Trade Diversion

Timely analysis of the modifications to the US-Korea trade deal (pdf) from the Peterson Institute’s Jeff Schott:

In economic terms, the overall impact of the new deal differs little from the old deal. Changes in the tariff schedules reduce the overall benefits of the trade pact but not by very much. Immediate tariff cuts on autos and light trucks have been deferred a few years, but changes in Korea’s regulatory policies and procedures on autos should help mitigate existing problems and preclude the introduction of new nontariff barriers to US exports to Korea…

Under the new agreement the US car tariff, currently 2.5 percent, will be maintained for four years (i.e., until January 2016) and then eliminated. In turn, Korea slowed its own tariff reform… In addition, the US tariff on light trucks, which has been 25 percent since the infamous 1963 US-Europe chicken war, will be maintained for seven years (until 2019) and then phased out over the next three years. Originally, the light truck tariff was to be phased out in 10 equal annual increments…

Do these changes in tariff reforms make much of a difference? Probably not—and definitely not if the Doha Round agreement concludes and begins to cut most-favored nation (MFN) tariffs starting in January 2013, the likely start date if a WTO deal is reached by early 2012… US light truck tariffs would be phased down from 25 percent to 6.1 percent in 2019. So for light trucks, the US MFN tariff would be lower than the KORUS preferential tariff beginning in January 2014.

(Updated 6 Dec 2010, 7pm.)

The US-Korea PTA is back on the table, as US automakers won some concessions from South Korea:

The new supplement agreement allows 25,000 cars per U.S. automaker to qualify for entry into the South Korean market based on U.S. safety standards. That is about four times the amount agreed to under the deal struck in 2007.

It also allows the United States to keep a 25 percent tariff on trucks until the eighth year, instead of beginning to reduce it in the first year. The United States will still have to eliminate the duty in year 10 of the pact.

South Korea is no longer required to eliminate immediately its 8 percent tariff on U.S. auto imports, but will reduce it to 4 percent for four years before eliminating it.

Seoul will still immediately eliminate a 10 percent tariff on U.S. trucks under the revised pact.

South Korea was given an additional two years — until 2016 — to eliminate duties on some U.S. pork products.

The deal needs to be ratified by the Korean National Assembly and the US Congress. Last month, Jeff Schott said that the deal could still be “fast tracked” to Congress because it was signed by President Bush before his trade promotion authority expired. I do not know if yesterday’s revisions (”supplement agreement”) also qualify under the old TPA or if the revised PTA will be subject to Congressional amendments.

UPDATE: Reuter’s Doug Palmer says that White House and USTR both say the revised deal is eligible under the old trade-promotion authority.

If you approach the subject as an economist, the US-Colombia PTA’s political deadlock is tough to understand. As I noted repeatedly 30 months ago (1, 2, 3, 4) when the PTA was in the news, Colombia’s only meaningful benefit would be making its regularly renewed tariff preferences permanent. US exporters would face lower tariffs in a few areas. Thus, the deal won’t cause substantial change in the economic environment. The PTA’s significance lies in its foreign-policy role, not its economic content.

Nonetheless, writing in the WSJ, Mary O’Grady tries to make the trade deal about economics:

But to make sense of the Obama administration’s opposition to a Colombia FTA—when the U.S. is already open to Colombian exports under the Andean Trade Preference Act (ATPA)—takes real mind-bending.

The advantage for Colombia of the trade agreement is that it will codify ATPA, so it doesn’t have to be renewed every few years. In exchange, Colombia commits to opening to U.S. foreign investment and exports. Consumers, producers and investors in both countries come out winners.

There are also geopolitical gains for the U.S., which benefits from the institutionalization of open markets…

Next year, Ottawa’s Colombia free trade agreement will enter into force, and Canadian producers will join the list of competitors who have an advantage over Americans in the Colombian market. The European Union and South Korea have also signed FTAs with Colombia and will have advantages on the industrial production front.

It’s hard to understand what Mr. Obama is thinking about besides his loyalty to the AFL-CIO. But Colombia’s plans are clear. It wants to trade with the U.S. But if it is rejected, it will simply buy and sell with the rest of the world.

The economics are clear. But I think O’Grady has missed part of the politics. News coverage suggests that Democrats are worried about human rights issue in Colombia, American unions are concerned about violence against Colombian union leaders, and Colombia is arguing that its labor conditions have improved. No one seems to be worried about a flood of Colombian imports hurting US jobs. If that’s the case, then it’s likely fruitless to talk about the economics rather than the politics of the trade deal.

At their meeting last week, APEC leaders announced intentions to negotiate a Free Trade Area of the Asia-Pacific (FTAAP) by 2020. Emmanuel lists reasons to think it’s empty rhetoric:

Again, there is much reason for scepticism. How can the US complete a deal with nine participants when it cannot even complete a bilateral arrangement with South Koreaafter three years, for example? Recall, too, that the Bogor Goals are well off track. The text of the 1994 Leaders’ Declaration says APEC’s achievements should include “the industrialized economies achieving the goal of free and open trade and investment no later than the year 2010 and developing economies no later than the year 2020.” 2010 is about to end, yet agricultural protectionism remains rife in the likes of the US and Japan. As for the Doha Development Round, forget about it since most of the rest of the world already has.

Importantly, remember that this is not the first time the US has tabled the FTAAP idea. Alike the Free Trade Area of the Americas (FTAA), FTAAP has singularly failed to find adherents. Ah well, hope always springs eternal for some.

I don’t see how the FTAAP’s prospects have improved since 2007, which is the last time I discussed the proposal, echoing the skepticism of Chris Dent and Jagdish Bhagwati. That year, Vinod Aggarwal laid out the skeptical case (pdf) at length in a chapter titled “The Political Economy of a Free Trade Area of the Asia-Pacific: A U.S. Perspective” in An APEC Trade Agenda?.

The trade policy agenda has been relatively quiet since President Obama took office (notwithstanding a few murmurs about the Korea-US trade deal triggered by last week’s G20 meeting). The administration has been content to let the WTO system maintain the status quo and address disputes, as it has invested its political capital elsewhere. But trade does need to show up on the Congressional agenda occasionally, if only to maintain status-quo policy. “Congress needs to act during the lame duck session on renewal of the Generalized System of Preferences (GSP) program and the Andean Trade Preference Act (ATPA), both of which expire at the end of 2010.”