Why Free Trade Agreements Are Important

Why Free Trade Agreements are Important

The American consumer market offers more choices of goods, often at competitive prices, than ever before. American consumers have access to a wide array of goods, such as clothing, electronics, furniture, and automobiles, both in retail stores and online. Where does this abundance of goods come from? The benefits of free trade agreements.

It is not just convenient to have avenues to conduct business with other countries, but it is almost a necessity in the complex world of international commerce. Free trade agreements (FTA’s) between nations serve this purpose. A free trade agreement like USMCA presents exporters with an opportunity to expand their businesses overseas, as it makes their products more affordable in growing markets. 

What is the purpose of a free trade agreement? More importantly, which countries does the U.S. have free trade agreements with and why is it important for a small manufacturing business?

What is a Free Trade Agreement?

According to the International Trade Association:

“A Free trade Agreement (FTA) is an agreement between two or more countries where the countries agree on certain obligations that affect trade in goods and services, and protections for investors and intellectual property rights, among other topics. For the United States, the main goal of trade agreements is to reduce barriers to U.S. exports, protect U.S. interests competing abroad, and enhance the rule of law in the FTA partner country or countries.”

More simply: By definition, free trade agreements reduce barriers to imports and exports between two or more nations. As well as reducing and eliminating tariffs, free trade agreements also improve the rules governing intellectual property, e-commerce, and government contracting, as well as removing obstacles behind the border that impede the flow of goods.  

Who Do Free Trade Agreements Benefit?

A free trade agreement benefits both countries and businesses, even for small businesses that take part in them. Creating jobs, opening new markets, and boosting investment for a nation are all benefits of free trade. Consumers benefit from these new markets because there are more options, better products, and lower prices. As a result, the governments are less likely to have to subsidize businesses or industries, and the funds can be better used elsewhere.

For businesses, it allows them to sell their goods directly to other countries without interference from their own government. Their ability to sell directly to other nations makes them a larger competitor in the global market than they would otherwise have been. ​​For small businesses in the U.S., this is especially important.

According to the USMCA Coalition, USMCA was a major milestone for small businesses: it was the first trade agreement dedicated to the interests of small businesses.

“Canada and Mexico are the top two export destinations for U.S. small and medium-size enterprises, more than 120,000 of which sell their goods and services in our two North American neighbors. When an American small business starts exporting, it’s almost always to Canada or Mexico.”

What Nations Does the United States Have a Free Trade Agreement With?

There are currently free trade agreements between the United States and the following nations:

Australia

Bahrain

Canada

Chile

Colombia

Costa Rica

Dominican Republic

El Salvador

Guatemala

Honduras

Israel 

Jordan

Korea

Mexico

Morocco

Nicaragua

Oman

Panama

Peru

Singapore

USMCA

It is important to note that China is missing from this list. Why? This question has a complex answer rooted in the political relationship between the two nations. According to the Library of Congress:

 “The United States and China have several unresolved issues surrounding the bilateral trade between the two countries. The trade deficit between China and the U.S. has swelled immensely as the volume of imports from China grew much more rapidly than U.S. exports to China. This large trade deficit has been an issue of concern for economists and policymakers alike. Some claim it as an indicator of Chinese unfair trade practices, while others credit the imbalance to the strength of the Chinese economy and production systems heavily influenced by state interventions. The Trump administration initiated several tariff measures with a goal of reducing the trade imbalance.”  

As reported by The New York Times, the Biden administration is not in a hurry to change tariffs with China or examine an FTA with the country.

“The Biden administration said it would not immediately remove the Trump administration’s tariffs and would require that Beijing uphold its trade commitments.” 

Business Benefits From Trading With Free Trade Partners Such as Mexico and Canada 

The USMCA gives preference to Canada and Mexico, so it is beneficial for businesses in the US to trade with these nations (and others with Free Trade Agreements). However, free trade with Canada and Mexico carries other benefits that trade with other nations do not:

  • As a result of the U.S.-Mexico-Canada agreement (USMCA), the United States, Canada and Mexico now have the largest free trade area in the world with 454 million people.
  • About 13 million Americans are employed as a result of trade with Canada and Mexico.
  • An increase in cross-border trade and investment: From 1993 to 2019, trade between the three members quadrupled from $290 billion to $1.23 trillion.
  • More resilient supply chains: A study by the Brookings Institute found that: “Integrated North American supply chains could provide a viable alternative to Chinese manufacturing and allow some critical industries to move production closer to home.”

The benefits of doing business with a nation that has a free trade agreement with the U.S. are numerous. The US and its trading partners can trade and invest more efficiently and integrate their economies thanks to free trade agreements. We use free trade agreements to strengthen our supply chains and to remain competitive, innovative, and economically leading in North America. 

As an American business looking to sell goods overseas, it would be better to start with countries with U.S. free trade agreements rather than trying to break into a country such as China.

For nearshore manufacturing to succeed, free trade between North American countries is essential. Manufacturing in Mexico with a nearshore partner like NovaLink is an excellent idea if you wish to have access to free trade agreements in North America. Contact us today