National Manufacturers Association
1 February 2005
NAM’s Recommended Candidates for
Additional Free Trade Agreement Negotiations
Foreign trade barriers on American manufactured goods in many parts of the world are
much higher than U.S. trade barriers on imports from those countries, with the United
States giving these countries favorable market access that is not reciprocated. The NAM
seeks to end this disparity. We seek to level the global playing field for American
manufacturers by reducing foreign barriers down to U.S. levels, or by eliminating them
altogether. The NAM is a strong supporter of reducing trade barriers through multilateral
trade negations in the World Trade Organization (WTO) Doha Round, but also supports a
continued effort to negotiate bilateral or regional free trade agreements (FTAs).
FTAs are a proven, practical way of eliminating foreign trade barriers and also gain trade
agreements that are “WTO-plus,” that provide improved coverage of intellectual
property, services, customs facilitation, and other factors important to the expansion of
trade. FTAs have resulted in substantially improved market access for U.S.
manufacturers, and the 18 countries with which the United States either has negotiated, or
is negotiating, FTAs already account for nearly 50 percent of total U.S. exports of
Accordingly, the NAM recommends the negotiation of additional FTAs, focusing on
those that would be of strong benefit to U.S. manufacturers. After undertaking an
extensive quantitative analysis, the NAM has identified the top 10 trading partners with
which FTAs would most benefit U.S. manufacturers. The NAM is recommending five of
these to the Administration for exploration as to the feasibility of initiating FTA
negotiations. The NAM is placing the other five on an “FTA Watchlist,” believing the
time is not yet right to recommend them for active consideration.
The NAM recommends the following five countries as those with which the
Administration should explore the possibility of negotiating new FTAs:
The NAM has selected the following major markets as possibilities for future FTA
negotiations, depending upon future circumstances:
The following sections of this paper discuss the reasons why additional FTAs are needed,
the reasons for selecting recommended and Watchlist partners, and the methodology used
to reach our conclusions.
Why Negotiate FTAs?
Free Trade Agreements (FTAs) are the quickest and most practical way to eliminate the
imbalance in market access between the United States and other countries. The United
States is a very open market. Today, the average U.S. import duty on imported
manufactured goods is 1.8 percent. Excluding textiles and apparel, it is only 0.9 percent.
Fully 70 percent of all U.S. imports enter the United States duty-free.
Foreign barriers to U.S.- made manufactured goods, both visible and non-visible barriers,
are much higher in many parts of the world. The average developing country duty on
U.S.-made goods is over 8 percent, and the average developing country “bound” duty rate
(the WTO ceiling tariff rates that countries may use) on U.S. goods is 17 percent - a rate
19 times as high as the average actual tariff rate assessed in the United States, excluding
textiles and apparel.
The National Association of Manufacturers (NAM) seeks to end the disparity between
U.S. and foreign market openness. Our goal is to level the global playing field for
American manufacturers, both by pressing for market-determined currencies and by
lowering or eliminating foreign trade barriers. The NAM supports an effort to reduce or
eliminate foreign trade barriers through multilateral trade negations in the World Trade
Organization (WTO) Doha Round, through regional trade negotiations such as the
FTAA, and through bilateral free trade agreements.
While the NAM would prefer to have trade barriers reduced all at once in the WTO, we
cannot be assured that will happen. Also, negotiations in the WTO do not cut as widely
and deeply into trade barriers as do FTAs.
U.S. FTAs are designed to take foreign tariffs to zero, and U.S. negotiators have been
successful in eliminating the vast bulk of tariffs immediately upon implementation of an
FTA. The U.S. - Australian FTA, for example, eliminated 99 percent of duties on U.S.
manufactured goods exports upon implementation. Both the Chile and CAFTA
agreements provide for the immediate elimination of at least 80 percent of those
countries’ import duties on U.S. manufactured goods. Duty reductions in multilateral
trade rounds, on the other hand, tend to be phased in over a number of years.
In addition, FTAs negotiated by the United States are extensive in their coverage,
including obtaining partner commitments in customs facilitation, technical barriers to
trade, government procurement, investment, services, electronic commerce, competition
policy, intellectual property rights, and enforcement of labor and environmental laws.
The NAM believes strongly that future FTAs should continue to be as full and robust as
those already negotiated.
Going beyond that, the NAM believes that future FTAs, particularly those negotiated
with Asian countries, should contain provisions regarding the market valuation of
currencies. While small economies may benefit from currency pegs without risking
substantial distortion of U.S. trade, the same is not true for the significant trading partners
that are recommended for FTA consideration by the NAM.
A downside to FTAs is that they are all slightly different in coverage, commitments, time
schedules, and rules of origin. The spread of FTAs thus brings logistical and compliance
problems as individual companies have to pay attention to the varying rules. The NAM
recommends negotiating FTAs that are as compatible with each other as possible so that
they can be stitched together to form regional FTAs at some future point.
Top FTA Candidate Countries
The NAM undertook a quantitative analysis of all countries to which the United States
exports at least $1 billion of manufactured goods annually. After eliminating those
countries with which the United States already has FTAs (nearly 50 percent of U.S.
manufactured goods exports are already covered by these - see Table 1), countries not in
the WTO (as they lack the basic underpinning of trade rules), and Turkey (which is in a
customs union with the European Union), the NAM discovered there are only 18 trading
partners that currently purchase at least $1 billion of U.S. manufactured goods. These are
shown in Table 2, in the order of the NAM’s analytic score.
The key analytic methodology used by the NAM was an estimate of the added
manufactured goods exports that might occur if the other countries eliminated their tariffs
on U.S. manufactured goods. This amount was estimated for 2010, in order to allow
expected economic and trade growth. As these standardized estimates are only rough
approximations, other criteria were used as well, including estimates of non-tariff
barriers, the existence of a functioning judicial system, the difference between U.S. and
foreign tariffs, and others that are explained in the methodology section of this report.
The top ten countries were Brazil, China, Egypt, The European Union, India, Japan,
Malaysia, New Zealand, South Korea and Taiwan. After extensive discussion within the
NAM’s International Economic Policy Committee, a consensus was reached to
recommend Egypt, India, Malaysia, New Zealand, and South Korea; and to place the
other five - Brazil, China, The European Union, Japan, and Taiwan on a Watchlist,
possibly to be recommended in the future as circumstances change. It is significant that
all of the NAM’s five recommendations other than Egypt are in the Asia-Pacific region,
reflecting the rapid economic and trade growth expected to take place in that part of the
world. The five recommended countries are discussed below, in alphabetic order:
Egypt is a considerably smaller market for U.S. exports than some of the other countries
being recommended, but it has very high tariffs - the elimination of which could
significantly benefit U.S. exporters. At 17.1 percent, Egypt’s tariffs on U.S.
manufactured goods rank second only to India’s. Egypt’s bound tariff rates, moreover,
average 28 percent. U.S. manufactured goods exports in 2003 were $1.6 billion, and
Egypt’s assumed growth would raise that to $2.7 billion in 2010 - a gain of $1.1 billion.
The NAM’s estimates show that an FTA that eliminated Egypt’s tariffs on U.S.
manufactured goods could more than double that increase.
An additional factor is that the European Union is by far the largest supplier to Egypt,
and already has favored access to the Egyptian market. An FTA with Egypt would
remove this disadvantage to U.S. manufacturers and allow an increase in the U.S. share
of Egypt’s market. A high degree of correlation exists between EU exports and U.S.
exports, and the cost structure of both the U.S. and EU manufacturing industries indicates
the possibility of a high degree of substitutability of U.S. products if the price were to fall
considerably as a result of tariff elimination.
Due to its concentration in textiles and apparel, Egypt faces relatively high tariffs in the
United States, an average of 6.5 percent, implying Egypt could pick up considerable
exports to the United States - but most likely by displacing other exporters of similar
India is a rapidly-growing market and has the highest trade barriers in the world against
U.S. manufactured goods. India’s tariffs on U.S. manufactures average 28 percent -
eight times as high as the average 3.5 percent duty paid by Indian products in the U.S.
market - and India’s bound rates are 14 times as high. Moreover, fully 66 percent of
U.S. imports from India are currently duty-free. The United States exported $4 billion of
manufactured goods to India last year, an amount we estimate will likely rise to $8 billion
by 2010. With an FTA that eliminated Indian duties on U.S. manufactured goods,
however, U.S. exports to India could rise by about double that amount by 2010.
India also ranks near the top of countries having non-tariff barriers, and identification and
negotiation of these barriers could have a strongly beneficial effect on U.S. exports to that
country. It is, furthermore, significant that India’s bound tariff rates are about 80 percent
higher than its applied rates, meaning that India could significantly increase its tariffs
legally at any time - a possibility that would be precluded by an FTA. Given the degree
of imbalance in bilateral openness with India, American companies could benefit strongly
from an effective FTA.
In the NAM’s internal policy discussions, however, strong note was taken of India’s
array of non-tariff barriers, and concerns were raised regarding whether or not India was
ready to consider the sort of robust free trade agreement of the type that would be
negotiated by the United States. Note was also taken, on the other hand, of the fact that
India may be changing its views toward world trade and its role in the globalizing world
economy. The NAM’s International Economic Policy Committee decided to recommend
the Administration explore the possibility of negotiating a robust FTA with India,
knowing this could be a lengthy process and that interim steps may be necessary.
Outstanding commitments in the area of intellectual property and other areas as well
would have to be dealt with prior to negotiating an FTA.
Malaysia’s strong economic growth and large bilateral tariff disparity make it an
interesting FTA candidate from a manufacturer’s viewpoint. Malaysian tariffs on U.S.
manufactured goods average 6.6 percent - seven times as high as the 0.9 percent average
U.S. tariff on imports from Malaysia. The imbalance of market opportunity is further
shown in that fully 85 percent of Malaysia’s exports to the United States already enter
duty-free. Malaysia also has bound tariffs that are more than twice as high as its applied
rates, and could legally snap back to these higher tariffs at any time.
Malaysia’s expected rapid economic growth means that the $10 billion of U.S.
manufactured goods exports in 2003 could double by 2010 to about $22 billion. By the
NAM’s methodology, an FTA could increase that growth by one-fourth. The reduction
of non-tariff barriers in Malaysia could further add to U.S. exports.
Additionally, the NAM notes last year’s formation of a bilateral Trade and Investment
Framework Agreement (TIFA), which provides a basis on which to enter into discussions
of trade issues and on detailed discussions of what a bilateral trade agreement might look
like. Malaysia is a strong economic leader in Southeast Asia, and an FTA would also
promote the prospects for further bilateral agreements or a regional agreement between
the United States and countries in the region.
New Zealand is the second smallest importer of U.S. manufactured goods on the NAM
list, but is the most open market of the entire group in terms of quality of its judicial
system, absence of non-tariff barriers, treatment of customs, treatment of foreign
investment, transparency of regulations, etc.
These factors imply a relatively easy FTA negotiation, as New Zealand already has in
place most of the factors that would be sought in an FTA. New Zealand’s average
applied tariff on U.S. manufactured goods is 3.5 percent, somewhat higher than the 2.5
percent duty New Zealand products pay in the United States.
A very important factor with respect to New Zealand, however, is that it is unique among
industrial countries in having bound tariff rates that are much higher than its applied
rates. Its weighted bound rates on U.S. manufactured goods exports average 12.5
percent — nearly four times as high as its applied rates. New Zealand could legally raise
its tariffs to its bound levels at any time, a possibility that would be precluded by an FTA.
New Zealand imported $1.7 billion of U.S. manufactured goods in 2003, an amount that
the NAM model projects will be about $2.5 billion in 2010. The NAM’s linear estimates
indicate that this growth could be faster by perhaps one-eighth if an FTA were to
eliminate all tariffs on U.S. manufactured goods.
The European Union is New Zealand’s largest supplier, providing about 20 percent of its
imports, compared to the U.S. share of 11 percent - implying substitution possibilities for
South Korea’s tariffs on U.S. manufactured goods are about 2.6 times as large as U.S.
tariffs on South Korean goods. Given Korea’s size, expected rapid growth, and
significant trade barriers, an FTA with Korea could generate a considerable increase in
U.S. exports. The United States exported $18 billion of manufactured goods to Korea in
2003, which by our standard methodology would roughly double by 2010 without an
FTA and would grow perhaps one-fourth faster with an FTA. Korea’s tariffs on
American manufactured goods average 6.1 percent, while U.S. tariffs on imports from
Korea average 2.3 percent. Korea also is riddled with non-tariff barriers that could be
negotiated away in an FTA - which would further increase the value of an agreement.
The NAM’s International Economic Policy Committee had extensive discussions about
Korea’s formidable non-tariff barriers, particularly those in certain sectors of the
economy. Additionally, strong concerns were raised about Korean subsidies and
resulting implications with respect to imports into the United States. The NAM will
expect this issue to be on the table for discussion prior to, or as part of, any FTA
discussions with Korea. The NAM does not believe FTA discussions can be concluded
prior to successfully addressing the area of subsidies as well as other outstanding issues.
Additionally, NAM members discussed Korea’s distribution structure and the role of
competition policy in ensuring that U.S. companies would not find that tariffs and other
border barriers were nullified or impaired by any failure of competition policy to enable
U.S. exporters to have full access to Korea’s distribution channels at the wholesale and
retail level. NAM members, on the other hand, took favorable note of Korea’s strong
interest in the possibility of negotiating an FTA with the United States, and view this as
an opportunity to address the real barriers affecting trade.
NAM “Watchlist” Trading Partners
The NAM does not recommend commencement of FTA negotiations at this time with the
remaining five of the top ten trading partners, but instead placed them on an NAM
“Watchlist” for possible future recommendation as FTA candidates. The reasons are
Brazil would be an excellent FTA candidate - having a large market with high trade
barriers - were it not for the fact that Brazil has indicated its unwillingness to enter into
the sort of robust FTA that the United States negotiates. It has indicated great reluctance
to taking WTO-plus obligations in areas such as intellectual property protection, services,
and direct investment. Should Brazil change its viewpoint, rather than recommending a
bilateral FTA, the NAM would recommend a renewed effort to negotiate the Free Trade
Area of the Americas (FTAA). This would carry considerably greater benefits for the
United States, Brazil, and the rest of the Western Hemisphere. A strong FTAA has been
one of the NAM’s top trade priorities for years. Recent press reports have indicated that
there might be renewed interest on Brazil’s part, and the NAM will watch this closely.
The NAM does not currently recommend an FTA with China because that country is still
phasing in its basic WTO commitments and because its currency is pegged at an
artificially low level through the accumulation of hundreds of billions of dollars in
currency reserves. Until China has finished implementing its basic WTO commitments
and until its currency policy no longer provides such a price disadvantage to U.S.
products, the NAM cannot recommend negotiation of an FTA with China.
The European Union (EU) is by far the largest market for U.S. manufactured goods that
is not already an FTA partner. The EU, however, is not recommended as an FTA
candidate at this time because of the complications such a negotiation would pose for the
Doha Round, particularly in the agricultural sector that is so vital to the Round’s overall
success. The NAM believes, however, that an attempt should be made to negotiate a bold
North Atlantic standards area that would greatly diminish the cost of doing business in
Europe and the United States. Upon conclusion of the Doha Round, a careful analysis of
remaining transatlantic trade barrier should be conducted with a view of determining
what U.S. - EU bilateral arrangements might be mutually beneficial.
Japan is second only to the European Union as a market for U.S. manufactured goods
exports (excluding countries with which the United States already has FTAs). However,
its very low tariffs promise little U.S. manufactured goods export gain from the
elimination of duties. The NAM is optimistic about future Japanese economic growth,
however. U.S. manufactured goods exports to Japan were $39 billion in 2003 and are
projected to be $50 billion in 2010. An FTA would generate only a small increase in
exports if Japan’s tariffs were to be eliminated.
The significance of an FTA with Japan, however, would be not in its tariffs but in its nontariff
barriers - particularly its closed distribution system and its often impenetrable
system of standards and conformity assessment. These barriers have been estimated by
researchers as having an import-impeding effect equivalent to a very large tariff.
Accordingly, the NAM would recommend negotiation of an FTA with Japan only if
Japan were willing to negotiate extensive liberalization of its non tariff barriers, and
particularly if Japan would agree to negotiate a very robust competition policy chapter
that would bind Japan to an anti-trust system as effective as that in the United States. A
fully independent and aggressive Japan Fair Trade Commission could make a very
substantial difference in the ability of U.S. exporters to utilize the Japanese distribution
system - as well as increasing the transparency and efficiency of the distribution system
for domestic producers as well.
While Taiwan is already a large market for U.S. manufactured goods ($15 billion in
2003), it - like China - has only recently acceded to the World Trade Organization, and it
is still making its adjustments to WTO membership. Taiwan’s low tariffs in terms of
both bound and applied tariff rates promise only moderate gains from tariff elimination in
an FTA. The NAM’s projections indicate Taiwan could be importing $28 billion of U.S.
manufactured goods in 2010, and tariff elimination could expand that by perhaps oneeighth.
The possible gains from tariff elimination, while less than some others, are
nevertheless significant. Their elimination, coupled with strong provisions to address
standards and other non-tariff barriers, would make Taiwan an interesting candidate for
an FTA, but only after full implementation of its WTO commitments.
The NAM examined every country to which the United States exports at least $1 billion
of U.S. -made manufactured goods. There are 40 such countries, together accounting for
$542 billion dollars of U.S. domestic exports of manufactured goods in 2003, 97 percent
of the total. These are shown in Table 1. All other countries accounted for the remaining
3 percent of U.S. manufactured goods exports.
The United States already has, or is negotiating with, 18 of these 40 countries, accounting
for close to 50 percent of U.S. exports of manufactured goods. In examining the
remaining 22 countries, the NAM excluded Russia, Saudi Arabia, and Vietnam because
they are not yet members of the WTO and do not have the base commitments from which
a WTO-plus agreement could be negotiated. If an FTA were to be negotiated with a non-
WTO country, the entire set of WTO commitments would have to be negotiated
bilaterally - a task which is simply not feasible.
Additionally, Turkey was excluded because it is now in a customs union with the
European Union, and its trade regime is effectively negotiated by the European
The remaining 18 countries were examined by evaluating quantitative and qualitative
factors. The principal measure used by the NAM was an estimate of the added exports
that U.S. manufacturers could gain in 2010 from the elimination of the other countries’
tariffs. This measure combined an estimate of economic and import growth for each of
the countries, the size of the tariff reductions, a price elasticity for U.S. exports (i.e., a
one percent decrease in tariffs would generate what percentage of increased U.S. export
growth), and the proportion of U.S. exports to the country that are intra-company trade
(and hence less responsive to external price changes). This measure is the single most
comprehensive approach to answering the question of how much U.S. exports of
manufactured goods would benefit from the tariff-cutting aspects of an FTA. For
standardization, the measure assumed immediate elimination of all manufactured goods
tariffs, though in reality this is generally not feasible on either side of the negotiations and
some sensitive sectors are typically phased in over a longer period of time.
No attempt was made to estimate U.S. import changes or changes in the trade balance,
because of the “diversion effect.” A considerable amount, and perhaps the bulk of, trade
changes that would be generated by an FTA would result from a substitution of bilateral
trade for third country trade. For example, an increase in U.S. exports to an FTA country
would be generated by the fact that the U.S. products would no longer face a tariff in the
importing country, while imports from third countries would continue to pay the duties.
Thus, U.S. exports to the FTA country would become cheaper and could substitute for
comparable third country imports without seeing any increase in the FTA partner
country’s overall imports.
Similarly, the United States would import more from the FTA country and less from
other countries - and overall U.S. imports might not change at all. Attempting to
estimate the extent to which an FTA would result in trade diversion was beyond the
scope of this analysis, as was any attempt to estimate what “trade creation” effects might
result from greater economic efficiencies and faster economic growth that might result
from an FTA.
In addition to this basic estimate, the NAM examined other factors, including:
The dollar value of current U.S. exports of domestic manufactured goods.
Manufactured goods as a percent of total U.S. exports to each of the countries.
The proportion of U.S. manufactured goods imports that are already duty-free.
The larger the percentage, the greater the market access imbalance with the
partner country, but the less the United States has to “pay” for the agreement.
The size of the current applied tariff rate the partner country assesses on U.S.
exports of manufactured goods. The larger the weighted tariff, the more the
benefit to U.S. manufacturers that can be derived by reducing these to zero.
The size of the partner country’s bound tariff rates. Many countries have lowered
the statutory duties they apply to imports without negotiating down their bound
rates in the WTO. While they do not assess these higher bound rates, they could
legally move their rates up to the bound level at any time they chose. Hence
having a large bound-applied difference is a threat to future U.S. market access.
The functioning of the justice system. Derived from a World Economic Forum
index, this measures how well the justice system works in practice, which is an
important factor in enforcing provisions of an FTA. There is little point to
obtaining rights if there is no functioning court system to enforce them.
Effect of non-tariff barriers. The Heritage Foundation’s trade protection index
was used as a base. It was adjusted for some countries, such as Japan, where
additional sources of information were available. The NAM also examined the
non-tariff barriers in the U.S. Government’s National Trade Estimate Report.
Property rights index - Derived from the Heritage Foundation’s Property Rights
scale, this measure assesses the degree to which private property rights are
respected and enforced.
Regulation index - Also derived from the Heritage Foundation indices, this
measure assesses the degree to which businesses are subject to government
regulation or government directives.
Antidumping — The NAM analysis included a measure of antidumping cases,
scaled to the size of U.S. exports of manufactured goods. The fewer the cases the
better, and the better the assumed functioning of the trading system.
This analysis was based on the extensive research and data collection by the NAM’s
International Economist, Chi Nguyen
Table 1. Countries to Which the United States Exported at
Least $1 Billion of Domestic, U.S.-Made Manufactured
Goods in 2003, $ Millions
Countries with Which the United States Has Free Trade
Agreements or Has Announced Negotiations are Bold Face-
|20||United Arab Emirates||$2,984|
Source: U.S. Census Bureau
National Association of Manufacturers