Please note: the purpose of this diary series is not an argument for or against the Trans-Pacific Partnership (TPP).
There have been a great number of diaries written on this topic, and my only goal here is to provide more information regarding what TPP does, and what it doesn't do.
Part one: Understanding free trade agreements can be found here.
In Part One we learned about how free trade agreements work, or don't work, as the case may be. Today we're going to talk about how FTAs are manipulated, and delve a bit deeper into trade statistics.
I'll also attempt to address in more detail some of the questions I was asked yesterday.
We don't need no stinkin' free trade
The United States already has official free trade agreements with twenty countries. Let's briefly evaluate each trade relationship with those countries for 2014 (all figures in the US dollar X one million, figures found here) :
Australia
Exports: $26,667.7
Imports: $10,669.9
Balance: +$15,997.8
Bahrain
Exports: $1,060.2
Imports: $965.2
Balance: +$95.0
Canada
Exports: $312,032.0
Imports: $346,062.6
Balance: -$34,030.6
Chile
Exports: $16,630.5
Imports: $9,491.0
Balance: +$7,139.5
Colombia
Exports: $20,316.7
Imports: $18,234.2
Balance: +$2,082.4
Costa Rica
Exports: $7,026.4
Imports: $9,507.6
Balance: -$2,481.2
Dominican Republic
Exports: $7,954.7
Imports: $4,518.9
Balance: +$3,435.8
El Salvador
Exports: $3,346.7
Imports: $2,395.5
Balance: +$951.2
Guatemala
Exports: $6,056.6
Imports: $4,217.2
Balance: +$1,839.5
Honduras
Exports: $5,931.7
Imports: $4,643.2
Balance: +$1,288.5
Israel
Exports: $15,073.6
Imports: $23,050.6
Balance: -$7,977.0
Jordan
Exports: $2,051.9
Imports: $1,357.4
Balance: +$694.5
Korea(South)
Exports: $44,544.0
Imports: $69,605.7
Balance: -$25,061.7
Mexico
Exports: $240,326.2
Imports: $294,157.5
Balance: -$53,831.3
Morocco
Exports: $2,068.3
Imports: $991.0
Balance: +$1,077.3
Nicaragua
Exports: $1,014.2
Imports: $3,104.3
Balance: -$2,090.1
Oman
Exports: $2,014.0
Imports: $975.2
Balance: +$1,038.8
Panama
Exports: $10,397.8
Imports: $400.3
Balance: +$9,997.4
Peru
Exports: $10,070.2
Imports: $6,079.3
Balance: +$3,990.9
Singapore
Exports: $30,531.6
Imports: $16,463.5
Balance: +$14,068.1
I know, I know, the above list is boring, so let's break it down:
We have surpluses with our free trade partners Australia, Bahrain, Chile, Colombia, Dominican Republic, El Salvador, Guatemala, Honduras, Jordan, Morocco, Oman, Panama, Peru, and Singapore. These surpluses add up to $57,270.7 (million).
We have deficits with our free trade partners Canada, Costa Rica, Isreal, South Korea, Mexico, and Nicaragua. These deficits add up to $125,491.9 (million).
Whoa! That means that we're at a net deficit of $68,221.2 million in our free trade agreements. WTF?
Good question, dear reader, but unfortunately it's one that I can't adequately answer here if we're ever going to get to the point (TPP). In order for me to do that, I'd have to write about each individual country, our relationship with them, what their main exports are, what we need from them, etc.
The reason I wanted to bring these numbers to the table is to further illustrate a point that I mentioned in Part One: FTAs get far more credit than they deserve by friend and foe alike. It's incredibly easy to point to the countries that we have surpluses with and declare FTAs to be beneficial to the US, and it's equally as easy to point to the countries that we have deficits with and declare FTAs as dangerous to the US.
But neither one explains the numbers because, as noted in Part One, there are a lot of outside forces that influence trade beyond FTAs.
Let's look at some randomly chosen countries that we don't have FTAs with for comparison:
Africa:
Exports: $37,965.7
Imports: $34,567.7
Balance: +$3,398.0
Bangladesh
Exports: $1,088.4
Imports: $5,278.3
Balance: -$4,189.8
Cayman Islands
Exports: $810.8
Imports: $24.1
Balance: +$786.7
(Note: When I randomly chose these countries, I picked the first three countries on the above list, then pulled numbers from the countries immediately following them.)
What do these numbers tell us? They tell us that our surpluses and deficits are all over the place regardless of trade status. They tell us that we have a lot of data in regard to the countries that we have FTAs with, but they're inconclusive. They tell us that even if the United States decided to no longer participate in any free trade agreements, it would have a negligible impact on international trade.
As I noted in Part One, FTAs aren't free-for-alls between nations. There are standards that must be met in order to get preferential treatment for any given commodity, and that won't always (or even often) apply to our exports.
But here's where it gets a bit slick.
Notably missing from the list of countries that we don't have an FTA with is New Zealand. We have a pretty amicable trade relationship with them, but we don't have a FTA. Why not? Well, there might be a dozen reasons, but the main one is that we don't need one.
Let's use China, New Zealand, and Australia as an illustration since I already mentioned them (and because there's already an interesting trade situation between the three that I've been following).
The US has a FTA with Australia but it doesn't have one with China or New Zealand.
But it doesn't matter that the US doesn't have a FTA with New Zealand or China, because A) we continue to trade with those countries and B) our FTA with Australia means that Australia is more or less free to trade US commodities with a simple sleight of hand.
Here's how that works: in Part One of this series I explained how there are certain criteria that must be met in order for any given commodity to have preferential treatment under FTAs. Those criteria are more or less standard fare for all FTAs, meaning that if I want to trade something tariff free, I have to show that the commodity is created in the US.
But that doesn't mean that something that is manufactured elsewhere won't qualify under FTA standards.
Early on in my career, VOIPs (Vonage phones, to keep it simple) were becoming a Thing. At that point VOIP technology required hardware in order to function. The company I worked for could have been a contendah! Seriously, we had superior technology and much better service than Vonage, which was a small upstart at that point.
We imported these little routers from China, programmed them in our facility, then exported them out to countries all over the world. When the customer received them they'd plug a cord from their computer into the router and a cord out to their phone, and voila! International calls on the cheap.
Since the actual router was made in China, we got no preferential treatment under NAFTA when we sent them to Canada or Mexico. Natch, any other country.
But because I am who I am and I do what I do, I put together a report that showed that the fundamental functions of the router were done in the US. Sure, the physical product was manufactured in China so it fell outside of the parameters of NAFTA. But without the software downloads that we did in our facility, the product was essentially useless.
My conniving on this part worked a bit; some countries said, "yeah, you're right, the essential function of the thing was X% done in the US and therefore qualifies." Other countries weren't as accommodating and said "Uhh, no. This was manufactured in China and whatever software you put into it doesn't change that fact."
It's a risk all exporters take; we want our products to get preferential treatment; some countries will grant us that on a preponderance of evidence. Other countries will shoot us down on the same preponderance, especially if our product would compete with an important industry of that country.
BUT! And this is a big "but," there are still ways around that pesky "manufactured in" clause.
Back to New Zealand, Australia, and China:
As I stated above, we have a FTA in place with Australia but not New Zealand or China. But due to the FTA that Australia has in place with those countries, it doesn't really matter.
At this moment, Australia is capitalizing on a dairy scare in China (I addressed this briefly in the comment section of Part One). China is a very interesting country, and it becomes no less so when discussing trade. Brand names are incredibly important to the Chinese, and a particular, globally known brand had to recall product that was produced in China but got the tainted ingredients from New Zealand. No one in China will buy that brand name now and they've actually increased their imports from the country that was originally to blame for bad product.
This has been a considerable blow to China but a boom for Australia and New Zealand. But Australia and New Zealand alone can't sustain China's need for dairy products, and it's a bit reckless on Australia and New Zealand's part to ramp up production on behalf of China, because AU and NZ are in a quite precarious position already with their dairy industry: in short, they don't have the land or water to sustain a viable dairy industry, and this is only going to get worse as climate change ravages every landscape on the planet.
But it's okay right now, because Australia can exploit its FTA with the US in order to (temporarily) sustain this dairy boom with China.
Here's how it works:
Australia orders one million gallons of milk from a US company, and that transaction is given preferential status due to the FTA agreement we have with them. Then Australia tweaks it a bit.
This can be as simple as re-pasteurizing the milk (nearly all milk products are required to be pasteurized before they can be traded) or as significant as adding ingredients to the product and re-classifying it as something besides milk. They can also dehydrate the milk and put in a powder form and trade that powder as a purely Australian product. They can take the liquid that's a byproduct of the dehydration and process and sell that on the international market as an Australian product.
It doesn't matter that it was US milk that they dehydrated. Once they've changed the product enough, it qualifies as an Australian product.
That is one of the reasons why it doesn't matter that we don't have a FTA with New Zealand: it's just as easy to export a commodity to Australia and let them re-export it to New Zealand. The trade agreement between Australia and New Zealand renders our lack of one null and void, because any two given trading partners can set the parameters of what qualifies and what doesn't. New Zealand and Australia can set up a FTA that allows Australia to trade US commodities that they receive tariff-free to New Zealand.
In the same vein, our lack of a FTA with China is rendered useless because of the agreement Australia has with China. In essence, any party in a FTA can say "I won't sign an agreement with the US, but I will sign an agreement with a country that has signed an agreement with the US." So Australia is free to import any number of US commodities and sell it to China with a simple change of wording on their export documents.
Is all of this clear as mud yet?
Random notes about this series
Now that we (hopefully) have a better understanding of traditional free trade agreements, we'll be moving on to the Trans-Pacific Partnership. I don't yet know how many diaries it will take to cover the main points that we need to know, so please be patient with me! I'll be working on this as much as possible because it's almost crunch time. I should have started this much earlier in the year.
Many commenters have noted the secrecy surrounding TPP, so I wanted to briefly address that. It absolutely is unnerving when people we don't trust are negotiating something that will impact our lives but we're not allowed to know what they're negotiating. This isn't entirely unprecedented, however. Most free trade agreements are negotiated behind closed doors. However, as many have noted, the TPP is like a FTA on steroids, and the secrecy surrounding that is no exception. At this point in the process there is no reason for the public to not know what's in the deal.
And finally, I want to address some questions I received yesterday regarding my personal opinion on all of this. I specifically wanted to avoid opinions in this series because I want it to be informative, but where I stand is a fair question. It is, however, one with an answer that probably won't satisfy most readers.
First and foremost: I do not support the TPP. It is a more radical agreement than we've seen in the past, and many of the provisions (that we know of) have precisely zero to do with trade. That bothers me a great deal.
But as far as traditional FTAs are concerned, I'm rather agnostic about them. Like many things in life, there are pros and cons to each agreement. In theory, FTAs should create a balanced trade relationship between nations. As we've seen in the numbers above, that doesn't happen. But that doesn't happen without FTAs in place. So I'll go back to what I stated in part one: I believe they get too much credit from friend and foe alike.
And it's hard to evaluate the ramifications of trade deals as a whole because there have been so many other factors at work in our economy. Our middle class has been in rapid decline for a few decades now; there is no one cause for that- it's a culmination of causes. Starting in the Reagan era up until today, it's been a steady drip of falling wages and financial insecurity. Eliminating free trade deals would do essentially nothing to correct that.
If I ruled the world, we would still have FTAs but they'd be much different, with enforceable provisions for labor and environmental protections, among other things.
And finally, I believe that international trade is essential and will only become more important as climate change continues. There is a reason that we put embargoes on nations as a punishment. It can (and often is) crippling because the days of a self-sustaining nation are gone. There are very few countries that can sustain their population on their own natural resources alone. (In fact, international trade is critical enough that some entities are still able to ship to all five embargoed nations; all that is required is proof that it's for a valid reason, particularly for aid purposes. When we cut a nation off, we also cut off a major food supply for the people of that nation.)
America is one of these countries that could be self-sustaining. In fact, most states in the US could be self-sustaining, albeit with a radically less-varied diet. A compelling case could be made that we should keep more of our natural resources here and focus on self-sustaining. That's a case I'd love to hear and could probably support except that, as I noted above, there are other nations that depend on foreign trade to feed their people. So there's an ethical question there about who we are; speaking from a purely American standpoint, it would be great for us. Speaking as a citizen of the world, and just as a human being, I don't think I could support that.