Pros & Cons of Free Trade Agreements

What Is a Free Trade Agreement?

A free trade agreement is a pact between two countries or areas in which they both agree to lift most or all tariffs, quotas, special fees and taxes, and other barriers to trade between the entities.

The purpose of free trade agreements is to allow faster and more business between the two countries/areas, which should benefit both.

(See specific PROS and CONS at page two of this article.)

A result of international free trade is "globalization." (See Globalization: What Is It? at About.com's Guide to U.S. Foreign Policy.)

Why All Should Benefit from Free Trade

The underlying economic theory of free trade agreements is that of "comparative advantage," which originated in an 1817 book entitled "On the Principles of Political Economy and Taxation" by British political economist David Ricardo.

Put simply, the "theory of comparative advantage " postulates that that in a free marketplace, each country/area will ultimately specialize in that activity where it has comparative advantage (i.e. natural resources, skilled artisans, agriculture-friendly weather, etc.)

The result should be that all parties to the pact will increase their income. However, as Wikipedia points out:

"... the theory refers only to aggregate wealth and says nothing about the distribution of wealth. In fact there may be significant losers... The proponent of free trade can, however, retort that the gains of the gainers exceed the losses of the losers."

Claims that 21st Century Free Trade Doesn't Benefit All

Critics from both sides of the political aisle contend that free trade agreements often don't work effectively to benefit either the U.S. or its free trade partners.

(See specific PROS and CONS at page two of this article.)

One angry complaint is that more than three million U.S. jobs with middle-class wages have been outsourced to foreign countries since 1994. The New York Times observed in 2006:

"Globalization is tough to sell to average people. Economists can promote the very real benefits of a robustly growing world: when they sell more overseas, American businesses can employ more people.

"But what sticks in our minds is the television image of the father of three laid off when his factory moves offshore."

And in late 2007, some potential U.S. trading partners are having second thoughts about how "free" trade actually is with the United States. (See Where It Stands, on page two of this article.)

Presidential Fast-Track Trade Authority

In 1994, Congress permitted presidential fast-track track authority to expire in favor of allowing Congress more powers as the Clinton administration pushed the controversial North American Free Trade Agreement.

After his 2000 election, President George W. Bush made free trade a central part of his economic program, and pushed hard to obtain fast-track powers. With the Trade Act of 2002, Congress restored for five years fast-track trade rules for the White House.

Using this new, powerful authority, the Bush administration quickly sealed an astounding ten new free trade pacts with other countries:

• Singapore, 2004
• Chile, 2004
• Australia, 2005
• Morocco, 2006
• El Salvador, 2006
• Nicaragua, 2006
• Honduras, 2006
• Guatemala, 2006
• Bahrain, 2006
• Dominican Republic, 2007

Despite intense pressure from the Bush administration, Congress refused to extend presidential fast-track trade authority after it expired on July 1, 2007, as Congress was dissatisfied with Bush trade deals for many reasons, including:

• Record losses of millions of U.S. jobs and companies to foreign countries
• Exploitation of labor forces and resources and defilement of the environment in foreign countries
• The enormous trade deficit generated by the Bush administration

Pending Free Trade Agreements

As of December 2007, three U.S. free trade agreements or extensions (Panama, Colombia and South Korea) are pending thorough review in Congress, and have drawn significant opposition for many reasons.

A pact with Peru passed in late 2007 and was signed by the president on December 14, 2007.

President Bush, chafing at having lost presidential fast-track authority, has repeatedly urged Congress to pass these four pending pacts.

For more information on trade, see these articles by Kimberly Amadeo, About.com's Guide to the U.S. Economy :

Description of the U.S. Trade Deficit and Its Impact on the U.S. Economy
Trade Policy Definitions

The U.S.-Israeli agreement also allows American products to compete on an equal basis with European goods, which have free access to Israeli markets.

The second U.S. free trade agreement, signed in January 1988 with Canada, was superceded in 1994 by the complex and controversial North American Free Trade Agreement (NAFTA) with Canada and Mexico, signed with much fanfare by President Bill Clinton on September 14, 1993.

Active Free Trade Agreements

For a complete list of active U.S. trade pacts, see U.S. Regional Trade Agreements at About.com's Guide to the U.S. Economy.

For a complete listing of all international trade pacts to which the U.S. is a party, see the United States Trade Representives' listing of global, regional and bilateral trade agreements.

For a listing of all worldwide free trade pacts, see Wikipedia's List of Free Trade Agreements.