Strategic View: Looking beyond trade agreements

Infrastructure investment may be much more important for U.S. exports than FTAs    Measured in terms of GDP or employment, it is a fact that economic activity growth has slowed since the early 1990s.
   This has coincided with a growing U.S. trade deficit. Policymakers are thus embarking on an effort to review existing U.S. bilateral trade agreements to ascertain whether they have been beneficial, or at least fair. It is, of course, reasonable to pursue this avenue of investigation, however there may be other factors that underlie the substantial U.S. trade deficit.
   Infrastructure investment trends, rather than the terms of trade agreements, may be responsible for the trade deficits and slower growth.
   It is worth noting that the U.S. trade deficit is measured in dollars and not in volume. On an average month, the total deficit is about $40 billion, the sum of a $20 billion services surplus and a $60 billion goods deficit. Over a year this adds up to $480 billion, or about 2.7 percent of GDP. However, the $480 billion annual deficit is larger than the GDP of 168 of the 191 countries whose economies are monitored by the International Monetary Fund.
   In terms of volumes, looking at port-level trade data, which accounts for more than 90 percent of U.S. international trade, the deficit is proportionately much smaller. The reason for this is that the U.S. tends to export upstream raw materials and industrial machinery which has a smaller value per ton than imports. For example, a ton of soybeans has a lower value than a ton of sport shoes.
   Heavy upstream goods have not benefitted from free trade agreements to the extent that manufactured consumer goods have. Many countries still impose hefty tariffs on agricultural goods and subsidize domestic production. According to World Trade Organization data, the volume of trade in manufactured goods has grown at an average annual rate of 7 percent a year from 1950 to 2015, while agricultural goods trade grew at 3.5 percent. To some extent this indicates that trade agreements have not been as favorable to the United States given that it has comparative and competitive advantages in goods that are not treated as favorably as general consumer goods.
   Trade agreements also have conditions to protect labor. Since the early 1990s, the need to create a minimum social foundation for the development of trade—one that guarantees certain safeguards against “social dumping”—has resulted in the signing of an increasing number of free trade agreements which include a labor dimension, either in the agreement itself or in a parallel agreement.
   It is not clear if these trade agreement requirements have been met or enforced by the United States.

It is possible that the weak spending on infrastructure helped imports, but was not enough to help exports

   Since the point of signing a trade agreement is to improve economic growth, it is usually the case that the countries invest in infrastructure to support higher volumes of freight movement. Consistent data on U.S. public sector infrastructure investment over a long-term horizon is not readily available, but existing data indicates that this has generally not kept pace with economic or population growth. Railroads have continued to invest a large amount of their earnings back into their networks. Ports continue to upgrade freight-handling equipment, strengthen quay walls and dredge berths. However, highways, particularly around major port gateways, have not kept pace with freight volume growth, judging by the incidence of congestion.
   It is possible that the weak spending on infrastructure helped imports, but was not enough to help exports. Imports generally have a higher value per ton and are thus generally more profitable to handle than exports. Insufficient investment in infrastructure that results in congestion may have had a more negative impact on export growth than on import growth, since higher value cargo can tolerate the higher expenses of overcoming congestion.
   It appears that the United States needed to deliberately invest in export-oriented infrastructure, but essentially failed to do so. Import-oriented infrastructure deconsolidates shipments arriving on vessels to be distributed to a wide range of inland destinations. This is the opposite of what exports require. Exports require consolidation infrastructure that collects products from a range of domestic origins into containers or directly on to ships. The kinds of goods the United States exports are different than those which it imports. The United States tends to export empty dry containers back to countries where imported goods come from, but imports empty refrigerated containers in order to export agricultural goods that require temperature control.
   Even the locations of the export origins and import destinations aren’t the same. Therefore, export-oriented infrastructure to consolidate goods that are different than those which are imported and have origins that are different than import goods’ destinations is needed.
   Given that U.S. exports tend to be heavier than its imports, it is necessary to invest in infrastructure to support that type of freight movement. This means heavy freight corridors for trucks to reduce the cost of taking indirect routes and investment in inland waterway freight movement, since barges are the cheapest and most effective means of moving very heavy cargoes. Fortunately for the United States, railroads have made significant investments to support heavy freight movement, but this may not have been enough, judging by the size of the trade deficit. Since U.S. exports generally have a lower value per ton, it is important to ratchet down the cost of transportation as much as possible, so that they can be competitive over the widest possible international geographic area.
   Regardless of whether trade agreements need to be revised, it will be necessary to increase investment in export-oriented infrastructure to reduce the trade deficit and improve the economic outlook in the United States.