For other versions of this document, see http://wikileaks.org/wiki/CRS-RL33944 ------------------------------------------------------------------------------ ¢ ¢ Prepared for Members and Committees of Congress ¢ ¢ The 110th Congress has a full legislative and oversight agenda on international trade. The agenda may include considering legislation to implement a number of free trade agreements, possible renewal of trade promotion authority (TPA), as well as oversight of U.S. trade relations with China. This report provides information and context for many of these topics. It is intended to be read primarily by Members and staff who may be new to trade issues. This report is divided into four sections in a question-and-answer format: trade concepts, U.S. trade performance, formulation of U.S. trade policy, and trade and investment issues. Additional suggested readings are provided in an appendix. The first section, on "Trade Concepts," deals with why countries trade, the consequences of trade expansion, and the relationship between globalization and trade. Key questions address the benefits of specialization in production and trade, efforts by governments to influence a country's comparative advantage, how trade expansion can be costly and disruptive to workers in particular industries and skill categories, and some unique characteristics of trade between developed countries. The second section, on trade performance, focuses on the U.S. trade deficit and its impact on industries. Several questions address the causes of trade deficits, the role of foreign trade barriers, and how the trade deficit can be reduced. In terms of business impacts, the questions focus on which U.S. industries appear to be the most and least competitive, and on the relative size of the manufacturing sector. The third section deals with the roles played by the Executive Branch, Congress, the private sector, and the Judiciary in the formulation of U.S. trade policy. Information on how trade policy functions are organized in Congress and the Executive Branch, as well as the respective roles of individual Members and the President, is provided. The formal and informal roles of the private sector and the involvement of the Judiciary are also covered. The fourth section, on U.S. trade and investment policy, asks questions related to trade negotiations and agreements and to imports, exports, and investments. The justification, types, and consequences of trade liberalization agreements, along with the role of the World Trade Organization, are treated in this section. The costs and benefits of imports, exports, and investments are also discussed, including how the government deals with disruption and injury to workers and companies caused by imports and its efforts to both restrict and promote exports. The motivations and consequences of foreign direct investment flows are also discussed. This report will not be updated. ¢ Trade Concepts................................................................................................................................ 1 Trade Expansion and Globalization .......................................................................................... 1 U.S. Trade Performance .................................................................................................................. 5 U.S. Trade Deficit ..................................................................................................................... 5 Sectoral Issues......................................................................................................................... 10 Formulation of U.S. Trade Policy.................................................................................................. 13 Role of Congress ..................................................................................................................... 13 Role of the Executive Branch ................................................................................................. 14 Role of the Private Sector ....................................................................................................... 15 Role of the Judiciary ............................................................................................................... 16 U.S. Trade and Investment Policy Issues ...................................................................................... 17 Trade Negotiations and Agreements ....................................................................................... 17 Import Issues ........................................................................................................................... 20 Export Issues ........................................................................................................................... 22 Investment Issues .................................................................................................................... 23 Additional Readings ...................................................................................................................... 25 CRS Reports............................................................................................................................ 25 Other Readings........................................................................................................................ 26 List of Questions ........................................................................................................................... 27 Trade Concepts........................................................................................................................ 27 U.S. Trade Performance .......................................................................................................... 28 Formulation of U.S. Trade Policy ........................................................................................... 28 U.S. Trade and Investment Policy Issues ................................................................................ 29 Figure 1. Employees on Nonagricultural Payrolls by Major Industry, 1960-2006........................ 12 Table 1. U.S. Exports, Imports, and Merchandise Trade Balances 2002-2006 ............................... 6 Table 2. Top U.S. Trading Partners Ranked by Total Merchandise Trade in 2006.......................... 9 Table 3. U.S. Industries with the Largest Trade Surpluses and Deficits in 2006........................... 10 Table 4. Recent Peaks and Current Employment for Industries With Heavy Import Competition................................................................................................................................ 13 Author Contact Information .......................................................................................................... 31 ¢ ¡ £ 1. Why do countries trade? Economic theory indicates that trade occurs because it is mutually enriching. It has a positive economic effect like that caused by technological change, whereby economic efficiency is increased, allowing greater output from the same amount of scarce productive resources. By allowing each participant to specialize in producing what it is more efficient at and trading for what it is less efficient at, trade can increase economic well-being above what would be possible without trade. There is a broad consensus among economists that trade expansion has a favorable effect on overall economic well-being, but the gains will not necessarily be distributed equitably. Moreover, although most economists hold that the benefits to the overall economy exceed the costs incurred by workers who lose their jobs, some economists argue that the benefits are often overestimated and the costs are often underestimated. 2. What is comparative advantage? The idea of comparative advantage was developed by David Ricardo early in the 19th century and its insight remains relevant today. Ricardo argued that specialization and trade are mutually beneficial even if a country finds it is more efficient at producing everything than its trading partners. If one country produces a given good at a lower resource cost than another country, it has an absolute advantage in its production. (The other country, of course, has an absolute disadvantage in its production.) If all productive resources were highly mobile between countries, absolute advantage would be the criterion governing what a country produces and the pattern of any trade between countries. But Ricardo demonstrated that because resources, particularly labor and the skills and knowledge it embodies, are highly immobile, a comparison of a good's absolute cost of production in each country is not relevant for determining whether specialization and trade should occur. Rather, the critical comparison within each country is the opportunity cost of producing any good--how much output of good Y must be forgone to produce one more unit of good X. If the opportunity costs of producing X and Y are different in each economy, then each country has a comparative advantage in the production of one of the goods. In this circumstance, Ricardo predicts that each country can realize gains from trade by specializing in producing what it does relatively well and in which it has a comparative advantage and trading for what it does relatively less well and in which it has a comparative disadvantage. 3. What determines comparative advantage? Most often, differences in comparative advantage between countries occur because of differences in the relative abundance of the factors of production: land, labor, physical capital (plant and equipment), human capital (skills and knowledge including entrepreneurial talent), and technology. Standard economic theory predicts that comparative advantage will be in activities that make intensive use of the country's relatively abundant factor(s) of production. For example, the United States has a relative abundance of high-skilled labor and a relative scarcity of low- 1 This section was prepared by Craig K. Elwell, Specialist in Macroeconomics, Government and Finance Division, CRS. ¢ skilled labor. Therefore, the United States' comparative advantage will be in goods produced using high-skilled labor intensively such as aircraft and comparative disadvantage will be in goods produced using low-skilled labor intensively such as apparel. In addition to differences in factor endowments, differences in productive technology among countries create differences in relative efficiency and may be a basis for comparative advantage. Nevertheless, some high skilled services jobs, such as computer programming and graphic design, can today be easily done in a country such as India because of the revolution in telecommunications. 4. Can governments shape or distort comparative advantage? Government actions to influence comparative advantage can be grouped in two broad categories: policies that indirectly nurture comparative advantage, most often by compensating for some form of market failure, but not targeted at any specific industry or activity; and policies that aim to directly create and nurture comparative advantage in particular industries. Indirect influence on comparative advantage can emanate from government policies that eliminate corruption, enforce property rights, remove unnecessary impediments to market transactions, assure macroeconomic stability, build transport and communication infrastructure, support mass education, and assist technological advance. Policies that try to exert a direct influence on comparative advantage may include infant industry policies, industrial policies, or strategic trade policies. They all have the essential goal of identifying and nurturing particular industries that are thought to have extra- ordinary economic potential. In this view, realizing that potential requires initial government support, including protection from foreign competition. The efficacy of direct government efforts to shape comparative advantage is likely to vary significantly according to stages of economic development. China and India, for example, have used industrial policies to restructure their economies and enable them better to take advantage of world markets. 5. What is the terms of trade? A nation's terms of trade--the ratio of an index of export prices to an index of import prices--is a measure of the export cost of acquiring desired imports. Increases and decreases in its terms of trade indicate whether a nation's gains from trade are rising or falling. A sustained improvement in the terms of trade expands what our income will buy on the world market and can make a significant contribution to the long-term growth of economic welfare. Similarly, a falling terms of trade raises the export cost of acquiring imports, which reduces real income and the domestic living standard. Although trade is considered a process of mutual benefit, each trading partner's share of those benefits can change over time, and movement of the terms of trade is an indicator of that changing share. 6. What are the costs of trade expansion? Like technological change and other market forces, international trade creates wealth by inducing a reallocation of the economy's scarce resources (capital and labor) into relatively more efficient exporting industries that have a comparative advantage and away from less efficient activities that have a comparative disadvantage. This reallocation of economic resources is often characterized as a process of "creative destruction," generating a net economic gain to the overall economy, but also being disruptive and costly to workers in adversely affected industries that compete with imports. Many of these displaced workers bear significant adjustment costs and many may find work only at a lower wage. Although economic analysis almost always indicates that the economy-wide gains from trade exceed the costs, the perennially tough policy issue is how or whether to secure those gains for the wider community while dealing equitably with those who ¢ are hurt by the process. Economists generally argue that facilitating the adjustment and compensating for the losses of those harmed by market forces, including trade, is economically less costly than policies to protect workers and industries from the negative impacts of trade. While it is debatable how well existing worker assistance policies have worked, funding is also a longstanding issue. The Peterson Institute for International Economics, for example, estimates the lifetime costs of worker displacement to be roughly $50 billion year, but calculates that the United States spends about $2 billion per year to address the costs connected to displacement. 7. Does trade destroy jobs? Trade creates and destroys jobs in the economy just as other market forces do. Economy-wide, trade creates jobs in industries that have a growing comparative advantage and destroys jobs in industries that have a growing comparative disadvantage. In the process, the economy's composition of employment changes, but there may not be a net loss of jobs due to trade. Consider that over the course of the last economic expansion, from 1992 to 2000, U.S. imports increased nearly 240%, but total employment grew by 22 million jobs and the unemployment rate fell from 7.5% to 4.0% (the lowest unemployment rate in more than 30 years.). 8. Does trade reduce the wages of U.S. workers? International trade can have strong effects, good and bad, on the wages of American workers. Concurrent with the large expansion of trade over the past 25 years, real wages (i.e., inflation adjusted wages) of American workers grew more slowly than in the earlier post-war period, and inequality of wages between the skilled and less skilled worker rose sharply. Trade based on comparative advantage tends to increase the return to the abundant factors of production--capital and high-skilled workers in the United States--and decrease the return to the less-abundant factor--low-skilled labor in the United States.2 Therefore, it is reasonable to expect that, other factors constant, the large increase in trade over this period, particularly increased trade with economies with vast supplies of low-skilled labor, could harm the wages of low-skilled U.S. workers. However, other economic factors such as technological change and the shifting structure of production among emerging economies may have mitigated the potential adverse effect of trade on wages. While there may be no strong evidence that expanding trade has depressed the average wages of U.S. workers, some evidence suggests that increased trade may have caused 10% to 20% of the increase in wage inequality.3 Many observers believe the larger share of increased inequality of U.S. wages was likely caused by advancing technology's tendency to pull up the wages of high-skilled workers and increased immigration's tendency to push down the wages of low-skilled workers. 9. What is intra-industry trade? A sizable portion of world trade sees countries exporting and importing to each other goods from the same industry. This phenomenon is called intra-industry trade. This type of trade is particularly characteristic of the large flows of products between advanced economies, which have very similar resource endowments. This suggests that there is another basis for trade than 2 Only 10% of the U.S. labor force has less than a secondary level of education as compared to over 60% below this level in China's labor force. See U.S. Department of Labor, Bureau of Labor Statistics, Current Population Survey, 2006 and Barro, Robert and Jong-Wha Lee, "International Data on Educational Attainment," NBER Working Papers 7911, September 2000. 3 For a survey of this evidence see Douglas Irwin, Free Trade Under Fire, Princeton University Press, 2002, pp. 90-97. ¢ comparative advantage behind intra-industry trade: the exploitation of economies of scale. Economies of scale exist when a production process is more efficient (i.e. has lower unit cost) the larger the scale at which it takes place. This scale economy becomes a basis for trade because while the United States and Germany, for example, could be equally proficient at producing any of a wide array of goods such as automobiles and pharmaceuticals that consumers want, neither has the productive capacity to produce the full range of goods at the optimal scale. Therefore, a pattern of specialization tends to occur with countries producing and trading some sub-set of these goods at the optimal scale. 10. Why is intra-industry trade important? A significant attribute of intra-industry trade is that it tends not to generate the strong effects on the distribution of income that can occur with trade based on comparative advantage. This attribute may explain why the large trade expansion that took place in the 1950-1980 period was less politically contentious than has been true for trade expansion since 1980. The earlier period was dominated by rising trade between advanced economies with similar endowments of productive resources and similar levels of technology. Therefore, trade at that time was largely an expansion of intra-industry trade that had no relatively abundant factor of production to exploit. As a consequence, it had little adverse affect on the return to the factors of production, including the wages of U.S. workers. In contrast, a much larger portion of the trade expansion since 1980 has been with less-developed economies with their relative abundance of low-skilled and priced labor--a likely source of downward pressure on wages in the developed economies. 11. What is globalization? Globalization has come to represent many things, but economic globalization refers specifically to the increasing integration of national economies into a world wide trading system. Globalization involves trade in goods and services, and trade in assets (i.e. currency, stocks, bonds, and real property), as well as the transfer of technology, and the international flows (migration) of labor. Since 1950, world trade in merchandise has consistently grown faster then world production. In the recent period of 1990-2005 world trade in merchandise grew at about 6.0% per year as compared to about 2.0% for world output.4 As a result, world exports as a percent of world GDP rose from about 12% to about 32%. In the United States global integration has advanced quickly, with imports as a share of GDP rising from about 10% in the 1950s to about 17% today. More recent but far more dramatic has been the growth of international trade in assets. In the 1990s gross capital flows leaped by 300% as compared to a 63% advance of trade in goods. The rising economic integration of the world economy has been facilitated by two types of events: the myriad of technical advances in transport and communication that have reduced the natural barriers of time and space that separate national economies; and national and multi- national policy actions that have steadily lowered various man-made barriers (i.e. tariffs, quotas, subsidies, and capital controls) to international exchange. 12. What is the global supply chain and how does it relate to globalization? A supply chain is the interrelated organizations, resources, and processes that create and deliver a product to the final consumer. A global supply chain organized mostly by multinational corporations (MNCs) means that products that were once produced in one country may now be 4 See International Monetary Fund, World Economic Outlook, June 2006. ¢ produced by assembling components fabricated in several countries. This supply chain has meant that as much as 30% of the recent growth of world trade has been through trade in intermediate products. Not only does such geographically fragmented production raise the level of trade associated with a particular final product, it also tends to raise the level of trade with both developing countries and developed countries. This growth of the global supply chain has been facilitated by technological advances that have increased the speed and lowered the cost of international transport and, perhaps most importantly, accelerated the international flow of information that allows MNCs to coordinate geographically fragmented production with relative ease. In addition, government action has achieved a substantial reduction of various man-made trade barriers and promoted movement toward a market based economy. 13. How does globalization affect job security? A greater degree of international economic integration can add to disruptive forces in the marketplace, including concerns that an estimated 30 to 40 million high-wage and high-skilled U.S. service sector jobs may now be vulnerable to "outsourcing" over time. Although this increased integration is unlikely to have a negative effect on overall employment rate or the average worker wage, greater volatility of worker incomes and employment is a possible effect. While the precise causes remain unclear, some evidence for the United States indicates a steady rise in wage and employment volatility since the 1980s.5 In response to this rise, some argue that because increased volatility raises the economic risk attached to employment and earnings, the "social safety net" that protects workers from periodic market disruptions should be expanded commensurately. 14. What is meant by the trade deficit? The U.S. trade deficit is the difference between the value of U.S. exports and U.S. imports. The deficit on trade in goods (merchandise) that reached a record $836 billion in 2006 is what the media generally calls the trade deficit. The United States, however, usually runs a surplus in trade in services with the world. By adding net exports of services to the calculation, the trade deficit on goods and services was $764 billion in 2006. Adding in net transfers of investment income and remittances by individuals to foreign countries gives the broader measure of the trade deficit that is called the current account. In 2006, the current account deficit was $857 billion. 15. Why are different numbers reported for the trade deficit? The data on imports and exports are reported in two ways that give similar but different numbers. When goods or services pass through U.S. borders, the Customs Service compiles the figures from shipping manifests and other documents and reports it to the U.S. Census Bureau. The 5 See Dani Roderik, Has Globalization Gone too Far? Institute for International Economics, 1997. 6 This section was prepared by Dick K. Nanto, Specialist in Industry and Trade, Foreign Affairs. Defense, and Trade Division. ¢ Bureau then produces data on imports and exports and calculates the trade deficit on a Census basis. The detail in these data allows the import and export flows to be broken out into trade by countries, sectors, and major ports. The Census data are then adjusted to a balance-of-payments basis by accounting for military sales, adding private gift parcels, including foreign official gold sales from U.S. private dealers, and making other refinements. The following table shows U.S. trade data on both a Census and balance-of-payments basis. 1 elba6002-2002 secnalaB edarT esidnahcreM dna ,stropmI ,stropxE .S.U . T )sra llod .S.U fo snoillib( sisaB susneC sisaB stnemyap-fo-ecnalaB raeY stropxE stropmI ecnalaB ecnalaB stropmI stropxE 2002 5.396 6.361,1 1.074- 8.186 7.461,1 9.284- 3002 8.427 1.752,1 3.235- 1.317 7.062,1 6.745- 4002 8.818 7.964,1 9.056- 5.708 9.274,1 4.566- 5002 0.609 5.376,1 5.767- 6.498 4.776,1 8.287- 6002 3.730,1 4.558,1 1.818- 7.320,1 8.958,1 1.638- stnuoccA snoitcasnarT lanoitanretnI .S.U ,sisylanA cimonocE fo uaeruB ,ecremmoC fo tnemtrapeD .S.U :ecruoS .ataD 16. What are the causes of the record trade deficits? The fundamental cause of the U.S. trade deficit is excess spending by U.S. consumers, business, and government. In essence, Americans consume more than they produce. This allows other countries to sell more to the United States than they buy from the United States. Economists characterize this as a lack of savings by U.S. consumers, business, and government. Households buy much on credit; businesses invest much with borrowed funds; and the government runs budget deficits. As long as foreigners (both governments and private entities) are willing to loan the United States the funds to finance the lack of savings in the U.S. economy, the trade deficit can continue. The United States, however, accumulates more and more debt. 17. What role do foreign trade barriers play in causing trade deficits? Trade barriers tend to affect bilateral trade in specific products and with particular countries, but they do not necessarily affect the size of the overall U.S. trade deficit. For example, trade with Burma or North Korea is non-existent or small because of U.S.-imposed export barriers. Foreign countries also impose barriers to imports and limit foreign access to their markets by a variety of measures. Some barriers are overt, such as high tariffs or import quotas. Others are less visible, such as income tax audits by tax authorities of persons buying foreign automobiles or controls over foreign exchange that prevent citizens wishing to purchase imports from obtaining the foreign currency necessary. If, for example, a government requires exporters to sell their dollars to the government at a fixed exchange rate, and that government invests the dollars in U.S. securities rather than allowing businesses and consumers to use the dollars to buy American exports, then this combination of government intervention in currency markets plus exchange controls can increase the size of the U.S. trade deficit. Foreign trade barriers also can affect the profitability of U.S. exporters and thereby influence the size of the overall U.S. trade deficit. If U.S. exporters are able to sell more to a country that has ¢ lowered its trade barriers, the exporting companies can increase their profits, hire more American workers, and possibly increase the overall U.S. saving rate. This can occur only if the economy is operating at less than full employment. 18. How does the trade deficit affect the exchange value of the dollar? Without sufficient inflows of capital, a trade deficit causes other parts of the economy to adjust, particularly the country's exchange rate--for the United States, this is the value of the dollar relative to that of the Chinese yuan, Japanese yen, Canadian dollar, British pound, or European euro. The way the adjustment mechanism works is that the excess of U.S. imports causes a surplus of U.S. dollars to flow abroad. If these dollars are then converted to other national currencies, their excess supply tends to lower their price (exchange rate) relative to other currencies, and the value of the dollar depreciates. This causes imports to be more expensive for American consumers and U.S. exports to be cheaper for foreign buyers. This process gradually causes U.S. imports to decrease and exports to increase and for the trade deficit to be diminished. The dollar, however, may not be exchanged for foreign currencies because of its special status in global financial markets and because the U.S. economy is viewed both as a safe haven for storing wealth and as an attractive destination for investments. In some countries, the dollar is used as a medium of exchange, and in most countries it is used as a reserve currency by central banks. Foreign governments can intervene to keep the value of their currency from appreciating relative to the dollar by buying excess dollars and sending them back to the United States by buying Treasury securities or other U.S. assets. This is what China has been doing. In Japan's case, the government has not intervened since the spring of 2004 to keep the value of the yen low, but private Japanese investors are causing the same result by investing their savings overseas where interest rates are higher (financiers also are borrowing in Japan and lending the funds abroad).7 The surplus of dollars, therefore, may not cause the dollar to depreciate and for the trade deficit to decrease. 19. How is the trade deficit financed? The U.S. trade deficit is financed by borrowing from abroad. This takes the form of net financial inflows into the United States. In 2006, U.S. net financial inflows amounted to $719 billion. Foreigners acquired $1,765 billion in assets in the United States, while Americans acquired $1,046 in assets abroad. Foreigners purchased an additional $29 billion in Treasury securities and $621 billion in other securities, while increasing their deposits at U.S. banks by $441 billion and acquiring $13 billion in U.S. currency. Foreigners also invested $184 billion in their companies located in the United States. 20. Is the trade deficit a problem for the U.S. economy? The U.S. trade deficit is a dual problem for the economy. In the long term, it generates debt that must be repaid by future generations. Meanwhile, the current generation must pay interest on that debt. Whether the current borrowing to finance imports is worthwhile for Americans depends on whether those funds are used for investment that raises future standards of living or whether they are used for current consumption. If American consumers, business, and government are borrowing to finance new technology, equipment, or other productivity enhancing products, the 7 See Nakamae, Tadashi. Weak Yen Conundrum. The International Economy, Winter 2007, pp. 42-45. ¢ deficit can pay off in the long term. If the borrowing is to finance consumer purchases of clothes, household electronics, or luxury items, it pushes the repayment of funds for current consumption on to future generations without investments to raise their ability to finance those repayments. In the short term, the trade deficit could lead to a large and sudden fall in the value of the dollar and financial turmoil both in the United States and abroad. The current account deficit now exceeds 6% of GDP and is placing downward pressure on the dollar. If foreign investors stop offsetting the deficit by buying dollar-denominated assets, U.S. interest rates would have to rise to attract more foreign investment. Rising interest rates can cause havoc in financial markets and also may raise inflationary pressures. Global financial markets are now so closely intertwined that turmoil in one market can quickly spread to other markets in the world. 21. How long can the United States keep running trade deficits? U.S. deficits in trade can continue for as long as foreign investors are willing to buy and hold U.S. assets, particularly government securities and other financial assets.8 Their willingness depends on a complicated array of factors including the perception of the United States as a safe haven for capital, relative rates of return on investments, interest rates on U.S. financial assets, actions by foreign central banks, and the savings and investment decisions of businesses, governments, and households. The policy levers that influence these factors that affect the trade deficit are held by the Federal Reserve (interest rates) as well as both Congress and the Administration (government budget deficits and trade policy), and their counterpart institutions abroad. 22. How can the trade deficit be reduced? In reducing the U.S. trade deficit, the policy tool kit includes direct measures (trade policy) that are aimed at imports, exports, and the exchange rate, and indirect measures (monetary and fiscal policies) aimed at U.S. interest rates, saving rates, budget deficits, and capital flows. Monetary and fiscal policy, however, usually address conditions in the U.S. macroeconomy and generally consider the trade deficit only as a secondary target. It is ironic that the most effective method of reducing the trade deficit is through monetary and fiscal policy, yet monetary and fiscal policy is rarely determined by the trade deficit. 23. What is the role for trade policy in reducing the trade deficit? Trade policy consists of the strategies, goals, and initiatives by governments to change the laws, regulations, and agreements that provide the framework for international trade and to take action to remedy distortions in the movement of goods, services, and capital flows across national borders. U.S. trade policy operates along three paths: (1) in opening markets abroad for U.S. exporters, (2) in protecting U.S. industries from imports that are unfairly traded (sold at prices lower than those in the exporting country) or from import surges that cause, or threaten to cause, substantial harm, and (3) trying to ensure that exchange rates are not manipulated by other nations to hinder the process by which trade is brought into balance or to gain competitive advantage. Currently, U.S. trade policy to open markets abroad is conducted at three levels: through bilateral negotiations and trade/investment agreements, through establishing free-trade agreements, and 8 See Mann, Catherine L. Is the U.S. Trade Deficit Sustainable? Washington, Institute for International Economics, 1999. 224 p. See also: CRS Report RL33274, Financing the U.S. Trade Deficit, by James K. Jackson. CRS Report RL31032, The U.S. Trade Deficit: Causes, Consequences, and Cures, by Craig K. Elwell. ¢ through multilateral negotiations under the WTO. Trade policy plays a proactive role in leveling the playing ground for U.S. business, a remedial role in correcting distortions in trade caused by foreign government intervention, and a reactive role in addressing specific problems raised by U.S. businesses. The specifics of U.S. trade policy are discussed in the section on U.S. Trade and Investment Policy below. Trade policy aims at reducing the U.S. trade deficit by increasing U.S. exports or decreasing U.S. imports. U.S. trade policy, however, operates under multiple constraints. Trade policy, for example, can affect specific trade flows but the overall trade deficit tends to be determined by macroeconomic conditions (savings and investment flows). The U.S. government, moreover, faces legal obligations, political resistance, and other constraints on policy aimed at decreasing imports or increasing exports. Free market principles and U.S. law, for example, preclude the government from moving against big box retailers that sell low-cost imports from China. U.S. obligations under the World Trade Organization preclude arbitrary increases in import tariffs or large direct subsidies for U.S. exporters, and only under special circumstances, usually related to national security or severe offenses to international humanitarian values (e.g., genocide) does the United States block trade with a specific country (e.g., Cuba or Burma). 24. Who are the leading U.S. trade partners? As shown in the following table, in 2006, Canada was America's largest merchandise trading partner, but China passed Mexico to take second place in the ranking. Fourth was Japan, then Germany, and the United Kingdom. 6002 ni edar esidnahcreM lato yb deknaR srent raP gnidar .S.U po .2 elba T T T T T )srall oD . S.U fo snoilliM( knaR yrtnuoC edarT latoT ecnalaB stropxE stropmI 1 adanaC 799,335 538,27- 185,032 614,303 2 anihC 799,243 945,232- 422,55 377,782 3 ocixeM 624,233 290,46- 761,431 952,891 4 napaJ 047,702 244,88- 946,95 190,841 5 ynamreG 293,031 357,74- 913,14 370,98 6 KU 038,89 440,8- 393,54 734,35 7 aeroK htuoS 582,87 473,31- 554,23 038,54 8 ecnarF 663,16 139,21- 712,42 941,73 9 nawiaT 832,16 191,51- 320,32 512,83 01 aisyalaM 280,94 289,32- 055,21 235,63 11 aleuzeneV 771,64 351,82- 210,9 561,73 21 lizarB 716,54 161,7- 822,91 983,62 31 ylatI 912,54 680,02- 765,21 256,23 41 aibarA iduaS 794,93 188,32- 808,7 986,13 51 dnalerI 551,73 521,02- 515,8 046,82 61 aidnI 719,13 537,11- 190,01 628,12 71 dnaliahT 426,03 913,41- 251,8 274,22 ¢ knaR yrtnuoC edarT latoT ecnalaB stropxE stropmI 81 airegiN 741,03 686,52- 132,2 619,72 91 aissuR 005,42 660,51- 717,4 387,91 02 nedewS 769,71 417,9- 621,4 148,31 12 aireglA 495,61 193,41- 201,1 294,51 22 aisenodnI 284,61 623,01- 870,3 404,31 32 elihC 053,61 077,2- 097,6 065,9 42 aibmoloC 379,51 755,2- 807,6 562,9 .ecremmoC fo tnemtrapeD .S.U morf ataD :ecruoS .sisab smotsuC a no era stropmI .sisab susneC a no era ataD .stropxe + stropmi = edart latoT :etoN 25. Which industries appear to be the most competitive as measured by the size of their trade surpluses? Which are the least competitive as measured by their trade deficits? The international competitive advantage of specific industries can be measured in a number of ways--one of which is their trade balances. Other measures include profitability, value added, productivity, employment, and technological change. The table below shows the balance of trade for U.S. industries (as defined by 2-digit Harmonized System tariff classifications). By this measure, the industries with the largest surpluses, in 2006, include aircraft and spacecraft, cereals, optical and medical instruments; plastic, chemical products, grains/seed/fruit, cotton/yarn/fabric, animal feed, and wood pulp. These U.S. industries can be considered the most competitive in international trade. The table also shows those industrial sectors with the largest deficits in trade. These include mineral fuel and oil, motor vehicles, electrical machinery, machinery, woven and knit apparel, furniture and bedding, toys and sports equipment and footwear. Despite the large trade deficit by the mineral fuel and oil sector, the major oil companies remain quite competitive. They are multinational firms who, themselves, do much of the importing of crude oil for their refineries often from their own sources of oil. The deficit in trade in electrical machinery, moreover, may reflect more the global supply chain of multinational producers who may be located in the United States and have competitive products but manufacture their machinery abroad. 6002 ni sticifeD dna sesulpruS edar tsegraL eht htiw seirtsudnI .S.U .3 elba T T )srall oD . S.U noilliM( sesulpruS edarT tsegraL sticifeD edarT tsegraL noitpircseD 6002 noitpircseD 6002 1 tfarcecapS ,tfarcriA 4.161,94 cte ,liO ,leuF lareniM 1.836,892- 2 slaereC 6.293,21 yawliaR toN ,selciheV 9.576,221- 3 stnemurtsnI lacideM ,scitpO 8.673,11 yrenihcaM lacirtcelE 0.223,38- 4 citsalP 1.153,8 yrenihcaM 8.219,16- 5 stcudorP lacimehC .csiM 8.850,8 lerappA nevoW 1.031,63- persons, unpaid family workers, private household workers, and those employed in agriculture. These data are based on reports from employing establishments and do not include proprietors, self-employed 9 to 113 million persons. worked in service-producing industries. By 2006, employment in services had more than tripled Most of the new jobs are being created by the service sector. In 1960, 35.1 million persons total nonfarm employment has dropped from 29% in 1960 to 10% in 2006. below.) Since total U.S. employment has risen, however, manufacturing employment as a share of number peaked at 19.4 million in 1979 and has declined to 14.2 million in 2006.9 (See Figure 1 over the past 46 years. In 1960, 15.4 million persons were employed in manufacturing. That countries reinforce that perception. Employment in U.S. manufacturing has declined moderately merchandise that indicate the product was made in China, Italy, or any of a number of foreign Media reports of factories being closed, workers laid off, and the plethora of labels on Imports are often blamed for what is perceived as the shrinking of the U.S. manufacturing sector. 26. Is the U.S. manufacturing sector shrinking? .sisaB susneC a no era ataD .ecremmoC fo tnemtrapeD .S.U morf atad gniylrednU .SRC :ecruoS 2.275,5- draobrepaP ,repaP 7.484 epoR ,eniwT ,tleF ,gniddaW 52 4.453,6- doofaeS dna hsiF 3.615 stuN dna tiurF elbidE 42 6.146,7- foerehT selcitrA dna reppoC 0.625 .cte ,slateM esaB rehtO 32 3.929,7- rebbuR 4.636 tpircsunaM ;repapsweN ,kooB 22 2.933,8- sgaB ;yrelddaS trA rehtaeL 6.176 scirbaF detehcorC ,tinK 12 2.496,8- selcitrA elitxeT csiM 7.668 yhpargotameniC/cihpargotohP 02 2.878,8- munimulA 7.969 qe ngiS ciffarT ;yawliaR 91 1.260,9- rehtO laicepS 2.221,1 noitinummA dna smrA 81 6.630,01- slacimehC cinagrO 9.441,1 staoB dna spihS 71 8.794,21- slateM ,senotS suoicerP 7.491,1 occaboT 61 0.194,31- segareveB 2.295,1 dooF suoenallecsiM 51 6.639,41- stcudorP leets/norI 9.888,1 perP latneD ;cte ,xaw ,paoS 41 9.552,61- leetS dna norI 5.810,2 snikS dna sediH 31 8.483,61- dooW 7.890,2 taeM 21 9.211,71- stcudorP lacituecamrahP 6.701,2 hsA ,galS ,serO 11 2.233,81- raewtooF 3.264,2 yttuP ,tniaP ,eyD ,gninnaT 01 1.491,02- snoisivorP tropmI laicepS rehtO 6.976,2 .ctE ,plupdooW 9 7.263,02- tnempiuqE stropS dna syoT 2.672,3 deeF laminA ;etsaW dooF 8 6.922,23- gniddeB dna erutinruF 3.449,4 cirbaF ,nray+nottoC 7 8.810,33- lerappA tinK 0.679,7 tiurF ,deeS ,niarG csiM 6 6002 noitpircseD 6002 noitpircseD sticifeD edarT tsegraL sesulpruS edarT tsegraL ¢ ¢ 1 erugiF 6002-0691 ,yrtsudnI rojaM yb slloryaP larutlucirganoN no seeyolpmE . Million Persons 140 120 Natural Resources/Mining 100 Construction 80 Manufacturing 60 40 Services 20 0 1960 65 70 75 80 85 90 95 2000 2006 Year Source: U.S. Department of Labor. Based on reports from employing establishments. Even with reduced employment, production by the manufacturing sector as a whole continues to rise, although production in some sectors has been stagnant or declining. What appears to be happening depends on the industry, but studies of de-industrialization generally conclude that it is being caused primarily by developments internal to the economy and not by trade. These include technological change, the shift in consumer demand from manufactured products toward services as incomes rise, and the declining relative price of manufactured items. Import competition has played a role in certain industries. One study concludes that import competition has contributed less than one-fifth to the relative decline of manufacturing in the advanced economies and has had little effect on the overall volume of manufacturing output in those countries.10 27. Which industries are losing the most jobs? The industries that are incurring large deficits in their balance of trade are under heavy competition from imports and have been reducing employment. Table 3 shows certain of those industries with the recent peaks in their employment and their employment in 2007. The peak dates range from 1991 to 2004, while the declines since then range from 299.8% for the apparel industry to 165.0% for textile mills, and to 7.5% for furniture and related products. 10 Brady, David and Ryan Denniston, "Economic Globalization, Industrialization and Deindustrialization in Affluent Democracies," Social Forces, 85 no. 1 (Sep 2006): pp. 297-310, 312, 315-316, 318, 320-327. ¢ 4 elbaT tropmI yvaeH htiW seirtsudnI rof tnemyolpmE tnerruC dna skaeP tneceR . noititepmoC )snosreP dnasuohT( yrtsudnI kaeP tneceR kaeP tnemyolpmE 7002 egnahC tnemyolpmE dna selciheV rotoM 0002 .beF 3.033,1 7.510,1 %6.32- straP tnempiuqE lacirtcelE 0002 .luJ 8.595 6.634 %7.62- secnailppA dna dna retupmoC 1002 .naJ 2.278,1 0.493,1 %5.52- stcudorP cinortcelE yrenihcaM 8991 .raM 9.225,1 8.212,1 %4.02- slliM elitxeT 5991 .beF 9.084 5.181 %3.26- slliM tcudorP elitxeT 4002 yaM 9.971 1.751 %7.21- lerappA 1991 .ceD 6.719 5.922 %0.57- dna erutinruF 4002 .rpA 3.575 3.535 %0.7- stcudorP detaleR rebbuR dna scitsalP 0002 .beF 9.959 0.497 %3.71- stcudorP dna tnemyolpmE hguorhT dna kaeP cificeps-yrtsudnI tneceR tsoM .scitsitatS robaL fo uaeruB .S.U :ecruoS .7002 ,6 hcraM desseccA .egnahC ¢ 28. What role does Congress play in the making of trade policy? The role of Congress in formulating international economic policy and regulating international trade is based on express powers set out in Article 1, section 8 of the U.S. Constitution, "to lay and collect taxes, duties, imposts and excises" and "to regulate commerce with foreign nations, and among the several states," as well as the general provision to "make all laws which shall be necessary and proper" to carry out these specific authorities. Congress exercises this power in many ways, among the most important being the enactment of tariff schedules and trade remedy laws, and the approval and implementation of reciprocal trade agreements. 29. What committees take the lead in exercising congressional authority over trade? Because of the revenue implications inherent in most trade agreements and policy changes, the House Ways and Means Committee and Senate Finance Committee have responsibility for trade matters. Each Committee has a subcommittee dedicated exclusively to trade issues. Other 11 Prepared by J. F. Hornbeck, Specialist in International Trade and Finance, Foreign Affairs, Defense, and Trade Division; and Jeanne J. Grimmett, Legislative Attorney, American Law Division. ¢ committees may have a role should trade agreements, policies, and other trade issues include matters under their jurisdiction. 30. What explicit ways does Congress make trade policy? U.S. trade policy is founded on statutory authorities, as passed by Congress. These include laws authorizing trade programs and governing trade policy generally in areas such as: tariffs, non- tariff barriers, trade remedies, import and export policies, political and economic security, and trade policy functions of the Federal Government. Congress also sets trade negotiating objectives in law, requires formal consultation from and opportunity to advise on trade negotiations with the Executive Branch (in part through the Congressional Oversight Committee--COG), and conducts oversight hearings on trade programs and agreements to assess their conformity to U.S. law and congressional intent. 31. How can individual Members affect trade policy decisions? Individual Members affect trade policy first as voting representatives who determine collectively the statutes governing trade matters. They may also exercise influence as sitting Members on relevant committees, in testimony before those committees, whether as a Member of it or not, and in exercising informal influence over other Members through the exercise of the political authority and power invested in them by the electorate. 32. What is meant by fast track or Trade Promotion Authority (TPA)? TPA (formerly fast track) refers to a statutory mechanism under which Congress authorizes the President to enter into reciprocal trade agreements governing tariff and non-tariff barriers, and allows their implementing bills to be considered under expedited (fast track) legislative procedures, provided the President observes certain statutory obligations in negotiating trade agreements, including notifying and consulting Congress. The purpose of TPA is to preserve the constitutional role of Congress with respect to consideration of implementing legislation for trade agreements that require changes in domestic law, while also bolstering the negotiating credibility of the Executive Branch by assuring the trade implementing bill will receive expedited and unamended consideration. ¡ 33. Who is in charge? The President directs overall trade policy in the Executive Branch and performs specific trade functions granted him in statute. The principal adviser to the President on trade matters is the United States Trade Representative (USTR). A cabinet-level appointment, the USTR has primary responsibility for developing and coordinating the implementation of U.S. trade policy (19 U.S. C. 2171). 34. Why was the USTR created? 12 Prepared by J. F. Hornbeck, Specialist in International Trade and Finance, Foreign Affairs, Defense, and Trade Division, and Jeanne J. Grimmett, Legislative Attorney, American Law Division. ¢ Congress created the USTR in 1962 (originally as the Office of the Special Representative for Trade Negotiations) to heighten the profile of trade and provide better balance between competing domestic and international interests in the formulation and implementation of U.S. trade policy and negotiations, which were previously managed by the U.S. Department of State. 35. How are trade decisions made? The USTR has primary responsibility for trade policy decisions within the executive branch; however, they often involve areas of responsibility that fall under other cabinet-level departments, at times requiring a multi-department process. To implement this process, Congress established the Trade Policy Committee, chaired by the USTR and consisting of the Secretaries of Commerce, State, Treasury, Agriculture, Labor, and other department heads as the USTR deems appropriate. The USTR subsequently established two sub-cabinet groups--the Trade Policy Review Group (TPRG) and the Trade Policy Staff Committee (TPSC). The Executive Branch also solicits advice from a three-tiered congressionally-established trade advisory committee system that consists of private sector and non-Federal government representatives. 36. What are the functions of the Executive Branch in U.S. trade? The Executive Branch executes trade policy in a variety of ways. It negotiates, implements, and monitors trade agreements, and has responsibility for customs enforcement, collection of duties, implementation of trading remedy laws, budget proposals for trade programs and agencies, export and import policies, and agricultural trade, among others. 37. When does the President get involved in trade decisions? The President is responsible for influencing the direction of trade legislation, signing trade legislation into law, and making other specific decisions on U.S. trade policies and programs where he deems the national interest or political environment requires his direct participation. This can take place in many areas of trade policy, such as requesting TPA/fast track authority, initiating critical trade remedy cases, meeting or communicating with foreign Heads of State or Government, and other areas subject to or requiring high political visibility. 38. What is the formal role of the private sector? The formal role of the private sector in the formulation of U.S. trade policy is embodied in a three-tiered committee system that the Congress has provided in section 135 of the Trade Act of 1974, as amended. These committees advise the President on negotiations, agreements and other matters of trade policy. At the top of the system is the 45-member Advisory Committee for Trade Policy and Negotiations (ACTPN) consisting of presidentially-appointed representatives from local and state governments and representatives from the broad range of U.S. industries and labor. The USTR administers the ACTPN in cooperation with the Departments of Agriculture, Commerce, Labor, and other relevant departments. At the second tier are industry-specific policy advisory committees, each one consisting of representatives of a specific U.S. industry who 13 Prepared by William H. Cooper, Specialist in International Trade and Finance, Foreign Affairs, Defense, and Trade Division. ¢ provide advice on their specific industry. The third tier consists of sector-specific representatives who provide technical advice. The USTR and the relevant department Secretary appoint members of the sector-specific committees in the latter two tiers. 39. What is the informal role that the private sector plays in the formulation of U.S. trade policy? The private sector helps shape U.S. trade policy in a number of informal ways. For example, representatives from industry and non-government organizations may be invited to testify or ask to testify before congressional committees on trade matters. Private sector representatives are also invited or request to testify before the United States International Trade Commission (USITC), the U.S. Department of Commerce, or other government bodies to provide assessments of the potential impact of pending trade actions, such as an antidumping or countervailing duty orders, on their industries and sectors. Private sector organizations also lobby Congress and the Executive Branch to forward their interests in U.S. trade policy actions and agreements. 40. Why are trade decisions so heavily lobbied? Trade is becoming a larger and increasingly integral part of the U.S. economy. Virtually all kinds of agricultural and manufactured goods are tradeable--they can be exported and imported. In addition, a growing number of services--once considered non-tradeable because of their intangibility--can be bought and sold across borders because of technology advancements, such as the internet. As a result, how U.S. trade policy is shaped and implemented can affect a broad spectrum of people in the United States. For some industries, firms, and workers, congressional decisions to support a particular free trade agreement or Department of Commerce rulings on antidumping cases, subsidies, and other cases could affect both employment and growth. Those decisions could also influence product choices of U.S. consumers. Consequently, groups representing the multinational national corporations, small businesses, farmers, workers, consumers, and other segments of the economy strive to make sure that their clients' views on trade policy decisions are represented. ¢ 41. How do federal courts get involved in trade? Legal challenges may be brought in federal court by importers, exporters, domestic manufacturers and producers, and other parties affected by governmental actions and decisions concerning trade. Cases may involve, for example, customs classification decisions, agency determinations in antidumping and countervailing duty (CVD) proceedings, presidential decisions to (or not to) restrict imports under trade remedy statutes, or the constitutionality of state economic sanctions. The federal government may also initiate legal proceedings against individuals and firms to enforce customs laws or statutory restrictions on particular imports and exports. Some trade statutes may preclude judicial review. For example, most preliminary determinations in antidumping and CVD proceedings and governmental actions involving the implementation of WTO and free trade area agreements may not be challenged in federal court.15 While most federal 14 Prepared by Jeanne J. Grimmett, Legislative Attorney, American Law Division. 15 For further information, see CRS Report RS22154, WTO Decisions and Their Effect in U.S. Law, by Jeanne J. Grimmett. ¢ cases involving trade laws are heard in the U.S. Court of International Trade (see below), cases may also be filed in other federal courts depending on the cause of action or proceeding involved. Court decisions may significantly affect U.S. trade policy when they examine whether an agency has properly interpreted its statutory mandate, determine whether an agency has acted outside the scope of its statutory authority, decide how much deference should be granted the Executive Branch under a particular statute, or rule on whether a trade statute violates the U.S. constitution. 42. What is the U.S. Court of International Trade? The U.S. Court of International Trade (USCIT) is an Article III federal court located in New York City with exclusive jurisdiction over a number of trade-related matters, including customs decisions, antidumping and countervailing duty determinations, import embargoes imposed for reasons other than health and safety, and the recovery of customs duties and penalties. Formerly known as the Customs Court, the USCIT was renamed in the Customs Court Act of 1980, which also significantly enlarged its jurisdiction. The court consists of nine judges, no more than five of whom may be from the same political party. Judges are appointed by the President with the consent of the Senate. USCIT decisions are appealable to the U.S. Court of Appeals for the Federal Circuit and to the U.S. Supreme Court. Statutory provisions related to the USCIT may be found at 28 U.S.C. §§ 251-258 (establishment) and 28 U.S.C. §§ 1581-1585 (jurisdiction). ¢ 43. Why does the United States negotiate trade liberalizing agreements? The United States negotiates trade liberalizing agreements for economic and commercial reasons, including: · to encourage foreign trade partners to reduce or eliminate tariffs and non-tariff barriers and, in so doing, increase market access for U.S. exporters; · to gain an advantage for U.S. exporters over foreign competitors in a third- country market; · to increase access to lower cost imports that help to control inflation and offer domestic consumers a wider choice of products; and · to encourage trading partners, especially developing countries, to rationalize their trade regimes, and thereby improve the efficiency of their economies. The United States has also negotiates trade liberalizing agreements for political/national security reasons, including: · to strengthen established alliances; · to forge new strategic relationships; and 16 This section was prepared by William H. Cooper, Specialist in International Trade and Finance, Foreign Affairs, Defense, and Trade Division. ¢ · to establish a presence in a geographic region. 44. What are the various types of trade liberalizing agreements? In general, reciprocal trade agreements can be categorized by the number of countries involved: bilateral agreements, such as free trade agreements (FTAs), are between two countries; regional agreements, such as, the North American Free Trade Agreement (NAFTA), involve three or more countries in a geographic region; and multilateral agreements, such as those negotiated in the World Trade Organization (WTO), involve many countries from virtually all regions. 45. Who benefits from trade liberalizing agreements? Who loses? Economic theory suggests and empirical studies have generally concluded that economies as a whole benefit when trade barriers are removed because economic resources (land, labor, and capital) are employed more efficiently. However, economic theory and studies also point out that the benefits of trade liberalization are not distributed evenly within an economy and not even among economies. Some industries, firms, and workers "lose" if they cannot adjust to the increased foreign competition resulting from the trade agreement or if particular provisions of the trade agreement disadvantages their interests. Other industries, firms, and workers "win" if they can take advantage of new market opening opportunities presented by the trade agreement or if particular provisions of the trade agreement favors or promotes their interests. 46. What is the WTO? The World Trade Organization (WTO) is a 150-member body that establishes through negotiations and implements the multilateral system of rules on trade in goods and services and on other trade-related matters and adjudicates disputes under the rules. A fundamental principle of the WTO is non-discrimination in trade among the members. The WTO was established in January 1995 as a part of the agreements reached by the signatories to the General Agreement on Tariffs and Trade (GATT) at the end of the Uruguay Round negotiations. The WTO's primary purpose is to administer the roughly 60 agreements and separate commitments made by its members as part of the GATT (for trade in goods), the General Agreement on Trade in Services (GATS--for trade in services), and the agreement on trade-related aspects of intellectual property rights (TRIPS). 47. How are disputes resolved under WTO agreements? If a WTO Member believes that another Member has adopted a law, regulation, or practice that violates a WTO agreement, the Member may initiate dispute settlement proceedings under the WTO Dispute Settlement Understanding. The process begins with consultations and, if these fail to resolve the dispute, the Member may request that the WTO establish a dispute panel. A panel report may be appealed to the WTO Appellate Body by either disputing party. If the defending Member is found to have violated a WTO obligation, the Member will be expected to remove the challenged measure. If this is not done by the end of the established compliance period, the prevailing Member may request authorization from the WTO to take temporary retaliatory action. In most cases, retaliation consists of tariff increases on selected products from the defending Member. To date, over 350 complaints have been filed since the WTO agreements entered into force, with the majority of disputes resolved through consultations and negotiations rather than the panel process. ¢ WTO decisions do not have direct effect in U.S. law. Thus, in the event a U.S. statute is found to violate a WTO obligation, the dispute findings may not be implemented except through legislative action. Where an administrative action is successfully challenged, the United States Trade Representative (USTR) decides what, if any, compliance action will be taken. If sufficient statutory authority exists to amend or modify a regulation or practice or to issue a new determination in a challenged administrative proceeding, the USTR may direct the agency involved to make the change, provided that certain statutory procedures for such actions are followed.17 48. What is the Doha Round? Since the GATT was signed in 1947, its signatories (member countries) have revised and expanded the trade rules in various rounds of negotiations. The Doha Development Agenda (DDA)is the ninth round and the first under the WTO. It is named after the city where it was launched in November 2001--Doha, Qatar. The WTO members included "development" in the title to reflect their intention to emphasize issues of importance to developing countries. The negotiations have primarily focused on three areas--agriculture, non-agricultural goods, and services, although members have conducted negotiations in other areas as well, such as rules. As of this writing, negotiators have not been able to reach agreements and conclude the round. 49. What are free trade agreements (FTAs)? At a minimum, FTAs are agreements between/among two or more countries under which they agree to eliminate tariffs and non-tariff barriers on trade in goods and services among them, but each country maintains its own trade policies and regulations, including tariffs, on trade outside the FTA. FTA partner countries may also agree to reduce barriers or otherwise establish rules of behavior in other economic activities--investment, intellectual property rights (IPR), labor rights and environmental protection. 50. How do FTAs that the United States has negotiated generally differ from those negotiated among other countries? The FTAs that the United States negotiates are often more comprehensive than those that are negotiated among other countries, particularly developing countries. The standard U.S. FTA model includes not only the elimination of tariffs on trade in goods among the FTA partners, but also reduction of barriers on trade in services, rules on foreign investment, requirements for intellectual property rights protection, and provisions on labor rights and environment protection. These rules may not necessarily guarantee "free trade," but may condition or influence the terms of competition in specific markets. 51. What are Trade and Investment Framework Agreements (TIFAs)? A TIFA is an agreement between the United States and another country (for example Afghanistan) or group of countries (for example, ASEAN) to consult on issues of mutual interest in order to promote trade and investment among the participants. Most U.S. TIFAs are with developing countries. The United States and its TIFA partner(s) agree to establish a joint ministerial-level council as the overall mechanism for consultation with the possibility of establishing issue- 17 Uruguay Round Agreements Act, P.L. 103-465, §§ 123(g), 129, 19 U.S.C. §§ 3535(g), 3538. ¢ oriented working groups. A TIFA is a non-binding agreement and does not involve changes in U.S. law; therefore, TIFAs do not require congressional approval. In some cases, TIFAs have led to FTA negotiations. 52. Why do countries import goods and services from other countries? Some goods that are imported into the United States, such as bananas or crude oil, cannot be produced at home or produced in sufficient quantities to satisfy domestic demand. Many other goods and services are imported because they can be produced less expensively or more efficiently by other countries. 53. What are other benefits of imports? Consumers can benefit through access to a wider variety of goods at lower costs. Producers can benefit through access to lower priced components or inputs that can be utilized in the production process. Longer term, imports can also provide pressures for companies to reduce costs through innovation and research and development, thereby serving as a spur to economic growth. 54. What are the costs of imports? By providing increased competition to companies producing similar or competing products, imports can contribute to job losses and business failures. If these job losses and company failures are concentrated in a region, imports can also be a cause of considerable economic distress in a community. 55. How does the government deal with disruption and injury to producers and workers? The government tries to help producers and workers who are adversely affected by trade though application of various trade remedy laws. These laws include responses to unfair trade practices and to increased levels of injurious imports, as well as the Trade Adjustment Assistance program. 56. What are the main trade remedy laws? Two primary trade remedy laws aimed at unfair trade practices are the antidumping (AD) and countervailing duty (CVD) laws. Other trade remedy laws include Section 201 (see below), Section 301 (focuses on violations of trade agreements or other foreign practices that are unjustifiable and restrict U.S. commerce), and Section 337 (focuses on unfair practices in import trade such as patent and copyright infringement). 57. What is the purpose of the countervailing duty law? The purpose of the CVD law is to offset any unfair competitive advantage that foreign manufacturers or exporters might enjoy over U.S. producers as a result of receiving a subsidy. As defined by the WTO, a subsidy is a financial contribution, such as a loan, grant, or tax credit, 18 This section was prepared by Vivian C. Jones and Mary Jane Bolle, Specialists in International Trade and Finance, Foreign Affairs, Defense, and Trade Division. ¢ provided by a government or other public entity that confers a benefit on manufacturers or exporters of a product. Countervailing duties, if imposed, are designed to equal the net amount of the foreign subsidy and are levied upon importation of the subsidized goods into the United States. 58. What is the purpose of the antidumping law? Dumping generally refers to a situation where goods are sold in one export market at prices lower than the prices at which comparable goods are sold in the home market of the exporter, or in its other export markets. It is thought that companies dump products to gain market share or to deter competition. U.S. law provides for the assessment and collection of antidumping duties when an administrative determination is made that foreign goods are being dumped or sold at less than fair value in the United States and that such imports are materially injuring a U.S. industry. 59. What is the import relief (safeguards) law? U.S. trade law (chapters 1 and 2 of the Trade Act of 1974, as amended) provides the President with the authority to provide domestic industry with temporary import relief, which could include tariffs and quotas, if it is found to be seriously injured from surges of imports that do not necessarily involve unfairly traded products. This provision is based on the recognition that liberalization of trade barriers could cause individual sectors of the U.S. economy economic adjustment problems, and that domestic industries should provide a period of relief to allow them to adjust to changed competitive conditions. The U.S. International Trade Commission investigates and recommends on import relief cases, and the President takes final action. 60. What is the Trade Adjustment Assistance Program? The first trade adjustment assistance program was adopted as part of the Trade Expansion Act of 1962. In proposing the program, the Kennedy Administration argued that "those injured by trade competition should not be required to bear the full brunt of the impact. Rather, the burden of economic adjustment should be borne in part by the federal government ... [because] there is an obligation to render assistance to those who suffer as a result of national trade policy."19 The current trade adjustment assistance program has three parts: Part A for workers, Part B for firms, and Part C for farmers. Under Part A, certified workers may be eligible for remedial education, wage reimbursement, job search and relocation allowances, and tax credits for health insurance costs. Under Part B, firms may be eligible for technical assistance to help them develop strategies to remain competitive in the changing international economy. Under Part C, farmers impacted by competing imports may be eligible for cash benefits.20 19 Trade Adjustment Assistance: The More We Change the More It Stays the Same, by Howard Rosen, in C. Fred Bergsten and the World Economy, edited by Michael Mussa, Peterson Institute for International Economics, December 2006, pp. 79-113. 20 See Trade Act of 2002, P.L. 107-210, August 6, 2002, Division A: Trade Adjustment Assistance. ¢ 61. What are the arguments for and against extending Trade Adjustment Assistance (TAA) to all dislocated workers? Some observers have suggested extending TAA to all dislocated workers--roughly defined as workers who lose their job involuntarily, for reasons not related to job performance.21 Supporters point to an inequity in eligibility among trade-related job losers: Many who lose their jobs directly or indirectly to trade are not eligible for benefits under the current TAA program. These include (1) virtually all service sector job losers; (2) certain manufacturing sector job losers, depending on the country to which the job is outsourced, whether the United States has a trade agreement with it, and whether or not imports of "like"or "directly competitive" articles are expected to increase; (3) some job losers in "upstream" supply operations and "downstream" user operations; (4) those who lose their jobs to a decline in U.S. exports; and (5) those who lose their jobs to automation designed to increase exports or improve competitiveness against imports. Supporters also argue for an expanded and simplified program of eligibility in order to eliminate the difficulties of administering a program with such a complex set of eligibility criteria. Opponents question why trade-related job losses should be treated any differently than non-trade related job losses; some oppose any adjustment programs "because they imply that there is something wrong with the operation of the free market." The National Association of Manufacturers reportedly has warned, "Business enterprises and their employees are continuously affected for better or for worse by all sorts of events beyond their control.... All experience warns that programs of this type inevitably expand and proliferate."22 Others my be concerned with definitions, administering such a complex program, and its fiscal impact. ¡ 62. What are the benefits of exports? From the perspective of individual companies, export markets provide opportunities to expand production runs and reduce costs. Companies may also be able to sell goods and services at higher prices than they can obtain at home. From the perspective of individual workers, jobs in export-oriented industries often provide higher than average wages. 63. What are some costs of exporting? From an economic perspective that views higher levels of consumption as being the goal of economic activity, countries export goods and services in order to earn the foreign currency with which they can buy imports. Exports, according to this view, are foregone production that could have been consumed domestically. 64. What factors most determine U.S. export levels? Economists maintain that the overall level of U.S. exports is determined primarily by the same macroeconomic conditions that generate the U.S. trade deficit. These include the level of savings 21 Rosen, op. cit., p. 101, footnote 32. 22 Rosen, op. cit., p. 80-81. 23 Prepared by Angeles Villarreal, Analyst in International Trade and Finance and Dick K. Nanto, Specialist in Industry and Trade, Foreign Affairs, Defense, and Trade Division. ¢ and investment, the foreign exchange rate, and willingness of foreigners to invest in U.S. assets. U.S. exports also depend on economic growth rates in major markets. The higher the rate of economic growth in Asia (particularly Japan and China), Europe (particularly Germany, the U.K., and France), Canada, and Latin America, the more people in those markets are likely to buy U.S. exports, other things being equal. 65. What factors determine the exporting success of specific sectors? The level of American exports in specific sectors depends both on the overall level of exports and on an interplay of factors such as the relative competitiveness of the American industry, trade barriers abroad, and sometimes the degree of U.S. export promotion. The higher the overall level of exports, the more individual sectors are likely to sell abroad, but given the impact of macroeconomic factors, export surges by a particular sector often are offset by a decline in exports by other sectors. In a world of floating exchange rates, a large export surge will cause foreigners to buy more dollars to pay for those exports. This raises the demand for dollars and increases its price relative to other currencies. Since the United States does not intervene in currency markets to fix its exchange rate, the higher value of the dollar makes U.S. exports more expensive and may reduce their sales. 66. How does the U.S. government promote exports? For many years, the U.S. government has promoted exports by providing credit, finance, and insurance programs that are administered by the Export-Import Bank, the Department of Agriculture, and the Overseas Private Investment Corporation. In addition, the Department of Commerce through the Foreign Commercial Service in the International Trade Administration of the Department of Commerce acts to promote U.S. exports of goods and services, particularly by small and medium-sized companies. Nearly every country promotes its exports as well. 67. What does the U.S. government do to restrict exports? Congress has authorized the President to control the export of various items for national security, foreign policy, and economic reasons. Separate programs and statutes for controlling different types of exports exist for nuclear materials and technology, defense articles and services, and dual-use goods and technology. Under each program, licenses of various types are required before an export can be undertaken. The Departments of Commerce, State, and Defense administer these programs. 68. What are the main kinds of capital flows? Generally, the two main kinds of capital flows are foreign direct investments and foreign portfolio investments. Foreign direct investments involve the acquisition of real assets such as real estate, a manufacturing plant, or controlling interest in an ongoing enterprise by a person or entity from another country. Foreign portfolio investments involve purchase of foreign equities or bonds, loans to foreign residents, or the opening of foreign bank accounts. Direct investments involve a 24 Prepared by James K. Jackson, Specialist in International Trade and Finance, Foreign Affairs, Defense, and Trade Division. ¢ long-term commitment and usually have direct employment stimulation advantages for the host country while portfolio investments are extremely liquid and can be withdrawn often times at the click of a computer mouse. In addition, there are official capital flows generated by governments for various purposes such as humanitarian assistance and other foreign aid. 69. Which is larger--trade or capital flows? It depends. Recent data indicate that from 1985 to 2005, global trade in goods and services, as measured by exports, doubled from $6 trillion a year to $12 trillion a year. During the same twenty-year period, capital flows, as measured in the balance of payments accounts (direct, portfolio, and other official investments), more than quadrupled from $1.1 trillion a year to $5.2 trillion a year. But during this time period, there also has been an explosion in growth in other types of capital flows, known as foreign exchange and over-the-counter derivatives markets. These markets facilitate trade in foreign exchange and other types of assets. While the capital flows associated with these markets do not directly relate to transactions in the balance of payments, they do affect the international exchange value of the dollar, which in turn affects the prices of goods and services and the cost of securities. A survey in 2004 by the world's leading central banks indicated that the daily trading of foreign currencies totals more than $1.9 trillion. 70. Why do companies invest abroad? For the most part, firms invest abroad to increase their profits. Economists and other experts generally conclude, however, that a broad range of factors influence a firm's decision to invest abroad. The major determinants of foreign direct investment are the presence of ownership- specific competitive advantages in a transnational corporation, the presence of locational advantages such as resource endowments or low-cost labor in a host country, and the presence of superior commercial benefits in an intra-firm relationship as opposed to an arm's-length relationship between investor and host country. Multinational firms apparently are motivated by more than a single factor, and likely invest abroad not only to gain access to a low-cost resource but to improve their efficiency or to improve their market share. 71. Why has foreign investment increased so dramatically in recent decades? From 1990 to 2005, the stock, or the cumulative amount, of foreign direct investment in the world grew from $1.8 trillion to $10.7 trillion, or by nearly 600 percent. This rapid growth arises from a number of factors. One of the most important factors has been a change in public policies toward foreign direct investment among most countries. Foreign direct investment has come to be viewed favorably not only by the economically advanced countries, but also by developing economies, which now often compete to bring in much-needed capital, technology, and technical expertise. Currently, about three-fourths of all direct investment is placed among the highly developed economies where consumer tastes and workers wages are comparable. 72. What are some of the benefits of direct foreign investment? Generally, economists argue in favor of unimpeded international flows of capital, such as direct investment, because they estimate that such flows positively affect both the domestic (home) and foreign (host) economies. For the home country, direct investment benefits the individual firms that invest abroad, because they are better able to exploit their existing competitive advantages and to acquire additional skills and advantages. Direct investment also seems to be associated with a strengthened competitive position, a higher level of skills of the employees, and higher ¢ incomes of firms that invest abroad. Host countries benefit from inward direct investment because the investment adds permanently to the capital stock and often to the skill set of the nation. Direct investment also brings technological advances, since firms that invest abroad generally possess advanced technology, processes, and other advantages. Such investment also boosts capital formation and contributes to a growth in a competitive business environment and productivity. In addition, direct investment contributes to international trade and integration into the global trading community, since most firms that invest abroad are established multinational firms. 73. What are some of the costs of direct foreign investment? Concerned observers argue that U.S. direct investment abroad supplants U.S. exports, thereby reducing employment and wages in the U.S. economy. While it appears unlikely that the overall U.S. employment level is affected by direct investment flows, jobs in particular companies and sectors can be eliminated when a company decides to produce similar products abroad. For example, if a U.S. auto company closed an assembly line in the United States and opened one in Mexico assembling the same product line, U.S. auto assembly jobs are lost. Similarly, while inward flows of foreign direct investment tend to create new jobs, there sometimes is concern that the new foreign owners may not serve as stable and dependable community partners as the previous nationally-based ownership. 74. What are BITs? Bilateral investment treaties (BITs) are agreements between two countries for the reciprocal encouragement, promotion and protection of investments in each other's territories. Most treaties contain basic provisions that cover the following areas: scope and definition of investment, admission and establishment, national treatment, most-favored-nation treatment, fair and equitable treatment, compensation in the event of expropriation or damage to the investment, guarantees of free transfers of funds, and dispute settlement mechanisms, both state-state and investor-state. U.S. BITs have to be ratified by the Senate. 75. What is CFIUS? The Committee on Foreign Investment in the United States (CFIUS) is an interagency committee that serves the President in overseeing the national security implications of foreign investment in the economy. CFIUS was established by an Executive Order of President Ford in 1975 with broad responsibilities and few specific powers. Legislation currently pending in Congress could affect the role and membership of CFIUS. CRS Report RS20088, Dispute Settlement in the World Trade Organization: An Overview, by Jeanne J. Grimmett. CRS Report RS21554, Free Trade Agreements and the WTO Exceptions, by Jeanne J. Grimmett, Todd B. Tatelman, and James E. Nichols. ¢ CRS Report RS22154, WTO Decisions and Their Effect in U.S. Law, by Jeanne J. Grimmett. CRS Report 97-896, Why Certain Trade Agreements Are Approved as Congressional-Executive Agreements Rather Than as Treaties, by Jeanne J. Grimmett. CRS Report RL31032, The U.S. Trade Deficit: Causes, Consequences, and Cures, by Craig K. Elwell. CRS Report RL31356, Free Trade Agreements: Impact on U.S. Trade and Implications for U.S. Trade Policy, by William H. Cooper. CRS Report RL32371, Trade Remedies: A Primer, by Vivian C. Jones. CRS Report RL32461, Outsourcing and Insourcing Jobs in the U.S. Economy: Evidence Based on Foreign Investment Data, by James K. Jackson. CRS Report RL32964, The United States as a Net Debtor Nation: Overview of the International Investment Position, by James K. Jackson. CRS Report RL33144, WTO Doha Round: The Agricultural Negotiations, by Charles E. Hanrahan and Randy Schnepf. CRS Report RL33274, Financing the U.S. Trade Deficit, by James K. Jackson. CRS Report RL33743, Trade Promotion Authority (TPA): Issues, Options, and Prospects for Renewal, by J. F. Hornbeck and William H. Cooper. CRS Report RL33388, The Committee on Foreign Investment in the United States (CFIUS), by James K. Jackson. CRS Report RL33463, Trade Negotiations During the 110th Congress, by Ian F. Fergusson. CRS Report RL33553, Agricultural Export and Food Aid Programs, by Charles E. Hanrahan. CRS Report RL33577, U.S. International Trade: Trends and Forecasts, by Dick K. Nanto, Shayerah Ilias, and J. Michael Donnelly. CRS Report 98-928, The World Trade Organization: Background and Issues, by Ian F. Fergusson. Burtless, Gary, Robert Z. Lawrence, and Robert Litan, Globaphobia, (Washington, DC: The Brookings Institution, 1998). Destler, I. M., American Trade Politics, Institute for International Economics, Washington, DC, 2005. The Economist, "Globalization and Its Critics," September 27, 2001. Friedman, Thomas, The Lexus and the Olive Tree (London: Harper Collins, 2000). ¢ Mankiw, N. Gregory, Principles of Economics (New York: Dryden Press, 1997). Mann, Catherine L., Is the U.S. Trade Deficit Sustainable? Institute for International Economics, Washington, DC, 1999. Office of the United States Trade Representative, 2007 Trade Policy Agenda and 2006 Annual Report (March 2007), at http://www.ustr.gov/Document_Library/Reports_Publications/2007 / 2007_Trade_Policy_Agenda/Section_Index.html. Office of the United States Trade Representative, 2006 National Trade Estimate Report on Foreign Trade Barriers (March 2006), at http://www.ustr.gov/Document_Library/ Reports_Publications/2006/2006_NTE_Report/Section_Index.html. Stiglitz, Joseph, Globalization and Its Discontents, Yale University Press, 2003. U.S. Congress. House Ways and Means Committee. Overview and Compilation of U.S. Trade Statutes, Parts I and II, June 2005 U.S. International Trade Commission, The Year in Trade 2005; Operation of the Trade Agreements Program (Pub. 3875, Aug. 2006), at http://hotdocs.usitc.gov/docs/pubs/ year_in_trade/pub3875.pdf. Wolf, Martin, Why Globalization Works (New Haven: Yale University Press, 2004). World Trade Organization, Dictionary of Trade Policy Terms (Cambridge, UK: Cambridge University Press, 2003). 1. Why do countries trade? 2. What is comparative advantage? 3. What determines comparative advantage? 4. Can governments shape or distort comparative advantage? 5. What is the terms of trade? 6. What are the costs of trade expansion? 7. Does trade destroy jobs? 8. Does trade reduce the wages of U.S. workers? 9. What is intra-industry trade? ¢ 10. Why is intra-industry trade important? 11. What is globalization? 12. What is the global supply chain and how does it relate to globalization? 13. How does globalization affect job security? 14. What is meant by the trade deficit? 15. Why are different numbers reported for the trade deficit? 16. What are the causes of the record trade deficits? 17. What role do foreign trade barriers play in causing trade deficits? 18. How does the trade deficit affect the exchange value of the dollar? 19. How is the trade deficit financed? 20. Is the trade deficit a problem for the U.S. economy? 21. How long can the United States keep running trade deficits? 22. How can the trade deficit be reduced? 23. What is the role for trade policy in reducing the trade deficit? 24. Who are the leading U.S. trade partners? 25. Which industries appear to be the most competitive as measured by the size of their trade surpluses? Which are the least competitive as measured by their trade deficits? 26. Is the U.S. manufacturing sector shrinking? 27. Which industries are losing the most jobs? ¢ 28. What role does Congress play in the making of trade policy? 29. What committees take the lead in exercising congressional authority over trade? 30. What explicit ways does Congress make trade policy? 31. How can individual Members affect trade policy decisions? 32. What is meant by fast track or Trade Promotion Authority (TPA)? ¢ 33. Who is in charge? 34. Why was the USTR created? 35. How are trade decisions made? 36. What are the functions of the Executive Branch in U.S. trade? 37. When does the President get involved in trade decisions? 38. What is the formal role of the private sector? 39. What is the informal role that the private sector plays in the formulation of U.S. trade policy? 40. Why are trade decisions so heavily lobbied? 41. How do federal courts get involved in trade? 42. What is the U.S. Court of International Trade? ¢ 43. Why does the United States negotiate trade liberalizing agreements? 44. What are the various types of trade liberalizing agreements? 45. Who benefits from trade liberalizing agreements? Who loses? 46. What is the WTO? 47. How are disputes resolved under WTO agreements? 48. What is the Doha Round? 49. What are free trade agreements (FTAs)? 50. How do FTAs that the United States has negotiated generally differ from those negotiated among other countries? 51. What are Trade and Investment Framework Agreements (TIFAs)? 52. Why do countries import goods and services from other countries? 53. What are other benefits of imports? 54. What are the costs of imports? 55. How does the government deal with disruption and injury to producers and workers? 56. What are the main trade remedy laws? ¢ 57. What is the purpose of the countervailing duty law? 58. What is the purpose of the antidumping law? 59. What is the import relief (safeguards) law? 60. What is the Trade Adjustment Assistance Program? 61. What are the arguments for and against extending Trade Adjustment Assistance (TAA) to all dislocated workers? 62. What are the benefits of exports? 63. What are some costs of exporting? 64. What factors most determine U.S. export levels? 65. What factors determine the exporting success of specific sectors? 66. How does the U.S. government promote exports? 67. What does the U.S. government do to restrict exports? 68. What are the main kinds of capital flows? 69. Which is larger--trade or capital flows? 70. Why do companies invest abroad? 71. Why has foreign investment increased so dramatically in recent decades? 72. What are some of the benefits of direct foreign investment? 73. What are some of the costs of direct foreign investment? 74. What are BITs? 75. What is CFIUS? ¢ Raymond J. Ahearn Vivian C. Jones Specialist in International Trade and Finance Specialist in International Trade and Finance rahearn@crs.loc.gov, 7-7629 vcjones@crs.loc.gov, 7-7823 Mary Jane Bolle Dick K. Nanto Specialist in International Trade and Finance Specialist in Industry and Trade mjbolle@crs.loc.gov, 7-7753 dnanto@crs.loc.gov, 7-7754 William H. Cooper M. Angeles Villarreal Specialist in International Trade and Finance Specialist in International Trade and Finance wcooper@crs.loc.gov, 7-7749 avillarreal@crs.loc.gov, 7-0321 J. F. Hornbeck Craig K. Elwell Specialist in International Trade and Finance Specialist in Macroeconomic Policy jhornbeck@crs.loc.gov, 7-7782 celwell@crs.loc.gov, 7-7757 James K. Jackson Jeanne J. Grimmett Specialist in International Trade and Finance Legislative Attorney jjackson@crs.loc.gov, 7-7751 jgrimmett@crs.loc.gov, 7-5046 ------------------------------------------------------------------------------ For other versions of this document, see http://wikileaks.org/wiki/CRS-RL33944