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Policy Digest
January - March 1997
LATIN AMERICA EMBRACING FREE TRADE ON ITS OWN	Trade experts say countries throughout Latin America and the Caribbean are busy forming free trade pacts with one another while Washington snoozes. "Every previous administration was hungry for an opportunity like this, but Latin America wasn't ripe for it. Now that Latin America is genuinely interested, the United States has been out of focus,": says Robert A. Pastor of the Carter Center in Atlanta. Brazil and Argentina reportedly took an aggressive lead in forming a four-nation "common market" -- with a population of 240 million people and an annual output of $1 trillion. Leaders from Japan, China, South Korea and the European Union are reportedly looking for opportunities in an area they long considered a U.S. preserve. Disappointed by the Clinton administration's failure to extent trade benefits to them, Central American and Caribbean nations are seeking agreements with Canada, Mexico, Europe and Asia -- as well as South America. Experts say U.S. trade within the Western Hemisphere is not only much larger than with Europe or Asia -- but consistently registers a surplus that helps offset large deficits elsewhere. Chile, which has the fastest growing economy in Latin America, apparently lost interest in U.S. trade ties when the Clinton administration failed to follow up on promises to bring it into NAFTA. Now, Chile's foreign minister say, NAFTA membership no longer "has either the urgency or the importance it had in 1994." Source: Larry Rohter, "Free Trade Goes South, With or Without U.S.," New York Times, January 6, 1997.
Invisible Trade Barriers	International trade analysts say that the focus of trade negotiations is shifting from tariffs to invisible barriers which might hamper trade between nations in the future. Some of these barriers are environmental laws, labor standards, rules for competition and corruption. There are some 200 international treaties on the environment that predate formation of the World Trade Organization. Many of these let nations use trade sanctions to enforce the treaties -- contrary to provisions of the WTO agreement restricting the use of sanctions. The U. S. wants minimum labor standards set for the treatment of workers in the Third World; but these poorer countries say that such standards attack one of their biggest competitive advantages: cheap labor. National policies regarding the impact of competition from abroad on domestic industries is certain to be an area of dispute. Finally, there is the matter of corruption. The U. S. has made it illegal for its firms to bribe foreign officials to get contracts. But in many countries bribery is not against the law. Experts say that firms based in countries which permit bribery have an advantage over firms in countries which don't. Now the U. S. is pressing other countries to bar their firms from bribing foreign officials. Source: Charles Oliver, "For Trade, Now the Hard Part," Investor's Business Daily, January 20, 1997. For more information on trade issues, see the Trade section of the NCPA's Policy Digest archives at http://www.ncpa.org/pd/trade/trade.html
Uncle Sam, Salesman	Politicians' enthusiasm for promoting national exports has been growing, both in the U. S. and in countries around the world. In the opinion of some, cold-war politics has been replaced by "geo-economics." Analysts say governments have four main ways to promote domestic products abroad. By subsidizing exports -- now banned under World Trade Organization rules. Governments can get around that by subsidizing research and development by up to 75 percent of an industrial firm's research costs or half the cost of product development under WTO rules. Governments can also offer "tied aid" by which the recipient promises to buy goods from companies in the donor country. Or governments can finance exports through "export credit guarantees," which insure exporters against the risk of default by their customers. Governments can also boost exports by manipulating the exchange rate of their currency, by gathering information on foreign markets for domestic sellers, or conducting trade missions by government authorities. The U. S. Commerce Department estimates that 90 percent of its work is on behalf of small companies. But officials admit there has been only a slight increase in small firms' share of American exports. "In the best of worlds," says the dean of the Yale School of Management, "governments should get out of this business altogether." Source: Governments and Exports, "Thoroughly Modern Mercantilists," The Economist, February 1, 1997. For more on Trade go to http://www.ncpa.org/pd/trade/trade.html
Small Businesses Connect Globally	Small business owners and their employees are benefiting by a growing trend: the tiny companies are exporting their products throughout the world. They are being lured by fast-growing overseas markets and lower trade barriers. Firms that export are 9 percent less likely to go bankrupt than those which don't, according to the Institute for International Economics. Workers at exporting companies make about 5 percent more on average than those at non-exporting firms. The top importers of U. S. products are Canada, Japan and Mexico. While only about one in ten manufacturers with fewer than 100 employees exported in 1987, about one in five was doing so by 1992. Similarly, the share of small and mid-size firms that get 10 percent or more of their sales from exports almost doubled between 1994 and 1996 -- from 27 percent to 51 percent, according to the Grant Thornton consulting firm. Trade experts say that fast-growing overseas economies are the reason U. S. exports rose 130 percent between 1985 and 1995 -- even though U. S. gross domestic product grew only 27 percent, inflation adjusted, during the same period. Small exporters are getting help from private consultants and brokers in maneuvering the export maze -- as well as help from governments here. They also have been spurred on by tariff reductions stemming from the signing of the North American Free Trade Agreement (NAFTA) between the U.S., Mexico and Canada. The only potential drawback: a strong dollar could make it tougher for small firms to make it big in the export market. For example, the dollar is trading now at about 124 yen, a 50 percent increase since April 1995. Source: Laura M. Litvan, "Small Firms Go International," Investor's Business Daily, February 26, 1997.
Why Free Trade is Good	Free trade has enabled America to become the economic powerhouse it is today. Some policymakers remain unconvinced of its practical benefits, but continuing free trade policies will allow U.S. citizens to become even wealthier in the future and help developing countries become wealthier. U.S. trade represented only 9 percent of gross domestic product (GDP) in 1960, but today accounts for 23 percent. Twelve million Americans owe their jobs to U.S. exports. Over the last three years, export of U.S. goods and services has risen by 20 percent - about one-third of real GDP growth. Today some 41 percent of U.S. exports go to developing countries, compared to 29 percent in 1970. The available data suggest that the wealthiest countries are those whose borders are the most open to trade, and that the poorest are those whose borders are least open to trade. For example: The average per capita income level of countries with an average tariff rate of 4 percent or below is more than $17,000. The average per capita income level of countries with average tariff rates above 20 percent is below $2,000. Source: Bryan T. Johnson, "Why Free Trade Is Good for America," F.Y.I. No. 127, January 23, 1997, Heritage Foundation, 214 Massachusetts Avenue, NE, Washington, DC 20002, (202) 546-4400. For the full text http://www.townhall.com/