United States: Free Trade Agreement Roundup: Opportunities in International Trade

Free Trade Agreements ("FTAs") are reciprocal, bilateral agreements between countries that are generally designed to open markets and eliminate trade barriers on goods, services, and agricultural products. Although certain FTAs, such as the North American Free Trade Agreement ("NAFTA"), or the faltering negotiations over the Free Trade Area of the Americas ("FTAA"), are prominently featured in popular media reports, the United States has negotiated additional FTAs with countries around the world, which offer an assortment of direct benefits to companies taking advantage of these agreements. The purpose of this article is to provide a background on these FTAs and how they can help U.S. and foreign businesses.

As one of the world’s largest exporters, the United States benefits from a national trade policy that promotes the use of FTAs. The primary objective of an FTA is to reduce trade barriers, generally in the form of import duties, between the countries signing the FTAs. This reduction or elimination of import tariffs creates many benefits for U.S. businesses and others engaged in international transactions across the U.S. border:

• Tariff Reduction: When import duties and other trade barriers are reduced or eliminated, importing businesses are able to realize higher margins because of the reduction of tariff outlays in inbound transactions, while exporting business are likewise able to enter new foreign markets where trade barriers had previously provided insurmountable cost advantages to domestic producers.

• Increased Investment: FTAs open foreign countries to direct U.S. investment and the United States to investment from countries around the world. Such access allows for the establishment of factories and facilities in trading partner countries, thereby creating economic opportunities and job growth in both partner countries.

• Investor Protection: FTAs ensure that countries adhere to a predictable legal framework, including provisions that curb corruption and enhance transparency in commercial transactions.

• Intellectual Property Rights: FTAs also include provisions to protect patents, trademarks and trade secrets of U.S. companies.

• Public Procurement: In order to foster government contracting between countries, FTAs strive to create an environment of open and fair government procurement.

• Social and Environmental Protections: In order to safeguard labor markets and the environment in FTA trade partner countries, the United States generally incorporates stringent labor and environmental protections into its FTAs.

FTAs are meant to encourage development and improve the lives of all citizens by providing cost savings on imported raw materials and finished products, while offering increased outbound market opportunities.

• On January 1, 1994, the United States, Mexico and Canada implemented the North American Free Trade Agreement ("NAFTA"), creating the world’s largest free trade area. After the implementation of NAFTA, three-way trade between the three countries more than doubled, from $306 billion in 1993 to $621 billion in 2002.

• The House of Representatives passed the U.S., Central American, Dominican Republic FTA ("CAFTA-DR") in July 2005, the Senate passed the Agreement in June 2005, and the implementing legislation was finally signed by the President in August 2005. The United States will implement CAFTA-DR on a rolling basis as countries complete their commitments under the Agreement. Countries which are signatories to CAFTA-DR include the United States, Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua. Although no action has been taken to this point, the United States Trade Representative recommended on February 24, 2006 that the Agreement become effective for El Salvador.

• Although the Free Trade Area of the Americas ("FTAA") garnered an enormous amount of international interest, there has been little progress in negotiations since the Miami Ministerial in November 2003. Involving 34 countries in an 800-million person marketplace, the FTAA was formally launched at the 1994 Summit of the Americas in Miami, and was originally scheduled to be completed by January 2005.

U.S. Bilateral FTAs

• The U.S.-Israel FTA ("Israel FTA") eliminates duties on merchandise exported from Israel to the United States. The Agreement became effective September 1, 1985, and has no termination date.

• The United States and Jordan signed the U.S.-Jordan FTA ("Jordan FTA") on October 24, 2000, and the Jordan FTA entered into force on December 17, 2001.

• The U.S.-Singapore FTA ("Singapore FTA"), the first U.S. FTA with an Asian nation, came into force on January 1, 2004.

• After 13 years of bilateral discussions and two years of negotiations, the U.S.-Chile FTA ("Chile FTA") entered into force on January 1, 2004. It was the first free trade agreement between the United States and a South American country.

• The U.S.-Australia FTA ("Australia FTA") entered into force on January 1, 2005. This was the first bilateral FTA between the United States and a developed country since the U.S.-Canada Free Trade Agreement in 1988.

• On September 14, 2004, the United States and Bahrain signed the U.S.-Bahrain FTA ("Bahrain FTA"). President Bush signed legislation implementing the Agreement into law on January 11, 2006.

• The House of Representatives and Senate passed the U.S.-Morocco FTA ("Morocco FTA") in July 2004. The Morocco FTA itself entered into force as of April 19, 2006.

• The United States began negotiations on an FTA with Oman ("U.S.– Oman FTA") on March 12, 2005, and signed a comprehensive agreement on January 19, 2006.

• The United States and the Republic of Korea ("KORUS FTA") announced their intent to negotiate a free trade agreement on February 2, 2006. While preliminary talks are ongoing, formal negotiations are reportedly scheduled to begin on June 5, 2006, and will be subject to significant time pressures in order to finalize the FTA before the Presidential Trade Promotion Authority expires in July 2007.

• The United States announced its intent to negotiate an FTA with Malaysia ("U.S.-Malaysia FTA") on March 8, 2006. At the current time, the United States is Malaysia’s largest trading partner and the largest foreign investor in Malaysia.

• In June 2004, the United States began FTA negotiations with Thailand. Negotiations toward completing an agreement were continuing as late as January 16, 2006.

• The United States began negotiations on an FTA with the United Arab Emirates ("UAE") on March 8, 2005. Negotiations on this agreement are ongoing.

• On June 2, 2003, the United States began negotiations for an FTA with the five member countries of the Southern African Customs Union ("SACU"). The SACU, which includes Botswana, Lesotho, Namibia, South Africa and Swaziland, is the largest U.S. export market in sub-Saharan Africa. Although no timeline exists for concluding these negotiations, Deputy United States Trade Representative Karan Bhatia announced on April 18, 2006 that the United States remained committed to concluding a comprehensive free trade agreement.

• The Andean Trade Preference Act ("ATPA") was enacted in 1991 to combat the production and trafficking of illegal drugs in the Andean countries: Bolivia, Colombia, Ecuador and Peru. The ATPA was expanded under the Trade Act of 2002, and is now called the Andean Trade Promotion and Drug Eradication Act. While Colombia receives certain benefits under ATPA, the United States concluded trade negotiations with Colombia on February 27, 2006 and an FTA should be forthcoming. Likewise, through ATPA, Peru receives certain trade preferences which will be made permanent through the operation of the Peru Trade Promotion Agreement ("PTPA") signed on April 12, 2006. Separate trade negotations initiated in 2004 between the United States and Ecuador have stalled over concerns about Ecuador’s failure to eliminate non-tariff barriers, government procurement restrictions, and export subsidies, as well as Ecuador’s lack of commitment to protecting intellectual property.

• On August 9, 2004, the United States and Panama ("U.S.-Panama FTA") participated in their fourth round of negotiations to establish an FTA. Although there is no indication of when these negotiations will conclude, the Chief Agricultural Negotiator for the United States issued a press release on February 13, 2006 stating that Panama wished to conduct a technical review of the U.S. food safety inspection system under these negotiations.

As discussed above, the primary benefit to participation in an FTA is the opportunity to import products into partner countries at a reduced or eliminated tariff. However, FTA benefits are only available between the participating countries. Therefore, complications arise when part of a product does not originate in the FTA country. In such cases, companies must apply the "rule of origin" in order to determine whether a non-FTA product qualifies as an "originating good" under the terms of the FTA. The purpose of a rule of origin is to prevent companies from transshipping their goods from non-FTA countries through an FTA partner in order to avoid tariff payments on exports from the FTA partner to the United States. In other words, rules of origin ensure that only goods originating from the FTA country enjoy the FTA trade preferences.

Most FTAs include rules which allow certain products with foreign inputs to be considered as originating in the FTA country, as long as those inputs have undergone some degree of transformation in the FTA country in order to create the final product. However, because countries are frequently FTA partners with a variety of different countries, it is possible to use an FTA with one country as a springboard to entering a third country free of duties. For example, Japan and the United States do not currently have an FTA in place. However, Japan has an FTA in place with Mexico, and Mexico is a member of NAFTA with the United States. Depending on the respective rules of origin in each of these countries, it may be possible for a Japanese company to export components of a finished good from Japan to Mexico free of duty, and then have the final manufacturing occur in Mexico for ultimate duty-free export to the United States. It is important to note that because FTAs are bilateral agreements between different countries, each agreement can differ significantly in rules of origin, timelines for duty reductions, and in scope. Therefore, companies must review carefully the text of each FTA prior to relying on FTA trade preferences.

This flurry of FTA activity presents a broad and varied menu of benefits to companies with international supply chains, companies involved in exporting their products or services, or companies looking for new ways to reduce their costs and improve their product offerings. With a minor investment in compliance processes to meet the terms of the various FTAs, forward-thinking companies will find a significant return in reduced trade barriers and increased market access for their products and services.

This article is presented for informational purposes only and is not intended to constitute legal advice.