Free Trade Agreements are Not that Free

Business Insider reported that the Free Trade Agreements with South Korea, Colombia, and Panama were sent to Congress today for their vote and approval by the House and Senate. The Trade Adjustment Assistance program, last major hurdle to the trade agreements, was voted and passed by the Senate a couple of weeks ago. This expensive (and expanded) program, geared towards appeasing union and worker pressures and fears of job displacement, was set as a condition by some Democratic congressmen and senators as a precondition to the vote on the Free Trade Agreements.

While any step towards the liberalization of trade should be welcomed and celebrated, it is strange that “free” trade agreements are not that free. In “real” free trade, domestic producers should be able to buy their preferred inputs, and consumers should be able to buy their preferred goods regardless of their country or region of origin. Free Trade Agreements are actually negotiated by bureaucrats, who get to choose what goods and services pay tariffs and which ones do not. This is similar to picking “winning and losing” economic sectors, producers, and consumers.

For example, the Congressional Research Service reported that Korean bureaucrats excluded rice from negotiations. Under these conditions, United States’ rice exporters will have a hard time selling their grain to South Korean consumers, due to Korea’s high tariffs and strict quotas on rice imports. Korean negotiators also restricted South Korean citizens’ access to United States’ beef, whose tariff will be phased out during the 15 years following the implementation of the agreement. This means Koreans will pay higher prices for rice and beef, in part thanks to negotiators who decided that protecting the domestic producers of these goods are more important than the rest of the Korean population.

United States bureaucrats are not immune to this problem. The same CRS report shows that the United States will restrict the import of large South Korean vehicles and light trucks, both with a restriction to be phased out in 10 years. Products made in “Outward Processing Zones”, like the Kaesong Industrial Zone (zones in North Korea where South Korean companies operate) will not be considered in the Free Trade Agreement, and companies in Kaesong will not be allowed to export to the United States with Free Trade Agreement benefits.

Other trade agreements, like the Chile, NAFTA and even CAFTA-DR are full of similar restrictions to trade. It seems that a “Free Trade Agreement” simply means “freer trade than before.” Many  policymakers — even those who support trade — still cling to the mercantilist view of the economy, where exports not imports, are heralded. They seem to feel the need to protect consumers and producers from trade, without realizing that both benefit from it.

Finally, FTAs can undermine the world trade system as well. As Jagdish Bhagwati explores in his book Termites in the Trading System, preferential trade agreements are slowly fractionalizing trade, and deals are negotiated to satisfy special interests. These deals are protectionist and can lead to discriminatory practices.

While FTAs do encourage trade, free trade should be completely free. Consumers and producers should be able to buy the products that fit their needs and budgets from their preferred suppliers, regardless of where they come from. This increases productivity and general economic growth.