[Economic Report of the President (2005)]
[Administration of George W. Bush]
[Online through the Government Printing Office, www.gpo.gov]


 
CHAPTER 8

Modern International Trade


Open markets and free trade raise living standards both at home and
abroad. The President's policy of opening markets around the world
is based on this solid foundation. Yet, as international trade has
grown in both volume and scope, so too have concerns that old ideas
about trade policies no longer apply to today's trade environment.
The key points in this chapter are:
Free trade allows countries to mutually benefit from
specializing in producing products at which they are adept and then
exchanging those products. This rationale remains the same, even
with advances in technology and new types of trade.
Foreign direct investment is playing an increasingly
important role in world trade, as companies invest across borders to
gain skills, technology, resources, and market access.
The Administration has advanced multilateral, regional, and
bilateral trade agreements in order to open global markets. Lower
trade barriers benefit consumers worldwide and expand markets for
America's manufactured goods, farm products, and services.

Free Trade: Beyond the Basics

The Administration's pursuit of trade liberalization is based upon
a long history of intellectual support for free trade. Modern trade
theory begins with the nineteenth century's David Ricardo. Ricardo's
central insight--his elegant model of comparative advantage--is the
starting point from which to explain the gains from trade.
Ricardo's model of comparative advantage addressed the question of
how a home country could compete with a foreign trading partner that
is better at producing everything. Ricardo showed that even if a
foreign country could produce each of two goods for less than the
home country could (that is, the foreign country has an absolute
advantage in the production of the goods), there could still be
mutual gains from trading the two goods. The key to the argument is
that it is relative costs of production (comparative advantage) that
matter, not absolute advantage.
As an example of Ricardo's theory of trade, consider a situation in
which one country requires two hours to produce a unit of each of
two goods, while in a second country it takes five hours to make
Good One and ten hours to make Good Two. In Ricardo's simple model,
the price of each good in the first country before trade is one unit
of the other good, because the two goods take the same resources to
produce. In the second country, Good Two would be expected to cost
twice as much as Good One, because it takes twice as much labor to
produce it. The first country has an absolute advantage in both
goods, but comparative advantage still provides a basis for trade.
In this case, the second country would gain from importing Good Two,
which costs only half as much in the other country (only one unit of
Good One). The second country would pay for these imports of Good
Two by exporting Good One. Similarly, the first country would import
Good One, which in its trading partner costs only one-half a unit of
Good Two. It would pay for its imports by exporting Good Two. In the
end, world production rises as a result of trade, and each country
can consume more of both goods. This stylized example illustrates
that comparative advantage allows countries to gain when they
specialize in producing items in which they are relatively the most
productive.
Critics do not usually argue that Ricardo's theory of comparative
advantage is incorrect, but instead that it omits key aspects of
trade that may undermine the theory's results and alter the
consequent policy prescriptions. In basic trade theory, for example,
capital and labor do not move across borders seeking the highest
return. At least for capital, such movements are now routine.
Economic models that take into account both capital and labor
(Ricardo's theory discussed only labor) show that countries as a
whole still gain from free trade. There are, however, differing
impacts of trade on different parts of the economy and the labor
force. Policies aimed at supporting individuals affected by trade
are thus vital to ensuring that its gains are widely shared. These
policies are discussed later in the chapter.

Globalization and the Terms of Trade

Theoretical arguments showing the gains from trade compare a
situation in which a country is open to trade with one in which it
is closed. The differences in production technology between a
trading partner and the home country mean that different prices
prevail in the two countries before they open their borders to
trade. It is this difference in prices that allows both countries to
benefit from trade. With the advent of trade, a new price for
exchanging products will be reached, somewhere between the countries'
original prices. This new price is known as the terms of trade. Each
country gains from opening when the terms of trade differs from the
pre-trade price.
Over time, events in either country could change the terms of trade.
Other things equal, each country would prefer the price it receives
for its export good to increase, just as any merchant would wish to
receive more for the product he sells.
After trade is opened, it is possible that changes in the world
economy could move the terms of trade in directions that benefit one
country but not the other. In this case, both countries would still
be better off than they were prior to trade, but one country would
see its gains diminished. Such subsequent price changes could come
from changes to the countries' technologies or from the discovery of
natural resources, such as oil, that lead to changes in production
and trade patterns.
The possibility that a country could lose from global price changes
is at the heart of some recent critiques of globalization. One
critique noted, for example, that as China develops and becomes more
similar to the United States, the United States could be made worse
off. There are two problems with this critique. The typical view of
globalization is that it is a phenomenon marked by increased
international economic integration. The critique above, however, is
of a situation in which development in China leads to less trade,
not more. If China and the United States have differences that allow
for gains from trade (for example, differences in technologies and
productive capabilities), removing those differences may reduce the
amount of trade and thus reduce the gains from that trade. The
worst-case scenario in this situation would be a complete
elimination of trade. This is the opposite of the typical concern
that globalization involves an overly rapid pace of international
economic integration.
The second problem with the critique is that it ignores the ways in
which modern trade differs from Ricardo's simple model. The advanced
nations of the world have substantially similar technology and
factors of production, and seemingly similar products such as
automobiles and electronics are produced in many countries, with
substantial trade back and forth. This is at odds with the simplest
prediction of the Ricardian model, under which trade should disappear
once each country is able to make similar products at comparable
prices. Instead, the world has observed substantially increased
trade since the end of World War II. This reflects the fact that
there are gains to intra-industry trade, in which broadly similar
products are traded in both directions between nations (the United
States both imports and exports computer components, for example).
Intra-industry trade reflects the advantages garnered by consumers
and firms from the increased number of varieties of similar products
made available by trade, as well as the increased competition and
higher productivity spurred by trade. Given the historical
experience that trade flows have continued to increase between
advanced economies even as production technologies have become more
similar, one would expect the potential for mutually advantageous
trade to remain even if China were to develop so rapidly as to have
similar technologies and prices as the United States.

The Impact of Trade on Labor Markets

According to standard economic theory, the degree to which an
economy is open to trade affects the mix of jobs within an economy
and can cause dislocation in certain areas or industries, but has
little impact on the overall level of employment. The main
influences on total employment are factors such as the available
workforce and the levels of interest rates, taxes, and regulations
that govern the labor market. Trade tends to lead a country to
specialize in producing goods and services at which it excels. Trade
affects the mix of jobs because workers and capital would be
expected to shift away from sectors in which they are less productive
relative to foreign producers and toward existing and new sectors.
This would be expected to lead to higher productivity and thus higher
wages for workers.
The conclusion that free trade has little effect on the overall
number of jobs is borne out in data on the U.S. economy. If trade
were a major determinant of the Nation's ability to maintain full
employment, measures of the amount of trade and the unemployment
rate would move in tandem, but in fact, they usually do not. The
increase in imports as a percentage of gross domestic product (GDP)
over the past several decades has not led to any significant trend
in the overall unemployment rate (Chart 8-1). Indeed, over the past
decade, the U.S. economy has experienced historically low
unemployment, while exports and imports have grown considerably.





Similar conclusions arise from examination of data on the trade or
``current account'' balance (the broadest measure of the difference
between exports and imports of goods, services, and income flows).
From 1960 to the third quarter of 2004, the current account balance
moved from a surplus of 0.5 percent of GDP to a deficit of roughly
5.6 percent of GDP. Yet the average unemployment rate in 2004 was
5.5 percent, the same as the average unemployment rate in 1960. Over
this period, the U.S. economy gained more than 75 million jobs--an
increase of roughly 140 percent. Increased trade has neither
inhibited overall job creation nor contributed to an increase in the
overall rate of unemployment.
That factors other than trade are the most important influences on
the labor market is of no consolation to a worker who loses a job
because of competition stemming from international trade. To assist
people facing such dislocation, the Administration has built upon
and developed programs to help workers acquire the skills needed to
prosper in new jobs.
The Administration has proposed a reform of the overall workforce
training system to help Americans obtain marketable skills needed to
compete for jobs in emerging and innovative fields. The
Administration recognizes that effective workforce training requires
the cooperation of the private sector and community colleges and has
worked to nurture these partnerships through the High Growth Job
Training Initiative at the Department of Labor and through the
recently-enacted Community-based Job Training Grants.
In addition, the Administration has proposed the establishment of
Personal Reemployment Accounts, an innovative approach to worker
retraining. With these accounts, qualifying individuals who lose
their jobs would receive an account with funds that can be used for
training and other services that best fit their needs. Individuals
who find new employment relatively quickly would be eligible to keep
the balance of their accounts as a cash reemployment bonus. The
accounts would thus provide both support to unemployed workers and
an incentive to find new employment.
The Administration has also worked to enhance the long-standing
Trade Adjustment Assistance program, which provides training and
income support to workers directly hurt by import competition. As
part of the Trade Act of 2002, eligibility was extended to workers
indirectly affected by trade, such as workers employed by firms that
supply goods and services to industries directly affected by trade
competition. Benefits were enhanced to include a health insurance tax
credit and a wage supplement for older workers who found new jobs
that did not pay as well as their previous jobs. This assistance,
which will total $12 billion over 10 years, will ease the adjustment
for displaced workers and help them move into jobs for which their
skills are most in demand.

The U.S. Advantage in Services Trade

This section considers the burgeoning trade in services.
The performance of U.S. service workers and firms has been
particularly strong. The United States exports more services than
it imports, and this surplus has been growing in recent years.
Moreover, U.S. services exports tend to involve relatively
highly-skilled and highly-paid occupations, such as engineering,
financial services, or architectural services. While services trade
may not have been envisioned in the time of Ricardo, the principle
of comparative advantage holds. Any move toward economic
isolationism would thus threaten the competitive gains made by U.S.
exporters while harming U.S. consumers and firms that benefit from
imports.
One prominent type of services trade is measured in the ``business,
professional, and technical services'' category. This statistical
category encompasses advertising, telecommunications, computer and
data processing services, and accounting and legal services. The
United States exports services when a U.S. firm provides
engineering or architectural services to partners in other
countries. Annual U.S. exports in this category have grown by
almost $25 billion since 1989, compared to a $10 billion increase in
imports over this period (Chart 8-2). The growing trade surplus in
this category is particularly striking in light of the widening of
the overall current account deficit. The existence of a trade
surplus suggests that the United States has a comparative advantage
in the international provision of tradable services.



Ricardo's theory that countries mutually gain from trade if they
each specialize in producing those items they could make relatively
efficiently was inspired by trade in goods. Given the difficulties
of communication and transportation in the nineteenth century, there
would have been little point in theorizing about trade in services.
In the modern global economy, however, services trade plays an
important role in international commerce and an especially positive
one for the United States. Advances in communication have made
possible the increased trade in services. These developments pose
a challenge to industries that did not previously face foreign
competition, though.
As noted above, the United States is good at the provision of
services. Expanded access to the broader international marketplace
would be expected only to further strengthen the U.S. advantage. The
U.S. advantages in services have fueled job gains both directly in
firms that export services and indirectly in firms that hire more
workers in the United States as a result of the efficiencies they
gain through trade. One study of the effect of services trade in
the information technology sector found that it created over 90,000
net new jobs in the United States in 2003 and is expected to create
317,000 net new jobs by 2008. These new hires tend to be in
positions requiring relatively high levels of skills or creativity,
such as software development.

Foreign Direct Investment: An Increasingly Important Part of Trade

While the intellectual foundations behind free trade are unchanged,
the means by which goods are exchanged between countries have
changed greatly since the time of Ricardo. Goods are no longer
simply produced in one place using only that country's resources and
then sent off on ships to be unloaded at a foreign port. Instead,
many of the goods Americans enjoy today--whether produced in the
United States or abroad--are made with components from a variety of
sources.
Production of goods in this fashion is facilitated by foreign direct investment (FDI). FDI occurs when an individual or firm buys a
foreign company or takes control of a sufficiently large portion of
a foreign company (typically 10 percent or more of the target firm's
stock) that it can influence management decisions. Greenfield FDI
occurs when a company builds a plant abroad from scratch (i.e.,
turns a ``green field'' into a factory), though this type of
investment is less common. FDI in turn gives rise to increased
trade.
U.S. firms investing or setting up enterprises abroad can increase
opportunities for exporting their goods. Moreover, there is a good
deal of evidence suggesting that increased employment at the foreign
subsidiaries of U.S. firms is associated with a corresponding
increase in employment in the U.S. parent company. Similarly, recent
research shows that one dollar of spending on capital investments
abroad by U.S. firms is associated with an additional 3.5 dollars of
spending on capital investment at home. The available evidence thus
suggests that, on the whole, overseas investment by U.S. firms goes
hand in hand with expansion at home.
Subsidiaries of foreign firms operating in the United States make
important positive contributions to the U.S. economy as well. These
firms bring over technology, techniques, and skills that in turn
lead U.S. industries to be more efficient. U.S. subsidiaries of
foreign companies employed 5.4 million U.S. workers in 2002, nearly
5 percent of total private-sector employment. This is up from 3.9
million workers in 1992 (4.3 percent of total private employment at
that time).

The Global Supply Chain and FDI

The production of goods today can involve many firms in different
countries performing a variety of distinct functions to bring
products to market. A car made by an American company could include
parts made by firms in the United States, Japan, Canada, and other
countries, and it might be assembled in Canada or in Mexico.
Producing this car could involve one firm extracting and molding
the steel for the chassis, another firm designing and assembling
interior components such as the seats and steering wheel, and a
third firm transporting cars to the showroom. Within these steps,
the production process could further involve a mix of domestic and
imported components. Likewise, a car produced by a foreign company
could be made in the United States and include a large share of
components made here as well.
Firms invest in other countries for many reasons. One is that by
investing abroad, firms may be able to take advantage of resources
that are unique to the country in which the foreign business is
located. Examples could be as straightforward as the development of
a mining project, which by necessity must be undertaken where the
natural resource is located, or the construction of an aluminum
smelter in a country with abundant deposits of bauxite, the ore from
which aluminum can be economically retrieved.
Firms might undertake foreign investment because it can be more
cost-effective to own a supplier rather than be one of the
suppliers' many customers. Once the goods are produced, the domestic
firm can use its distribution networks, infrastructure, and
knowledge about foreign tastes to export into new markets as well
as increase sales in existing markets. Firms might also invest in
retailing operations in other countries in order to exercise control
over the sale of their products. Moreover, some firms invest abroad
to avoid the trade barriers and transportation costs they might face
if they produced in only one country for export to the whole world.
FDI spurs increased trade as firms move goods between parent
companies and their foreign affiliates. Foreign affiliates use the
goods from the parent company as both inputs to production and final
goods to be sold through their distribution networks. In 2002, 35
percent of total U.S. trade in goods was accounted for by trade
within components of firms with operations in two or more countries.
This includes the flow in both directions, between U.S. companies
and their majority-owed subsidiaries abroad, and between
majority-owned U.S. subsidiaries and their foreign parent companies.

How Inward FDI Strengthens Domestic Firms

Foreign direct investment into the United States by foreign firms
can increase the competitiveness of U.S. domestic firms. Studies
suggest, for example, that American auto firms were driven to
produce higher-quality and more fuel-efficient cars in the late
1970s and 1980s when foreign car manufacturers began producing and
selling cars in the United States.
Evidence also shows that foreign direct investment into the United
States is associated with the adoption of new technology, techniques,
and skills by locally-owned companies. The transfer of expertise can
include skills in areas such as operations, marketing, management,
and organization; it can be especially important in sectors such as
biotechnology in which research and development activities play a
prominent role. Such technology can ``spill over'' to domestic
customers and suppliers through a number of channels. Examples would
include when workers at a foreign subsidiary leave and find
employment with local firms, when domestic customers incorporate the
products of these foreign firms into their supply chains, and when
foreign firms provide their U.S. suppliers with access to
information or technology in order to improve their own products'
quality and reliability. For example, one foreign auto manufacturer
in the United States recently shared with its U.S. steel suppliers
its innovations for producing stronger, rust-resistant steel. One
study estimates that such ``spillovers'' accounted for about 14
percent of the productivity growth in U.S. manufacturing firms
between 1987 and 1996.

Encouraging FDI

Many factors lead foreign firms to consider the United States when
deciding to invest abroad. These include a large pool of talented
workers, access to deep capital markets, a culture that supports
innovation and risk-taking, and a stable legal, political, and
economic environment. Evidence shows that countries prone to
corruption, political instability, and having private firms or
industries taken over by the government are less likely to receive
foreign direct investment than countries that protect investor and
intellectual property rights. A recent study found that the United
States was ranked the second-best country out of 145 in terms of
ease of doing business, just after New Zealand. In comparison, China
was ranked the 42nd-best place and India the 120th.
At home, the United States maintains an open and nondiscriminatory
policy toward investments made by foreign firms. With limited
exceptions, such as for national security reasons, the United States
permits foreign investment in all sectors. The United States does
not screen investments on size or the companies' country of origin,
does not restrict FDI to involve establishing only new facilities,
and, with limited exceptions, does not have performance requirements
such as local content requirements or export quotas.

Achievements in Trade Negotiations
The Administration has pushed aggressively to open global markets to
trade. This has been done through multilateral talks under the
auspices of the World Trade Organization (WTO) and through
agreements to liberalize trade between the United States and various
partners. The Administration has worked to ensure that the benefits
promised under the agreements are realized for U.S. consumers,
workers, manufacturers, farmers, and service providers. At the same
time, lower trade barriers benefit people in U.S. trading partner
countries. When U.S. trading partners do not fulfill their
obligations, the Administration has sought their compliance through
a practical, problem-solving approach. When that fails, however, the
Administration has utilized formal dispute-settlement mechanisms.
This section addresses the progress made in fostering global trade,
which provides mutual advantages to the United States and to all
nations. The section also discusses efforts to make sure that all
nations live up to the agreements they have signed. Because China
has grown in importance as a U.S. trading partner, this section
begins with a discussion of U.S. trade with this emerging economy.
It then describes efforts to ensure the protection of intellectual
property rights. It concludes with a description of progress in the
negotiation of bilateral and multilateral trade agreements.

Trade with China
Prior to China's accession to the WTO, exports from the People's
Republic of China were granted access to the U.S. market on
substantially similar terms as exports from members of the WTO.
This access, however, depended on an annual Congressional vote to
grant China ``Normal Trading Relations'' status (also known as ``Most
Favored Nation'' status). There were some exceptions to China's equal
access, most notably in textiles and apparel. Because China was not
a member of the WTO, it was not subject to the sort of reciprocal
obligations to lower trade barriers that WTO members undertook in
decades of trade negotiations.
The Administration's efforts to bring China into the WTO culminated
in China's December 2001 accession. WTO membership offered China the
stability of Permanent Normal Trade Relations and access to the WTO's
rules-based dispute-settlement mechanisms, but demanded of China
extensive, far-reaching, and often complex commitments to change its
trade regime, at all levels of government, and open its market to
greater competition. China committed to lower trade barriers in
virtually every sector of the economy, provide national treatment
(treat imports on an equal basis with domestically-produced goods),
improve market access to goods and services imported from the United
States and other WTO members, and protect intellectual property
rights (IPR). In light of the state's large role in the Chinese
economy, China also agreed to special rules regarding subsidies and
the operation of state-owned enterprises. In accepting China as a
fellow WTO member, the United States also secured a number of
significant commitments from China that protect U.S. interests
during the period in which China implements its WTO obligations.
The United States in turn agreed to accord China the same
treatment it accords the other 146 members of the WTO.
That treatment includes a gradual liberalization of the market for
textiles and clothing. This is a sector that has been gradually
transformed by advances in technology and transportation, as well
as by the opening of this sector through trade agreements.
Much of the world textile and apparel market had been governed for
decades by a global agreement that set bilateral quotas. Those
countries that were founding members of the WTO in the mid-1990s
agreed to liberalize textiles and apparel trade over the ensuing
10 years, a process that culminated with the elimination of quotas
on January 1, 2005.
Since China's WTO accession, the Administration has worked to secure
access to China's market for U.S. companies and their workers,
farmers, and service providers, as promised by China's WTO
membership, and to protect U.S. rights within Chinese markets.
Where possible, the Administration has tried to resolve differences
through negotiation. This approach has shown concrete results; in
April 2004, for example, meetings of the Joint Commission on
Commerce and Trade resolved seven potential WTO disputes involving
high-technology products, agriculture, and intellectual property
protection. When successful, this negotiated approach can deliver
more -immediate results than those available through the
sometimes-protracted legal procedures of a formal WTO dispute.
When this pragmatic approach has not produced prompt and effective
results, however, the Administration has also pursued dispute
resolution under WTO procedures. It filed the first-ever WTO case
against China to address discriminatory tax treatment of U.S.
semiconductors in China. Within four months of the filing, the
Chinese government agreed to eliminate the problematic tax program
to address U.S. concerns, resolving the dispute without lengthy
litigation.
A central point of discussion with the Chinese has been about the
benefits of moving to a flexible, market-based exchange rate.
The U.S.  government and organizations such as the International
Monetary Fund (IMF) have argued that the exchange rate should have
greater flexibility. Greater flexibility in China's exchange rate
would allow for smooth adjustments in international accounts and
would help protect China from the ``boom-bust'' economic cycles of
the past. Such a change poses a number of economic challenges.
The Department of the Treasury has been actively engaged with the
Chinese in working toward such a transition and has established a
technical cooperation program to address areas the Chinese view as
impediments to greater flexibility, leading to three missions in
2004 that covered currency risk management, banking system best
practices, and developing an exchange rate futures market in China.
Amidst these changes in policy, trade between the United States and
China has been growing rapidly. For goods trade through November
2004, China ranked as the third-largest trading partner of the
United States. For most of the period since China's WTO accession,
U.S. exports to China have been growing at a rate faster than its
imports from China (from 2002 to 2003, for example, U.S. goods
exports to China grew by 28 percent while imports from China grew
by 22 percent), but this export growth is occurring from a much
smaller base and so the bilateral trade deficit has grown. The
growing bilateral deficit has led to concerns in some circles about
China's rising prominence in world trade. In fact, the data suggest
that the increased imports from China are largely coming at the
expense of imports from other countries in the Pacific Rim
(Chart 8-3). This change is due in large part to China's role
as a final assembly platform for exports for Asian manufacturing
firms. The total share of imports from the Pacific Rim has fallen
from its recent high in the mid-1990s. This helps to demonstrate
why bilateral trade deficits have little economic significance and
why they are not a useful measure of the benefits of a trading
relationship; these bilateral measures can be driven by a
reallocation of trade among partners of the sort that is common in
a world of hundreds of trading nations.
Intellectual Property Rights
In 2004, the Administration launched a major initiative to protect
intellectual property rights. This initiative is called STOP! (for
Strategy Targeting Organized Piracy) and is the most comprehensive
initiative ever advanced to combat trade in pirated and counterfeit
goods. The initiative is a government-wide effort to empower
American businesses to secure and enforce their intellectual
property



rights in overseas markets, stop fakes at our borders,
expose international pirates and counterfeiters, keep global supply
chains free of infringing goods, dismantle criminal enterprises
that steal America's intellectual property, and reach out to
like-minded trading partners and build an international coalition
to stop piracy and counterfeiting worldwide. This initiative builds
on the Administration's strong existing record of global enforcement
and negotiation.
Such efforts are particularly important to the United States, which
is a major producer of innovative goods. Recordings, films, books,
and software are among the most successful U.S. exports. Property
rights in general are vital to the functioning of a market economy
(see Chapter 5, Expanding Individual Choice and Control). The
enforcement of intellectual property rights ensures that creators of innovative products capture the returns to their efforts. This
enforcement is vital as well to provide incentives to encourage
future innovation (see Chapter 7, The Global HIV/AIDS Epidemic).
Empirical studies have shown that improvements in a nation's
intellectual property protection can lead to increased trade.
These studies found the effect to be particularly strong in goods
that were easy to imitate, providing evidence that theft of
intellectual property displaces legitimate imports. One study
found that strengthened patent protection in large developing
countries could increase their imports by almost 10 percent.

Trade Liberalization

Tariffs and other barriers to trade in developing countries are
still much higher than those in the United States, so there remains
considerable scope for lowering barriers both to benefit our trading
partners and expand market access for U.S. firms. Imposing barriers
to trade means higher prices for consumers and firms and a lower
standard of living.
To dismantle these barriers and make the benefits of free trade
available to U.S. exporters, producers, and consumers, the
Administration has pursued trade agreements on several fronts. After
intense diplomacy at meetings in Geneva in July of last year, the
United States achieved international agreement on a framework for
moving forward on the Doha Development Agenda of WTO trade
negotiations. These talks, which were launched in 2001 in Doha,
Qatar, have focused on measures that will especially benefit
developing nations, including the elimination of agricultural export
subsidies. The Administration has also pursued free trade agreements
(FTAs) that set modern rules for commerce, meet high standards of
market access for goods, and break new ground in areas such as
services, e-commerce, intellectual property protection, transparency
and the effective enforcement of environmental and labor laws.
Agreements were concluded in 2004 with Australia, Morocco, Bahrain,
and with the participants in the Central American Free Trade
Agreement (CAFTA), including Costa Rica, El Salvador, Guatemala,
Honduras, Nicaragua, and the Dominican Republic. At the same time,
the United States continued negotiations with the five nations of
the Southern African Customs Union (Botswana, Lesotho, Namibia,
South Africa, and Swaziland) while launching new negotiations with
Thailand, Panama, and the Andean nations Colombia, Ecuador, and
Peru. The President has also announced to Congress his intention to
begin FTA negotiations with the United Arab Emirates and Oman.
Tariff reduction commitments negotiated in our bilateral FTAs in
2004 will save foreign consumers and businesses from paying higher
prices for imports and would be expected to spur increased
productivity and thus higher incomes in liberalizing countries. When
combined with agreements already negotiated by the Administration,
partner countries accounting for almost $50 billion in 2003 trade
have committed to eventually eliminate tariffs on almost all U.S.
exports. Tariffs that averaged as high as 19.6 percent for U.S.
exports will be reduced to zero as a result of these agreements.
Opening markets expands opportunities for U.S. farmers, businesses,
and workers. An example of the benefits of open markets can be seen
in the impact of the recent trade agreement with Chile. Caterpillar
Corporation manufactures mining trucks in Decatur, Illinois, that it
sells around the world. The Escondida copper mine in Northern
Chile--the largest copper mine in the world--uses mining vehicles
to move more than 350 million tons of material per year. Before the
free trade agreement with Chile went into effect in January,
Caterpillar's mining trucks were subject to tariffs of $60,000 or
more. These mining trucks now enter Chile duty-free, and have
become Illinois' biggest export. In 2004, Caterpillar tripled its
sales to Chile and added nearly 2,700 people to its U.S. payrolls.
The increase in market access for U.S. exports gained through
trade diplomacy is especially noteworthy because the United States
enters these negotiations with trade barriers that are very low.
Central American nations, for example, already had extensive access
to the U.S. market through the Caribbean Basin Initiative. Under
the terms of the CAFTA, those countries are now making reciprocal
commitments to allow in U.S. goods and services.
Bilateral FTAs can also strengthen opportunities for progress in
regional and WTO negotiations. In his first term, the President made
multilateral trade negotiations a priority. In the second term,
concluding multilateral trade negotiations held under the auspices
of the WTO will be a top priority for the Administration. Under the
President's leadership, the United States successfully led the
effort to ensure that 2004 was not a ``lost year'' for the Doha
Development Agenda negotiations. Early in 2004, the United States
mounted an intensive effort to get the Doha negotiations on a
practical track toward success. U.S. negotiators pressed trading
partners to narrow differences, establish key frameworks for
detailed  negotiations, and push forward to reach an agreement that
would foster increased economic growth, development, and
opportunity. The diplomatic effort focused on the key market access
areas of agriculture, industrial goods, and services; the effort in
2004 developed frameworks that will be built upon in moving forward
with the wider WTO agenda. At the end of July 2004, negotiations
were successfully put back on track. WTO ministers are scheduled to
meet in Hong Kong, China, at the end of 2005, to chart the final
course for the negotiations.
To ensure continued U.S. global leadership on trade, two legislative
steps are necessary. First, Congress needs to reaffirm the United
States' commitment to the WTO in its regular review. Second, Trade
Promotion Authority (TPA) must be renewed. TPA leaves the power to
regulate international commerce in the hands of the Congress. Under
TPA, Congress agrees to accept or reject an accord negotiated by the
President without modification. If TPA is not renewed, it will likely
be difficult--if not impossible--to achieve the kind of
comprehensive benefits the Administration has already negotiated in
its free trade agreements to date. At stake are the substantial
gains that would come from a successful conclusion to the Doha
talks. These gains would accrue both to the United States and to all
participants in the global trading system.

Conclusion

The United States is the world's leader in many ways and remains the
leading advocate for pro-growth policies around the world.
Connecting the world's economies through trade provides economic
benefits at home while offering opportunities to other nations that
are embracing economic reforms. Peace and prosperity go hand in hand,
each reinforcing the other. The President's policies are designed
to foster rising living standards at home, while encouraging other
nations to follow our lead.