Understanding the Three New U.S. Trade Agreements

On October 12, in a demonstration of bipartisan cooperation, Congress passed three separate trade agreements — with South Korea, Colombia, and Panama. They are the first trade agreements in four years. In terms of potential impact, the trade pact with South Korea is the most significant since the North American Free Trade Agreement (NAFTA) with Mexico and Canada in 1994.1

Proponents believe the agreements could boost exports by $13 billion annually and support tens of thousands of American jobs.2 The U.S. Chamber of Commerce claims that the pacts will prevent the loss of 380,000 jobs.3 However, labor organizations caution that the deals might lead companies to move more jobs and factories overseas.4 To address this concern, separate legislation extended financial and retraining benefits for workers who lose their jobs to foreign competition.5

It’s too early to know the outcome, of course, but the agreements represent a positive effort to stimulate economic activity at a time of congressional gridlock, slow GDP growth, and high unemployment. As an investor, you may find it helpful to consider how a more open trading relationship with these countries could impact the domestic economy.

Opening Markets

From the American point of view, the primary benefits could be to (1) eliminate or reduce tariffs on U.S. exports; (2) level the playing field for U.S. investors and businesses; (3) open service markets in areas like telecommunications; and (4) protect the environment, labor rights, and intellectual property rights.6 Although the fundamental concepts are the same for each of the three countries, the specific economic and political situations vary substantially.

South Korea

South Korea has the world’s thirteenth largest economy and is the seventh-largest U.S. trading partner.7 In 2010, the United States imported $48.9 billion in goods from South Korea and exported $38.8 billion. Automobiles accounted for about 75% of this $10 billion trade deficit.8 The agreement should help U.S. automakers narrow the gap by selling more vehicles in South Korea. It should also increase agricultural exports, which have been held back by high tariffs.9

U.S. textile manufacturers, who struggle to compete with lower-priced South Korean imports, have expressed some concern about a reduction in tariffs. To address this, the agreement allows the textile industry to petition the government to reinstate tariffs if cheaper Korean goods flood the market.10

Another concern is that Chinese products may enter the United States duty-free by passing through South Korea.11 Japanese officials fear that the agreement may make it more difficult for some Japanese goods to compete in the United States.12

Colombia

Although Colombia has a smaller economy than South Korea, it is the second-largest market for U.S. products in South America (after Brazil). The United States imported $15.7 billion from Colombia in 2010, mostly oil and other mineral fuels. In return, Colombia bought $12.1 billion in U.S. goods.13

The Colombian accord faced some stiff resistance due to a history of violence against labor organizers. However, Colombian President Juan Manuel Santos is a strong U.S. ally who signed a Labor Action Plan in April that committed the Colombian government to protect labor rights.14

Panama

Panama has a small economy with a trading relationship that heavily favors the United States. In 2010, Panama bought $6 billion in U.S. products while exporting only $381 million. The agreement should increase U.S. trade with Panama and make it easier for American companies to compete for contracts on the $5.25 billion expansion of the Panama Canal.15

Opposition to the agreement was that Panama has been (and still remains) a tax haven for wealthy Americans. However, last year the United States and Panama signed a tax information exchange agreement to provide more transparency.16

A Free-Trade Future?

With the passage of these accords, the United States now has free-trade agreements with 20 countries. The U.S.-led Trans-Pacific Partnership, currently being negotiated among nine nations, envisions a free-trade zone that would include more than 40% of world trade.17

Free trade seems to be the future of the global economy, and the United States is taking a strong leadership role, telling the world that we are open for business. The litmus test will be whether free trade aids the U.S. economic recovery and produces American jobs.

Investing internationally carries additional risks, such as differences in financial reporting, currency exchange risk, as well as economic and political risk unique to the specific country. This may result in greater share price volatility. Shares, when sold, may be worth more or less than their original cost.

1–2, 5, 7–8, 11, 13–16) Associated Press, October 12, 2011
3–4, 12) Bloomberg.com, October 12, 2011
6, 9) whitehouse.gov, 2011
10) The New York Times, October 11, 2011
17) Office of the U.S. Trade Representative, 2011

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent Naperville investment services advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

Saturday, January 7, 2012