By John Wainio, John Dyck, Mark Gehlhar, Tom Vollrath: USDA, Amber Waves

The proliferation of bilateral and regional free trade agreements (FTAs) over the past decade has become an important policy feature of the global trading system. These agreements create additional trade between members as their consumers respond to the availability of lower priced imports. At the same time, FTAs can divert trade from more efficient nonmember suppliers to member exporters receiving preferential treatment.

When countries mutually agree to reduce trade barriers within an FTA, suppliers in other countries continue to face unchanged (higher) tariffs when exporting to the FTA countries. Whether the differential tariff markups adversely affect the competitiveness of nonmember exporters depends upon the level of discrimination and the market shares of the supplying countries.

A recent ERS study using bilateral trade flows from 1975 to 2005 among 69 countries provides empirical evidence that FTAs increased trade among member countries in the world agricultural marketplace. The study shows, however, that trade expansion often is accompanied by trade contraction with nonmember countries. This suggests the large number of FTAs that do not include the United States may be eroding the U.S. presence in foreign markets.

Another ERS study focused more narrowly on specific FTAs and how they may change the pattern of U.S. agricultural exports. ERS researchers contrasted the effects of two recent FTAs negotiated by the Association of Southeast Asian Nations (ASEAN—Brunei, Indonesia, Malaysia, the Philippines, Singapore, Thailand, Vietnam, Laos, Burma (Myanmar), and Cambodia) with an agreement recently negotiated between the Mercosur countries (Argentina, Brazil, Paraguay, and Uruguay) and Colombia. According to the study, the two ASEAN agreements are projected to have only modest impacts on U.S. exports, while the Mercosur agreement has the potential to impose much larger costs on U.S. trade.

Growth in FTAs

According to the World Trade Organization (WTO), as of December 1, 2010, there were 290 FTAs in force (of these, 207 covered goods, and 83 covered services). More than two-thirds were put in place within the past decade. This trend is likely to continue based on the number of additional negotiations underway or being proposed.

Almost all countries are now party to at least one FTA. The U.S., once in the vanguard of countries creating FTAs, has negotiated fewer agreements in recent years. Between 2003 and 2007, the U.S. concluded negotiations with 16 countries, resulting in 8 FTAs with 13 countries—Singapore, Chile, Australia, Morocco, El Salvador, Honduras, Nicaragua, Guatemala, Bahrain, Dominican Republic, Costa Rica, Oman, and Peru. Three additional trade agreements with South Korea, Colombia, and Panama have been signed but have yet to be ratified by the U.S. Congress. Before a trade agreement can take effect, Congress must approve the implementing legislation submitted by the President.

The share of world trade between FTA partners has steadily increased. In 2009, an estimated 45 percent of global nonagricultural trade and 54 percent of agricultural trade was between FTA partners. The U.S. trades less with FTA partners than the rest of the world does—33 percent of U.S. nonagricultural trade and 41 percent of agricultural trade occurred with FTA partners in 2009. Important agricultural exporters, such as the European Union and Canada, have been particularly active in negotiating FTAs.

The primary objective in negotiating FTAs is to achieve preferential access to a partner’s market, thereby securing a competitive edge over other exporters and leveling the playing field against the FTA partner’s producers. Noneconomic factors also induce countries to form FTAs. Geopolitical factors, for example, have an effect, with some FTAs considered an important force for stability and development in a region. The uncertainties associated with getting a successful conclusion to the WTO multilateral negotiations may have also been a contributing force in the growth of FTAs. No doubt there has been a “domino effect” in recent years, with countries drawn into FTAs as a means to maintain market access in their partners’ markets.