Preferential trade agreements (PTAs) are treaties that remove barriers to trade and set rules for international commerce between two countries or among a small group of countries. A new report from the Congressional Budget Office (CBO) found that they may provide little boost to the overall U.S. trade balance.
PTAs directly affect a country’s economy by altering its flows of trade and investment. Primarily through trade, PTAs indirectly affect other aspects of a country’s economy — such as productivity, output and employment. As of August 2016, the U.S. had established 14 PTAs with 20 of its trading partners. The report surveyed the economic literature on trade and PTAs and summarized that literature’s findings on how trade and PTAs have affected the U.S. economy.
In CBO’s view, the consensus among economic studies is that PTAs have had “relatively small positive effects on total U.S. trade (exports plus imports) and, primarily through that channel, on the U.S. economy,” the report stated.
“The effects have been small because the agreements were mostly between the United States and countries with much smaller economies and because tariffs and other trade barriers were generally low when the agreements took effect,” the report noted. “PTAs have had little effect on the U.S. trade balance (exports minus imports) and have slightly increased flows of foreign direct investment, mostly by encouraging additional U.S. investment in the economies of member countries.”
International trade yields several benefits for the U.S. economy, the report added. Trade increases competition between foreign and domestic producers. That increase in competition causes the least productive U.S. businesses and industries to shrink; it also enables the most productive businesses and industries in the United States to expand to take advantage of profitable new opportunities to sell abroad and obtain cost savings from greater economies of scale.
“As a result, trade encourages a more efficient allocation of resources in the economy and raises the average productivity of businesses and industries in the United States. Through that increase in productivity, trade can boost economic output and workers’ average real (inflation-adjusted) wage. In addition, U.S. consumers and businesses benefit because trade lowers prices for some goods and services and increases the variety of products available for purchase,” the report said.
Not everyone benefits from trade expansion, however. Although increases in trade probably do not significantly affect total employment, trade can affect different workers in different ways. “Workers in occupations, businesses and industries that expand because of trade may make more money, whereas workers in occupations, businesses and industries that shrink may make less money or experience longer-than-average unemployment. Such losses can be temporary or permanent,” the report said. “Nevertheless, economic theory and historical evidence suggest that the diffuse and long-term benefits of international trade have outweighed the concentrated short-term costs. That conclusion has consistently received strong support from the economics profession.”
“The effect of PTAs on the federal budget is unclear,” the report said. Past cost estimates from CBO have indicated that PTAs, once implemented, would slightly lower federal revenues from tariffs. However, those results did not take into account macroeconomic feedback — the estimated effects on the federal budget that would arise from changes in economic output or other macroeconomic variables.