Fisher Investments Editorial Staff
Trade, US Economy

Racing Towards Zero

By, 10/17/2011

In the past few years, the Obama administration has been widely, and in some ways correctly, criticized for having a slow-motion approach to promoting free trade. In 2010, 14 major free trade deals were signed globally, including the second in two years between China and Taiwan (who have a long history of less-than-stellar relations). But the US was party to zero. What’s more, “Buy American” provisions entered into legislation, like 2009’s American Recovery and Reinvestment Act, were an additional mark against free trade. Even this year, trade deals have moved slowly in America. Until last week.

As we’ve discussed, the long-stalled free trade agreements with Panama, Colombia and South Korea passed Congress, and President Obama promptly signed them at a photo-op with South Korean President Lee Myung-bak. (The Currency Reform and Oversight Act also passed the Senate—but in our view that’s merely political cover likely to promptly die in the House.) But far from the media glare, US trade got even freer Friday: Mexico’s tariff on over 90 US goods was eliminated.

Earlier this year, the US and Mexico resolved a 15-year debate over direct Mexican truck access to the US. Since 1995’s implementation of the North American Free Trade Agreement, Mexican trucks have been banned from entering the US, necessitating a bizarre, costly and complicated arrangement in which Mexican trucks carried US-bound goods only so far as 25 miles from America. The goods were then loaded onto transfer trucks to cross the border and later moved onto American trucks for delivery. In response to this policy, Mexican tariffs were erected against US goods. Tit for tat.  

The agreement reached earlier this year allowed for Mexican truck access. And in response, Mexico halved its tariffs upon signing and promised to slash the rest when a Mexican truck received the first permit to cross the border. That happened Friday, so Mexico cut the remaining tariffs. (Retaliation—the good kind.) Mostly impacted are 99 American products ranging from agricultural to consumer goods. But also impacted are businesses—Mexican businesses whose costs were artificially inflated by the plurality of drivers and truck swapping and American businesses impacted by the tariff. While many fear potential dislocation of truckers’ jobs (possible in the short run), the fact is lower costs to businesses are a tailwind potentially leading to more hiring. In that way, permitting a Mexican truck to enter the US could very well amount to a jobs bill, free of government spending.

Perhaps this is getting little media play because it seems small. But according to the US Census Bureau, Mexico is the US’s third largest trading partner, with over $302 billion in total trade between the nations year to date. Of that, $128.7 billion is US exports—goods ranging from wheat to industrial equipment, electronics to hand soap. Eliminating tariffs and barriers likely aids future trade growth.

Leaving Mexico aside, talk continues on a grand trade agreement known as the Trans-Pacific Partnership (TPP). The TPP would construct a vast trade zone, from the US to Australia and Southeast Asia to Peru. Additionally, Japanese Prime Minister Noda spoke this week of joining TPP talks. Having the world’s third-largest economy involved—and relax some of its (many) strict protectionist barriers—would be a clear plus. Japan’s decision is expected before talks resume in November. A great deal of work remains on the TPP. And as with any multilateral agreement, this sweeping plan may not come to fruition. But if completed, it would aid trade globally and in the US.

America’s becoming more active in negotiating and enacting free trade agreements has been a long time coming, and the US can get more open to trade still. But that trade got freer last week is a plus for the US economy and represents one material way Washington can help set the stage for continued economic growth. Globally, governments competing to ink as many free trade deals as possible—a race to zero protectionism—would be a boon to economic growth.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.