FROM THE OFFICE OF PUBLIC AFFAIRS

United States Treasury

Office of International Affairs

New trade agreements negotiated under fast-track will expand trade by reducing tariffs and other barriers to trade. They will cut the taxes that foreign governments impose on U.S. products, making our products more attractive to foreign consumers and fueling continued growth in American exports. By allowing the United States to maintain the momentum generated by previous trade liberalizations, new fast-track agreements could contribute to an increase of at least $200 billion in U.S. merchandise exports, relative to what they otherwise would be, in the year 2010. Faster export growth is important. Studies show that jobs in export industries pay about 15% more on average than other jobs.

Fast-Track Cuts Taxes on U.S. Products

The benefits of fast-track agreements for the United States are clear. U.S. tariffs are already quite low--only about one-third of the average tariff rates applied by the major countries in Latin America and Asia with whom we are most likely to attempt to negotiate trade liberalizing agreements over the next decade. Fast-track agreements will cut barriers to U.S. exports to these countries far more than our barriers to their products.

In 1996, foreign governments collected approximately $31 billion from tariffs on U.S. exports. Countries in Latin America, who imposed an estimated $6.2 billion tax on U.S. exports, and in APEC, whose Asian members imposed an estimated $13.4 billion tax, account for most of these tariffs. If an agreement had been in place to cut these foreign taxes on American products by even one-half, taxes on U.S. exports would have been reduced by nearly $10 billion in 1996.

Effective Tariff Rates

Thailand 26.1%

China 23.0

Philippines 19.0

Peru 14.6

Uruguay 14.6

Venezuela 12.4

Brazil 11.7

Chile 11.0

Colombia 10.9

Indonesia 10.7

Argentina 10.3

Australia 8.9

Korea 7.7

New Zealand 6.8

Malaysia 6.4

Japan 2.8

Singapore 1.3

Hong Kong 0.0

Weighted Ave. of Above 7.5

Agreements negotiated under fast-track authority will reduce trade barriers in some of the most rapidly growing markets in the world; they will also allow the negotiated reduction of trade barriers in sectors where the United States has a comparative advantage.

The United States hopes to negotiate agreements on a global basis in the many areas of export interest, including agreements: in agriculture, a global market of $536 billion; in services, a market of $1.2 trillion; in government procurement, a market estimated to be worth $1 trillion in Asia alone in the next decade; in medical equipment; and in environmental technology. It also hopes to expand the scope of the successful information technology agreement.

1996 U.S. Exports ($ billion)

Services 237

Agriculture 61

Chemicals 71

Wood and Paper 26

Medical Equipment 11

Focusing on the gains from reducing average tariffs understates the gains from fast-track agreements in many ways. Average effective tariff rates often mask higher tariffs in products where the United States is extremely competitive. For example, many Asian APEC countries impose tariffs on transportation equipment and electrical machinery that are nearly twice as high as their average tariffs. Many countries -- particularly countries in Latin America and Southeast Asia -- have the right to impose higher tariffs on U.S. goods than they currently proposing. Fast-track agreements are needed to lower these tariffs.

Plus, tariffs are not the only, or in many cases, the most important, barriers to trade. While non-tariff barriers (NTBs) are difficult to quantify, fast-track agreements clearly provide one of the most effective ways to address NTBs as well as to reduce barriers to trade in services and to improve the protection of intellectual property rights.

Lower Barriers Mean More Trade

During the post-World-War-II period, trade has expanded rapidly--more rapidly, in fact, than overall economic activity. This expansion is not just a product of lower transportation costs and technological innovation. Trade as a share of economic activity actually fell when trade barriers rose sharply after World War I. Trade as a share of economic activity only recently returned to the levels experienced 100 years ago because of the reduction of trade barriers after World War II.

During the past 10 years global trade has grown at an average rate of 10% per year -- faster than global GDP, which has grown by 7% per year. The Uruguay Round agreement, the most recent set of tariff reductions negotiated under fast-track authority, has contributed substantially to the recent growth of trade. In addition to creating new GATT limits on barriers to trade in agricultural products and to trade in services, the Uruguay Round reduced average tariffs by almost one-third. Treasury baseline forecasts assume that U.S. trade will continue to grow by 9% per year--its average over the past 10 years -- between 1996 and 2000 because of the ongoing benefits from the Uruguay Round.

Fast-Track Needed to Sustain Momentum

Without continued U.S. leadership and fast-track agreements to assure that the U.S. captures a growing share of key export markets, U.S. trade will not be able to grow as rapidly. Since the content of future fast-track agreements is not currently known, the precise magnitude of the increase in trade likely to stem from future trade-liberalization agreements remains uncertain.

Treasury analysis indicates that each one percentage point increase in the annual rate of growth in U.S. trade between 2000 and 2010 translates into an additional $200 billion in U.S. exports in the year 2010. If further trade liberalization aided by fast-track agreements increased the annual rate of growth in U.S. trade between 2000 and 2010 by two percentage points -- not an unrealistic assumption given the estimated gains from the Uruguay Round -- this would increase total U.S. merchandise exports by more than $400 billion in 2010 , or roughly 2.4% of estimated U.S. GDP in 2010.

More Trade Means Higher Incomes

Increased trade raises American incomes in many ways. Trade allows America to concentrate on producing the goods and services that we produce best. This increases the income of U.S. workers: studies show that jobs in export industries pay around 15% more than jobs in the rest of the economy. Trade provides workers with better jobs and lets consumers benefit from greater competition, lower prices, and a wider selection of products.

It is very difficult to quantify all of the beneficial impacts of expanded trade on U.S. income. However, a substantial body of statistical evidence does demonstrate that countries that trade more are better off than countries that trade less. The results of a recent study that takes into account other factors and influences in order to better isolate the impact of trade on income suggests that the extra trade associated with fast-track trade agreements will raise the average incomes of Americans substantially by the year 2010.

In terms of 1997 purchasing power, each additional percentage point increase in the rate of growth in U.S. merchandise trade is estimated to generate between $800 and $1600 in extra income for a typical American family of four in 2010. A two percentage point increase in the rate of growth of U.S. trade from fast-track agreements would increase the income of a typical family of four by between $1600 and $3200 in 2010.

These calculations understate the likely gains from fast-track agreements. They only look at the benefits of liberalizing merchandise trade and thus do not incorporate the benefits associated with fast-track agreements that will lower the barriers, particularly the non-tariff barriers, to trade in services. Plus, many countries still have the right to impose higher tariffs than they currently impose, so continued rapid trade growth in the absence of future trade agreements should not be taken for granted.

The Cost of Inaction

Many countries of the world, including many of the most dynamic emerging markets, are moving to expand trade in preferential agreements that do not currently include the United States. Canada already has reached an agreement with Chile -- an agreement which is causing U.S. firms, like the Quaker Fabric Company of Massachusetts, to lose business to Canadian competitors simply because U.S. products face a 11% tariff in Chile and Canadian products do not. The European Union is exploring a preferential deal with Mercosur, a customs union that includes both Argentina and Brazil, that would give European products an edge over American products in the two largest markets in South America.

American leadership is needed to assure that the United States continues to exercise a dominant voice in the development of the global trading system. If we choose to sit on the sidelines, other countries will proceed without us, both undermining the world trading system that the U.S. has worked hard to create during the past 40 years and hurting U.S. exporters.