. Most of the recent growth in imports consists of goods that are duty-free on an MFN basis. As of 1990, 62.9 percent of all U.S. imports were MFN-dutiable, while only 23.9 percent were MFN duty-free. By 2004, the share of MFNdutiable products was halved (to 31.7 percent) while the share of MFN duty-free doubled (to 47.9 percent). The average tariff on all U.S. imports MFN and preferential, dutiable and duty-free has fallen by more than half over the past fourteen years. It was 3.33 percent in 1990, but was just 1.47 percent last year. The data also show that preferential trade programs such as the ATPA, CBI, and GSP cover very small shares of total U.S. trade. The MFN tariff reductions have had two consequences. One is that they have stimulated trade over the past decade with all countries that receive MFN treatment, whether or not they also have an FTA with the United States. Second, these cuts tend to diminish the value of the FTAs by reducing their margins of preference. All other things being equal, we would expect duty-free access to the U.S. market to have a greater impact on those products and partners that would otherwise face relatively high MFN tariffs. An FTA provides no advantage for those products that are now duty-free on an MFN basis, and the margins are not very large for many other items that the partners ship to the United States. The value of an FTA will therefore vary according to the tariff treatment of specific items. Table 2 provides data for the 28 largest items that the United States imported in 2004. 6 Although this is a small number of items, it is both representative and significant. The products in this table accounted for 47.8 percent of total imports. The weighted average tariff on these items was 1.4 percent, just slightly below the weighted average tariff on all U.S. imports that year (1.9 percent). The treatment accorded to these items in 1994 and in 2004 show just how far the Uruguay Round went in the reduction of MFN rates, and hence in the reduction of preferences that might be offered under with preferential programs or discriminatory agreements. For purposes of this analysis, we may arbitrarily define a significant tariff to be 3.0 percent or more; anything below this level might be taken as a low tariff, and hence one for which duty-free treatment may be considered an insignificant margin of preference. As of 1994, exactly half of these 28 products were subject to tariffs of 3.0 percent or more. Ten years later, the same was true for only four of these items. Only five of these products were duty-free on an MFN basis in 1994, but 15 of them were on the free list in 2004. 6 Note that the data here are averages for four-digit items in the Harmonized Schedule. Because the United States sets its tariff rates at the eight-digit level, some of these four-digit items are comprised of numerous eight-digit lines that have differing tariff rates.
5 TABLE 2: POTENTIAL MARGINS OF PREFERENCE ON U.S. IMPORTS, 1994-2004 HTS Item and Description Share 2004 U.S. Imports Average MFN Tariff 1994 2004 MFN Imports MFN Duty-Free 8471: Automatic Data Processing Machines 5.2 1.5 0.0 100.0 2711: Petroleum Gases 3.1 0.0 0.0 100.0 8473: Parts & Accessories for Office Machines 2.5 0.1 0.0 100.0 3004: Medicaments 2.4 4.9 0.0 100.0 8542: Electronic Integrated Circuits 2.0 0.0 0.0 100.0 7102: Diamonds, Whether or Not Worked 1.3 0.0 0.0 100.0 8517: Electrical Apparatus for Line Telephony 1.3 6.4 0.0 100.0 9403: Furniture & Parts Thereof 1.3 3.2 0.0 100.0 8802: Aircraft, Powered 1.0 2.9 0.0 100.0 9018: Instruments Used In Medical Sciences, etc. 1.0 5.0 0.0 100.0 9401: Seats & Parts Thereof 1.0 3.8 0.0 100.0 4407: Wood Sawn or Chipped Lengthwise 0.8 0.0 0.0 100.0 2713: Petroleum Coke, Bitumen, etc, 0.7 0.2 0.0 100.0 9503: Toys, Scale Models, Puzzles, etc. 0.7 6.7 0.0 100.0 7601: Aluminum, Unwrought 0.5 0.0 0.0 100.0 Tariffs Below 3.0% 8703: Motor Cars & Other Motor Vehicles 6.7 2.5 2.5 61.9 2709: Petroleum Oils, Crude 3.1 0.6 0.2 35.7 2710: Petroleum Oils & Oils from Bitum. Min. 2.9 1.1 0.5 77.5 8525: Transmission Apparatus for Radio, TV, etc. 2.6 4.9 0.2 97.3 8708: Parts & Accessories for Vehicles 1.6 2.7 2.3 51.6 8528: Television Receivers 1.0 4.6 2.1 69.1 8411: Turbojets, Turbopropellers, etc. 0.8 1.9 0.2 93.1 8504: Electrical Transformers and Related 0.5 3.0 1.0 79.8 8527: Reception Apparatus for Radio, TV, etc. 0.5 4.2 0.7 89.1 Tariffs of 3.0% or More 6403: Certain Footwear 0.9 9.1 9.1 97.5 6110: Sweaters, Pullovers, Sweatshirts, etc. 0.9 19.9 17.8 77.8 6204: Women s or Girls Suits, etc. 0.8 14.8 14.6 79.5 4202: Travel Goods, Handbags, Wallets, etc. 0.5 14.0 13.3 97.2 Source: Calculated from U.S. International Trade Commission data.
6 Differing Impact of FTAs on Partners and Products These are average figures that conceal the differences between products, of course, and there are some items for which MFN tariffs remain relatively high. Chief among them are apparel and accessories, where the average MFN tariff on U.S. imports last year showed only a modest reduction from the pre-uruguay Round levels. Other sectors that are still subject to high tariffs and for which there are commensurately wide margins of preference include handbags and related items, footwear, and fabrics. Tariffs are even higher than the averages might suggest for those agricultural goods that are subject to tariff-rate quotas, such as dairy products and tobacco. The abovequota tariffs on some of these goods are prohibitive. 7 It is precisely these restricted products that offer the best prospects for an FTA partner but only if those products figure heavily in the country s exports. Table 3 offers further details on the tariff treatment of imports from the FTA partners and candidates. Comparisons between these countries, and their experiences with FTAs thus far, offer some useful insights into the effectiveness of FTAs as a boost to trade. Jordan is the only one of the FTA partners for which the agreement has accounted for nearly all U.S. imports. 8 It is no coincidence that Jordan stands out in two other respects: It has the highest share of apparel in its exports, and the highest rate of growth in its exports to the United States. While the tariffs (and margins of preference) on apparel are quite high, it is not certain whether Jordan s growth in this area will be sustainable over the long term. Now that the decades-old system of apparel import quotas has ended, it is widely anticipated that China and a few other suppliers will capture market share even from countries that enjoy duty-free access to the United States. Singapore is at the other extreme. Less than four percent of imports from this country entered under the FTA last year, and the rate of increase in U.S. imports from Singapore was almost nonexistent. The explanation is quite simple: More than two-thirds of U.S. imports from Singapore are computers and related items, and these goods are duty-free on an MFN basis. The FTA therefore cannot extend any meaningful margin of preference for the most important items in this bilateral relationships. The SELA Member States that are either FTA partners or candidates lie between these two extremes. The composition of exports for some of these countries is closer to the Jordanian experience, with apparel being predominant. This is certainly the case for the CAFTA-DR countries. The boost that they get from an FTA may be moderated, however, by the fact that their exports of these goods already receive preferential treatment under the CBI. By contrast, Mexico s export composition is somewhat closer to that of Singapore. Computers and related items comprise over one-fifth of Mexico s shipments to the United States, but the country must now compete with many other suppliers that enjoy equally open access to the U.S. market. This is one reason why the rate of increase in U.S. imports from Mexico is now much lower than it was in the years immediately after the North American FTA took effect. As for the Andean countries, just over one-third of their exports to the United States are in the oil and gas sector. MFN tariffs on these products are generally low, meaning that an FTA extends a commensurately low margin of preference. Moreover, the duty-free treatment that United States already extends to energy imports from Canada and Mexico will tend to dilute the benefits that the Andean countries might get from an FTA. Concluding Observations What do these observations tell us about the prospects for the FTA partners and the candidates in the pipeline? The most important point here is that FTA partners current and prospective may find that the margins of preferences diminish over time. This will be due both to the MFN tariff reductions in the Doha Round (although the timing and depth of those cuts have yet to be determined) and to the proliferation of FTAs. This does not mean that the FTAs should be considered unimportant. The significance of duty-free access to the U.S. market will differ from one commodity to another, and for some goods notably apparel it can be quite substantial. As a general rule, however, we can expect that even as the FTAs grow both in numbers and in their share of U.S. trade, the boost that they provide to bilateral trade may nevertheless decline. 7 For example, the high average tariffs on imports from Uruguay (as shown in Table 1) is largely attributable to the very high tariffs (26.4 percent) applied to imports of frozen beef, which is the largest U.S. import from that country. If one leaves aside this product and three other types of beef, the average U.S. tariff on imports from Uruguay last year was 3.0 percent. 8 Most U.S. imports from Jordan do not enter under the terms of the bilateral FTA with that country, but enter instead under the U.S.-Israel FTA (to which Jordan can dock through a Qualified Industrial Zone agreement).
7 TABLE 3 TREATMENT AND COMPOSITION OF U.S. IMPORTS FROM FTA PARTNERS AND CANDIDATES, 2004 Partners Arranged in Order of Their Share of Imports Entering on an MFN Duty-Free Basis Share of Imports Entering Under Average Annual Tariffs in 2004 Composition of Imports MFN Other MFN Increase in Imports % of All As % of Oil and Computer Duty-Free FTA Preference Dutiable Since FTA Began Imports Dutiable Gas & Related Apparel Partners Mexico 33.8 62.0 0.0 4.2 13.8 0.3 6.4 11.2 21.2 4.5 Chile 49.3 41.9 GSP: 0.1 8.7 27.8 0.4 5.0 0.5 0.1 0.5 Israel 81.9 16.5 0.0 1.6 10.7 0.1 5.9 0.0 14.5 2.3 Canada 45.6 51.5 0.0 2.8 7.5 0.0 1.4 15.7 3.5 0.7 Jordan 3.1 86.8 GSP: 8.2 1.9 68.3 0.4 19.3 0.0 0.2 87.5 Singapore 90.8 3.8 0.0 5.5 1.0 0.5 8.7 0.0 68.4 1.6 Candidates Andean-4 34.2 0.0 ATPA:56.3 9.5 0.3 2.7 34.7 0.1 8.6 CAFTA-DR 27.7 0.0 CBI: 50.8 21.5 2.9 13.6 1.0 5.6 54.4 Panama 76.4 0.0 CBI: 13.1 10.6 0.1 1.4 7.7 0.9 0.6 Bahrain 16.7 0.0 GSP: 14.1 69.1 7.1 10.3 0.0 0.1 38.5 Oman 30.5 0.0 GSP: 11.3 58.2 4.9 8.3 39.9 0.0 29.7 Morocco 51.9 0.0 GSP: 6.7 41.4 2.7 6.4 1.0 22.5 13.8 Thailand 54.3 0.0 GSP: 18.0 27.8 2.8 10.1 0.0 37.8 10.4 S. African C.U. 59.4 0.0 AGOA :37.5 3.1 0.2 7.0 0.2 0.5 12.8 Australia* 45.0 0.0 0.0 55.0 1.6 2.8 4.7 3.6 2.8 United Arab E. 53.7 0.0 0.0 46.3 4.1 8.8 8.2 0.8 21.4 Rest of World 52.3 0.0 4.4 43.3 2.1 4.8 9.2 19.7 4.9 World 49.3 16.0 4.4 30.3 1.5 4.9 9.2 17.0 4.8 Source: Calculated from U.S. International Trade Commission data. Totals may not add precisely due to rounding. Other Preferences include the African Growth and Opportunity Act (AGOA), the Andean Trade Preferences Act (ATPA), the Caribbean Basin Initiative (CBI), and the GSP. NA = Data not available. * : The Australia FTA entered into effect on January 1, 2005, but the country was still a candidate in 2004. SELA Permanent Secretariat, Apartado Postal 17035, El Conde, Caracas 1010-A, Venezuela Tel: 955.7111 / 955.7121 Telefax: 951.5292 / 951.6901 E-mail: difusion@sela.org http://www.sela.org (Legal Deposit No. pp 199603CS182, ISSN: 1317-1836)