Richard Holwill  |  +1-202-285-3570  |  rnh@holwillandcompany.com

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Free Trade or Preferential Trade?


The United States has a trade problem; we buy more goods than we sell to foreign nations. President Trump contends that our trading partners treat us “unfairly.” This is a misperception of the problem. The issue is not that our trading partners treat the United States unfairly, they just treat other countries better.

They do so through a network of so called free-trade agreements (FTAs). That term disguises the actual effect of the FTAs, which has little to do with free trade. They should be called “preferential-trade agreements.” Through these agreements, the parties offer each other tariff levels lower than those charged to parties outside of the agreement. Most of these agreements also deal with non-tariff barriers, establish mutual-recognition agreements for regulated products and establish procedures for conflict resolution.

The World Trade Organization (WTO), which sets the general trade rules, has tallied 447 bilateral and regional trade agreements. The United States is party to only 20 of these agreements. In other words, we do business in a world with an expansive preferential-trade network from which we are excluded.

The net effect of being outside of the network is significant. According to a 2016 report from the World Economic Forum (WEF, also known as the Davos Group), of the 136 countries in the world trading system, exporters from 129 nations face lower aggregate tariffs than do exporters from the United States. The WEF also notes that the U.S. exporters have more market-access problems than do exporters from 104 other countries.

As other countries enter into more of these agreements, we are more isolated. Unfortunately, President Trump’s new tariffs, combined with the threat of additional tariffs, have prompted a surge of new trade deals that exclude the United States. Since he took office, 17 new preferential-trade agreements have been registered with the WTO.

The newest preferential-trade agreement is between the EU and Japan. Itcreates a trade zone that, once it is ratified, will cover 30 percent of world trade by value. In truth, the deal has been in the works for years but new U.S. protectionist trade policies prodded negotiators to move quickly. The pact will provide some relief to Japan and the EU in the event the U.S. places tariffs on automobiles and other goods and services. It’s also another blow to U.S. farmers, who had hoped to increase exports to Japan and Europe to compensate for lost sales to China.

The largest new preferential agreement is the Comprehensive and Progressive Agreement for Trans-Pacific Partnership(CPATTP), which links eleven countries representing 13.4 percent of the global gross domestic product ($13.5 trillion aggregate GDP) into a single network. This has the potential to become the world’s largest trade agreement. Currently, it is second to the North American Free Trade Agreement (NAFTA), which may wither if the three North American countries fail to modernize the pact.

CPATTP is often called TPP-11 because it replaces the 12-memberTrans-Pacific Partnership (TPP) that would have included the United States had President Trump not pulled us out of it. Had the original version of TPP gone into force it would have reduced tariffs paid by U.S. exporters on 16,000 manufactured products. It would also have lowered tariffs on U.S. agricultural exports by an average of 70 percent and improved market access for thousands of U.S. products.

China seeks trade agreements with its neighbors, as well as with Australia, New Zealand, Africa, Latin America and Europe. Several Latin American countries are looking for new agreements along the Pacific Rim while Latin American countries on the Atlantic Coast are looking for agreements with the EU. In fact, most countries are working on new trade agreements.

It would be a mistake to conclude that other countries do not want trade agreements with the United States. They do, but we refuse to move forward primarily because our politicians can’t make the case for trade. Instead, our leaders look for a simplistic answer to this very complicated problem. It is easy to say that a certain thing – such as a trade agreement – is the problem. It is more difficult to make the case that the absence of a thing is the problem.

I would love to hear our politicians say: “the problem is not the trade agreements that we do have; the problem is the agreements that we do not have.” To alleviate our trade deficit, we must enter into new bilateral and regional trade agreements that will address the tariffs that our exporters face and improve our access to foreign markets. If we remain aloof from this preferential-trade network, we cannot solve our problems.

Richard Holwill

Washington D.C.

August 13, 2018