Chapter 5: Foreign Policy: The Other Driver

By William Krist

Foreign policy was also the key driver of U.S. trade policy immediately after World War II.  At that time U.S. policymakers negotiated trade agreements that were designed to promote economic development in Europe and Japan. The U.S. also encouraged formation of the European Community as a means to promote peace between France and Germany.  After 1971, when the United States’ trade balance swung into deficit, foreign policy objectives took a back seat to promoting U.S. commercial interests, although foreign policy concerns were important in negotiating a free trade agreement (FTA) with Israel. After the terror attacks of September 2001, foreign policy concerns were again important as U.S. policymakers came to believe that promoting democracy and economic development were important in the “war on terrorism” and that trade agreements were a useful tool for promoting democracy and development.

U.S. trade policy immediately after World War II was based on the foreign policy objective of promoting strong democracies in Europe and Japan to block the spread of communism. Negotiating trade agreements to reduce trade barriers multilaterally was seen by U.S. policymakers as necessary to promote economic growth in Europe, Japan and other Western oriented countries. To this end, the United States pressed for the formation of the General Agreement on Tariffs and Trade (GATT) in 1947 and for several rounds of multilateral trade negotiations in which the United States was willing to sacrifice commercial interests by reducing its trade barriers to a greater extent than required of other participants.

Whereas foreign policy concerns dominated U.S. trade policy through the Kennedy Round (1964–67), by the early 1970s commercial concerns rose to the fore, as the U.S. trade balance swung into deficit and Japan and the European Communities became economically competitive. Although commercial concerns dominated the United States’ trade policy in this period, promoting freer trade was also seen as supportive of its foreign policy interests. Accordingly, the United States pressed for a successful conclusion to both the Tokyo Round (1973–79) and the Uruguay Round (1986–94), but it insisted that its developed-country trade partners open their markets to the same extent as it was doing.

Then came the September 11, 2001, terrorist attacks on the United States, and foreign policy concerns gained renewed urgency. Policymakers in the Bush administration came to believe that failed states such as Afghanistan and the closed states in the Middle East were breeding grounds for terrorists, and that economic development could be an important tool in the antiterrorism campaign. As an element of the U.S. strategy in the “war on terrorism,” the president announced plans for a Middle East Free Trade Area. And in the wake of the 9/11 attack, a new round of multilateral trade negotiations—the Doha Round—was launched in November 2001 with the stated objective of promoting development in the poorest countries. U.S. foreign policy objectives also influenced the U.S. decision to negotiate FTAs with several other countries.

Today, the pending free trade agreement with 11 other Pacific nations – the Trans-Pacific Partnership (TPP) – has enormous implications for U.S. foreign policy.

The United States, of course, has many tools to achieve its foreign policy objectives, including hard power, such as military force, and soft power, such as diplomacy and foreign aid. Furthermore, trade agreements are only one element of trade policy, which has a range of tools including sticks, such as trade sanctions, and carrots, such as preferential trade treatment, export financing, and bilateral investment treaties. However, FTAs can be viewed as the ultimate carrot, as such an agreement is the farthest ranging and the deepest form of trade relationship.

An FTA can promote foreign policy objectives in a number of ways. There is the immediate symbolism of entering into negotiations and announcing an agreement that says to the world “we are partners.” The agreement provides a forum for ongoing discussion and the resolution of commercial disputes that might otherwise fester or become foreign policy problems. And perhaps most important is that the trade agreement is expected to foster economic growth in the United States’ partner country, and this economic growth is considered important for promoting democracy, for removing safe havens for terrorists, and even for reducing the flow of narcotics and illegal immigration into the United States.

Trade Agreements and Foreign Policy: World War II through 9/11

As World War II was ending and policymakers began to consider how to develop the postwar global architecture, they were determined not to repeat the economic policy failures of the prewar period. Many felt that the high tariffs enacted by the United States in the Tariff Act of 1930, commonly known as the Smoot-Hawley Act, along with retaliation from its trading partners, had contributed to the severity of the Great Depression.[1] Additionally, many felt that restrictive trade agreements, such as Nazi Germany’s trade and exchange controls and Britain’s system of imperial preferences, had been contributing factors to the war.

As Robert Pollard and Samuel Wells described the post–World War II consensus, “a common set of beliefs, attitudes, and experiences informed the American prescriptions for world peace and prosperity. Almost every official concerned with economic diplomacy believed that the high tariffs, currency instability, and autarky which so many nations had practiced during the 1930s had set the stage for global depression and war.”[2]

As World War II ended, Europe and Japan were flat on their backs economically, and world trade had largely dried up. Policymakers felt that barriers to trade with America’s allies had to be reduced to help jumpstart economic growth. At the conference in Bretton Woods, New Hampshire, in July 1944, the postwar planners recognized the need for expanded trade, and they envisioned an organization to oversee the trade system. In the words of Cordell Hull, U.S. Secretary of State at the time of the Bretton Woods conference, “Unhampered trade dovetailed with peace; high tariffs, trade barriers, and unfair economic competition, with war. . . . If we could get a freer flow of trade . . . so that one country would not be deadly jealous of another and the living standards of all countries might rise, thereby eliminating the economic dissatisfaction that breeds war, we might have a reasonable chance of lasting peace.”[3]

To help Europe and Japan recover economically, the United States launched the Marshall Plan in 1948, and by 1952 it had channeled more than $13 billion in aid to Europe. In addition to foreign aid, the United States used trade to spur economic growth in its allies. Presidents Truman and Eisenhower supported five additional GATT trade rounds, which significantly reduced tariffs among GATT members.[4] Both presidents saw trade policy as an integral part of U.S. foreign policy. As President Eisenhower wrote in his memoirs, “A legislative matter of utmost importance to our economy and to the conduct of our foreign relations was the extension of the Trade Agreements Act.”[5]

The United States’ support for more open trade, of course, did not extend to its commercial dealings with the USSR. In response to Soviet aggression in Europe, President Truman adopted a “containment” strategy in March 1947, which promised to “support free peoples who are resisting attempted subjugation.”[6] Under this strategy, the United States and Western Europe created NATO in 1949. And the United States maintained tariffs at their high Smoot-Hawley rates on imports from the Soviet Union and its Warsaw Pact allies.

By the early 1960s, the world had changed. In 1961 and 1962, the United States–USSR Cold War was at one of its hottest points: The Berlin Wall went up in 1961, separating East and West Berlin; the Vietnam situation was escalating; and the October 1962 Cuban missile crisis almost led to a nuclear exchange. And Fidel Castro, who had seized power in Cuba in 1959, was forging constantly closer relations with Moscow and challenging the United States throughout Central and South America.

At the same time, Europe had regained significant economic strength. The European Economic Community (EEC) was in the process of establishing a customs union between Belgium, France, Germany, Italy, Luxembourg, and the Netherlands, and by 1962 it had established a highly protectionist Common Agricultural Policy that discriminated against American farm exports. Furthermore, the United Kingdom, Denmark, Ireland, and Norway were in an initial process of seeking membership in the EEC. From the beginning of the postwar period, the United States had supported formation of the EEC and had seen it as a bulwark against the Soviet Union. Now, however, the United States faced a potentially severe economic challenge as Europe moved to a customs union with high duties on imports of U.S. products, while European firms traded in the large, tariff -free EEC market.

Arizona congressman Morris Udall expressed this dilemma succinctly: “I am convinced that the success of the Common Market has been one of the greatest disappointments the Communists have suffered in post-war years. The Kremlin’s plan for world domination called for the capitalist economies of Europe to stagnate and, eventually, to collapse. . . . Today, Khrushchev sees the Common Market and its expansion as the most formidable barrier to communism, not because it is directed against the Soviet Union but because it strengthens the whole Free World. . . . But while economic integration represents new sources of strength for the Atlantic Alliance, the keystone of our Cold War strategy, the Common Market also has within it a potential for divisive economic rivalry. The heart of the matter lies in the fact that, while tearing down tariff walls against goods exchanged among themselves, Europeans are preserving barriers against the goods of outsiders, including ourselves.”[7]

To reconcile the competing U.S. commercial and foreign policy interests, President Kennedy sought and obtained new legislation, the Trade Expansion Act of 1962, which provided the authority for negotiation of the Kennedy Round from 1964 to 1967. The intent of this legislation was to support the continued integration of Europe as a shield against the spread of communism, while reducing the negative commercial impact on the U.S. by negotiating reductions in the external tariffs imposed by the EEC and thereby reducing the margin of preference U.S. exporters would have to overcome to sell in Europe.

Foreign policy objectives were explicit in the 1962 Trade Expansion Act. The purposes of that act, which were to be achieved “through trade agreements affording mutual trade benefits,” were

1.  “to stimulate the economic growth of the United States and maintain and enlarge foreign markets for the products of United States agriculture, industry, mining, and commerce;
2.  to strengthen economic relations with foreign countries through the development of open and nondiscriminatory trading in the free world; and
3. to prevent communist economic penetration.”[8]

In signing the act on October 11, 1962, President Kennedy said, “A vital expanding economy in the free world is a strong counter to the threat of the world communist movement. This act is, therefore, an important new weapon to advance the cause of freedom.”[9]

And in light of Castro’s challenge to the rest of Latin America, President Kennedy noted that “we’re particularly concerned that the countries of Latin America shall have an opportunity to participate in this period of economic growth particularly as it affects the Common Market as well as our own United States. We will use the specific authorities designed to widen markets for the raw materials and manufactures of the less developed nations whose economic growth is so important to us all and to strengthen our efforts to end discriminatory and preferential arrangements which in the long run can only make everyone poorer and the free world less united.”[10]

By the early 1970s, commercial concerns had risen to the forefront. In 1971, for the first time since the end of World War II, the U.S. trade balance shifted into deficit, the labor movement moved from supporting free trade to concerns with job displacement, and a number of industries faced greater competition in world markets. In this phase, which lasted until the 9/11 terrorist attacks, the United States continued to seek trade liberalization and believed that expanded trade promoted its own economic growth. In the two multilateral trade rounds of this period, the Tokyo Round and the Uruguay Round, commercial interests dominated the U.S. negotiating approach, although foreign policy interests were still relevant and the secretary of state could be counted on to testify in support of the negotiations. However, no longer were the trade agreements seen as critical foreign policy tools in which the United States would agree to greater trade liberalization than that of its developed country trade partners.

Negotiation of the United States’ first postwar FTA with Israel in 1985, however, was primarily driven by foreign policy objectives. Israel was the close U.S. ally in the Middle East, and in 1985 it was facing massive inflation of more than 400 percent a year. An FTA was seen as a way to help stabilize this U.S. ally.

As Edward Hudgins of the Heritage Foundation put it in support of the negotiations “Israel is America’s closest ally in the Middle East, sharing this country’s commitment to freedom and democracy, and American opposition to Soviet expansion. An economically strong Israel is better able to defend itself and thus protect both its own and U.S. interests. And its increasing prosperity, assisted by free trade, would provide a powerful example for the citizens of Arab countries who have grown tired of continuing poverty brought on by statist economic policies and military opposition to Israel. Thus a free trade area with Israel would advance the economic and political goals of both countries.”[11]

There was also a commercial interest for the United States in negotiating an FTA with Israel. At that time, Israel and the EEC were negotiating an FTA and the United States was concerned that its exporters would be put at a commercial disadvantage. An FTA where U.S. exporters would also have duty-free access to the Israeli market would level the playing field.

Similarly, while the major U.S. objective in negotiating the North American Free Trade Agreement (NAFTA) was commercial, foreign policy interests were also significant. U.S. policymakers saw an FTA with Mexico as a way to promote democracy and to slow down the flow of illegal immigrants and narcotics into the United States. As President Bill Clinton said in his November 3, 1993, letter to Congress supporting NAFTA, “Our commitment to more free and more fair world trade has encouraged democracy and human rights in nations that trade with us. With the end of the Cold War, and the growing significance of the global economy, trade agreements that lower barriers to American exports rise in importance. The North American Free Trade Agreement is the first trade expansion measure of this new era. . . . NAFTA will also provide strong incentives for cooperation on illegal immigration and drug interdiction.”[12]

9/11 and the Resurgence of Foreign Policy Objectives

With the terrorist attacks of September 11, 2001, foreign policy objectives returned to a preeminent role in setting the direction of U.S. policy regarding trade agreements. U.S. policymakers came to see the closed societies in the Middle East as breeding grounds for terrorists, and the belief that democracies made the world safer gained renewed credence. Trade agreements were seen as a potential tool to promote the rule of law and to help the United States’ partners in the agreements grow economically and move toward more solid democratic government.

As Secretary of State Condoleezza Rice said, “Then came the attacks of September 11, 2001. As in the aftermath of the attack on Pearl Harbor in 1941, the United States was swept into a fundamentally different world. . . . This new reality has led us to some significant changes in our policy. We recognize that democratic state building is now an urgent component of our national interest. And in the broader Middle East, we recognize that freedom and democracy are the only ideas that can, over time, lead to just and lasting stability.”[13]

The Bush administration came to see democracies as more responsible and peaceful than authoritarian governments: “The world has a clear interest in the spread of democratic values, because stable and free nations do not breed the ideologies of murder. They encourage the peaceful pursuit of a better life.”[14] The 2006 National Security Strategy of the United States presented democracy promotion in soaring rhetoric: “Because democracies are the most responsible members of the international system, promoting democracy is the most effective long-term measure for strengthening international stability; reducing regional conflicts; countering terrorism and terror-supporting extremism; and extending peace and prosperity.”[15]

The administration’s National Security Strategy committed to using all political, economic, diplomatic, and other tools “in the cause of ending tyranny and promoting effective democracy.” Thirteen specific tools were listed, including “concluding free trade agreements (FTAs) that encourage countries to enhance the rule of law, fight corruption, and further democratic accountability.”[16]

Just months after the 9/11 attacks, the administration successfully pressed the United States’ trade partners to agree to launch a new round of multilateral trade negotiations. At their November 2001 Ministerial Meeting held in Doha, the members of the World Trade Organization (WTO) agreed to a negotiating mandate that emphasized economic development and particularly the need to ensure that the least-developed countries benefit from expanded trade. From a foreign policy perspective, the United States believed that expanded trade resulting from reductions in trade barriers and distortions would promote economic development, which in turn would advance U.S. interests in promoting democracy and freedom.

However, it was not in the multilateral arena where trade policy became integral to the United States’ foreign policy but in the realm of U.S. bilateral and regional FTAs. At the end of 2001, the United States only had bilateral agreements with Israel and Jordan, as well as NAFTA. However, parallel to the launch of the Doha Round, the United States launched negotiations with several countries for bilateral FTAs, and by 2004 the free trade spigot was fully open. First came agreements with Chile and Singapore, then Australia, Morocco, the Central American Free Trade Agreement (CAFTA-DR, including the Dominican Republic), Bahrain, Oman, and Peru.

In their public statements supporting FTAs, including the “letter of intent” to negotiate an agreement, the administration often presented a number of reasons why a specific negotiation would be in the U.S. foreign policy interest. Promoting democracy and American values has been cited for most agreements. For example, in his letter of intent to Congress to enter into an FTA with Costa Rica, El Salvador, Honduras, Guatemala, and Nicaragua, the president stated: “This agreement will write a new page of our history with Central America—one that depicts sustained engagement in support of democracy, peaceful regional integration, economic opportunity, and hope.”[17]

Other justifications have included assisting in the “war on terrorism,” limiting the flow of narcotics and illegal immigration to the United States, promoting peace in the Middle East, and advancing U.S. objectives of broader regional agreements, including the Middle East Free Trade Area, the Free Trade Area of the Americas, and an Asian-Pacific trade area.

U.S. Trade Agreements and the Promotion of Democracy

Trade agreements can promote democracy in a number of ways. First, in the negotiations for an agreement, U.S. negotiators encourage their counterparts to consult with their private sector—including labor, business, and civil society representatives—and the U.S. Agency for International Development often provides funding to developing countries negotiating with the United States to establish such a consultative system. For many developing countries, this represents their first experience in systematically seeking private-sector input on a major policy issue.

Second, trade agreements are based on the rule of law. The WTO requires countries to notify their tariff schedule and restricts arbitrary increases in duties. Other elements of trade agreements—including intellectual property protection, the imposition of standards, and limitations on subsidies for products and services—are also governed by specific rules. To ensure adherence, both U.S. agreements and the WTO include robust dispute settlement provisions. For some developing countries, a trade agreement represents the first major adoption of laws governing commerce.

Most important, however, advocates of the importance of trade agreements for the promotion of democracy and the prevention of terror argue that trade agreements stimulate economic growth. In “Rethinking the National Interest,” Condoleezza Rice says:

Ultimately, one of the best ways to support the growth of democratic institutions and civil society is to expand free and fair trade and investment. The very process of implementing a trade agreement or a bilateral investment treaty helps to hasten and consolidate democratic development. Legal and political institutions that can enforce property rights are better able to protect human rights and the rule of law. Independent courts that can resolve commercial disputes can better resolve civil and political disputes. The transparency needed to fight corporate corruption makes it harder for political corruption to go unnoticed and unpunished. A rising middle class also creates new centers of social power for political movements and parties. Trade is a divisive issue in our country right now, but we must not forget that it is essential not only for the health of our domestic economy but also for the success of our foreign policy.[18]

U.S. trade representative Robert Zoellick, in testimony on March 5, 2003 before the Senate Finance Committee, compared the post-9/11 policy to that immediately following World War II: “Just as U.S. economic policy after World War II helped establish democracy in Western Europe and Japan, today’s free trade agenda will both open new markets for the United States and strengthen fragile democracies in Central and South America, Africa, and Asia.”[19]

The Bush administration came to see economic development as a key component in the war on terrorism. Underdeveloped, unstable countries were seen as safe havens for terrorists; and impoverished people were seen as potential recruits for terror organizations. Democracy was seen as providing a peaceful alternative to terrorism for countries to address grievances. In the Bush administration’s view, trade promoted economic development, and economic development promoted democracy. Thus, trade and economic development were keys to the war on terrorism through the promotion of democracy.

Bush’s trade representative, Robert Zoellick, put the issue this way: “Trade promotes freedom by supporting the development of the private sector, encouraging the rule of law, spurring economic liberty, and increasing freedom of choice. Trade also services our security interests in the campaign against terrorism by helping to tackle the global challenges of poverty and privation. Poverty does not cause terrorism, but there is little doubt that poor, fragmented societies can become havens in which terrorists can thrive.”[20]

In addition to viewing expanded trade as a long-term tool in promoting economic growth and limiting potential havens for terrorists, the administration argued that agreements with countries that supported us in the “war on terror” should be supported. Specifically, this argument was advanced for FTAs with Morocco, Malaysia, and Thailand.

Have the United States’ FTAs been effective in promoting democracy in its trade partners? It is not possible to answer this question at this time by examining U.S. bilateral agreements, because the sample size is small (the United States has FTAs with only twenty countries). Furthermore, most of these agreements are so recent that it is premature to attempt to draw any conclusions of the agreement’s impact on democracy (all but four went into effect in 2004 or more recently).

Additionally, the trade agreement with the United States is only one of many factors influencing the extent to which its partner country moves toward or away from democracy. Other factors, such as the geopolitical situation affecting the country, are far more important. Additionally, it is not clear if opening trade contributes to democracy or if a country first moves toward democracy and then opens up its trade system.

Economists and political scientists are split on the role that trade and economic development play in strengthening democracy. Quan Li and Rafael Reuveny conclude that there is a negative relationship between trade openness and democracy, as do Francisco Rodriguez and Dani Rodrik.[21] However, studies by Ernesto Lopez-Cordova and Christopher Meissner and by Daniel Griswold have found a positive correlation between trade openness and democracy.[22]

Often economic development can be very destabilizing. As Eva Bellin notes, “Rapid democratization carries with it the danger of tipping deeply divided countries into sectarian civil war, fueling radicalism rather than moderation, and empowering forces that are deeply anti- American. But this is not equally true in every country; in many cases, a process of political opening, properly calibrated, would enhance stability and advance the process of moderation.”[23]

The reality is that encouraging democracy requires patience, and the desire for democracy needs to grow from within the country. The United States cannot force democratization on an unwilling partner country. John Sewell, former president of the Overseas Development Council and a scholar at the Woodrow Wilson Center, warns: “The history of Europe and the United States in the 19th and 20th centuries should remind policymakers that achieving stable open markets and open societies was neither easy nor automatic. Indeed, policymakers ignore the links between political and economic reform in countries where neither is established at their peril.”[24]

The Middle East

As noted above, the United States implemented a bilateral FTA with Israel in 1985, primarily for foreign policy reasons. Eight years later, in 1993, Israel and the Palestine Liberation Organization signed the Oslo Accords, which were intended to be a framework for future relations between Israel and Palestine; and in 1994, Israel signed a peace treaty with Jordan, making that country the second Arab nation after Egypt to recognize the State of Israel. To encourage the peace process, in 1996 the United States amended the Israeli FTA to also provide duty-free treatment to exports from the West Bank, Gaza, and any subsequent Qualified Industrial Zones (QIZ) that might be created in Jordan and Egypt. President Clinton and many members of Congress felt that it was important to promote the peace process by encouraging economic development through expanded trade.

The QIZ program was designed to further Arab-Israeli economic cooperation. Goods produced in a qualified zone in Jordan or Egypt could qualify for duty-free treatment when exported to the United States, provided that they contained input from Israel and included at least 35 percent added value in the QIZ. Jordan immediately implemented the program; and building on this, the United States and Jordan began negotiations for a bilateral FTA. The United States–Jordan FTA was signed on October 24, 2000, setting the stage for Jordan to become the third U.S. FTA after Israel and NAFTA.

Then, following the terrorist attacks of September 11, 2001, and as part of the “war on terror,” President Bush announced the Middle East Free Trade Initiative in May 2003, with the objective of bringing the Middle Eastern countries into the global economy as an important foundation for promoting peace in the region. Because the Middle Eastern countries are at various stages of integration into the global economy, the initiative envisioned several graduated steps for Middle Eastern nations to increase trade and investment.[25] The first step in this plan was to encourage and assist Middle Eastern countries that are not currently members of the WTO to become members; the announced focus here was on Lebanon, Algeria, and Yemen. The second step was to have bilateral investment treaties and trade and investment framework action plans with interested Middle Eastern countries.[26] Along with this, the United States committed to improve its Generalized System of Preferences to better benefit Middle Eastern countries.

The final step would be to negotiate bilateral FTAs with the Middle Eastern countries, leading to the creation of a Middle East Free Trade Area (MEFTA) by 2013. These agreements would build on the FTAs that the United States already had with Israel and Jordan at that time. U.S. policymakers envisioned that these agreements might come in clusters, perhaps with the countries of the Maghreb and with the Gulf Cooperation Council and that these might then be joined into the full MEFTA.[27]

A White House fact sheet describing this initiative quotes President Bush as stating: “Across the globe, free markets and trade have helped defeat poverty, and taught men and women the habits of liberty. So I propose the establishment of a United States–Middle East free trade area within a decade.”[28] In a May 2003 Commencement Address at the University of South Carolina, he added: “In an age of global terror and weapons of mass destruction what happens in the Middle East greatly matters to America. The bitterness of that region can bring violence and suffering to our own cities. The advance of freedom and peace in the Middle East would drain this bitterness and increase our own security.”[29]

Morocco became the first Middle Eastern country to complete a free trade area negotiation with the United States as part of the MEFTA strategy, and the agreement was implemented on January 1, 2006. Negotiations between the United States and Morocco were launched in 2003, when King Mohammad of Morocco visited President Bush. Morocco was a logical early target, because it was among the first Islamic states to denounce the September 11, 2001, terrorist attacks and declare solidarity with the American people in the war against terrorism. Additionally, Morocco is a relatively stable and liberal Arab Muslim nation.

Next, the FTA with Bahrain was implemented in August 2006. Again, there were a number of reasons for negotiating an agreement with Bahrain. Bahrain and the United States signed a Defense Cooperation Agreement in October 1991, granting U.S. forces access to Bahraini facilities, and Bahrain was the headquarters of the U.S. Navy’s Fifth Fleet.

An FTA with Oman was also signed in January 2006. Like Bahrain, there were important defense reasons to select Oman as a trade partner; for example, Oman hosts three Air Force pre-positioning sites, and Omani airbases have been essential to the U.S. efforts in both Iraq and Afghanistan.

The United States also entered into negotiations for a free trade area with the United Arab Emirates (UAE), and again there were important reasons for the UAE to be an early target for an FTA. The UAE is a significant military ally of the United States; in 2006, U.S. naval vessels made more than 600 visits to UAE ports, more than to any other country outside the United States. The FTA negotiations, however, were not successful, primarily because the UAE was unwilling to open its services and oil sector to 100 percent foreign ownership, as demanded by the United States. This issue was not a stumbling block with Oman and Bahrain, primarily because the oil sector is less important in those countries and because those countries were already more open to foreign ownership.

The United States had also considered negotiating an FTA with Egypt. As a first step, in December 2004 the United States and Egypt signed an agreement to create QIZs that would allow for duty-free export to the United States of Egyptian goods that contain Israeli inputs. In announcing this agreement, the U.S. trade representative, Robert Zoellick, described it as “a concrete, practical result of President Bush’s plan to promote closer U.S. trade ties with the Middle East so as to strengthen development, openness, and peaceful economic links between Israel and its neighbors.”[30]

However, in 2005 parliamentary elections the opposition party made an unexpectedly strong showing. Egyptian president Hosni Mubarek then postponed the next scheduled elections for two years and imprisoned the opposition presidential candidate, Ayman Nour. As a consequence, the United States dropped efforts to negotiate an FTA with Egypt.

The concept of a Middle Eastern Free Trade Area actually has extensive roots in the Arab world. In 1997, the seventeen members of the Arab League agreed on a project to create a Greater Arab Free Trade Area (GAFTA). The seventeen GAFTA countries are slightly different from the MEFTA proposed by the Bush administration.  GAFTA would include Lebanon, Libya, Sudan, and Syria, which MEFTA would not, and MEFTA would include Algeria and Israel, which would not be in GAFTA.

The Arab League has made some progress in forming GAFTA, but substantial trade barriers remain to intraregional trade. Reducing these trade barriers in the Middle East could be important, because intraregional trade currently is minimal; only 7.6 percent of overall exports are within the region, even less than the intraregional trade in Africa.[31] Obviously, the fact that many Middle Eastern countries concentrate on oil production that is exported to the developed countries is a cause of the low level of intraregional trade, but another major factor is the high level of trade barriers to intraregional trade still maintained by each country.

The Americas

Achieving a free trade area of the Americas has been a U.S. objective at least since President George H. W. Bush announced the Enterprise of the Americas Initiative in June 1990.[32] To expand trade, he announced that the United States “stands ready to enter into free trade agreements with other markets in Latin America and the Caribbean. . . . We look forward to the day when not only are the Americas the first fully free, democratic hemisphere but when all are equal partners in a free trade zone stretching from the port of Anchorage to the Tierra del Fuego.”[33]

Actual negotiations to construct a Free Trade Area of the Americas (FTAA) were subsequently launched at the First Summit of the Americas held in Miami in December 1994. The objective of these negotiations was to eliminate barriers to trade and investment among the thirty-four democracies in the Americas. In their Declaration of Principles, the heads of state of the participating countries said that “free trade and increased economic integration are key factors for raising standards of living, improving the working conditions of people in the Americas and better protecting the environment.”[34]

U.S. trade negotiators saw an FTAA both in commercial and in foreign policy terms. In his letter of intent to negotiate the trade agreement, U.S. trade representative Robert Zoellick said: “By reducing and then eliminating hemispheric trade barriers, the FTAA will provide substantial and growing foreign markets for U.S. goods and services. The FTAA agreement will also strengthen the rule of law, solidify economic reform throughout the hemisphere, and reinforce the democratic principles that unite FTAA countries.”[35]

All countries in South, Central, and North America were participants in the FTAA negotiations except Cuba, which was considered by the United States to be the only nondemocratic nation in the Americas. Logically, of course, if trade promotes economic growth and this in turn promotes democracy, it would have made sense to include Cuba in the proposed FTAA. However, U.S. negotiators no doubt felt that this would place too great a political burden on the negotiations. The United States has maintained an economic, commercial, and financial embargo against Cuba since 1962, when Congress passed the “Cuban Democracy Act” with the stated purpose of promoting democracy in Cuba. By 1994, of course, it was clear that the approach of embargoing trade had failed to promote democracy in Cuba. However, opponents of opening up trade with Cuba had substantial political clout, and they would have greatly complicated the negotiations.

To achieve an FTAA, the Bush administration pursued a two pronged strategy, with the first prong being direct negotiations among the thirty-four North and South American democracies. Parallel to this, the United States also sought to negotiate FTAs with individual countries in the Americas “to create competition among countries for liberalization in the Western Hemisphere, thus furthering our efforts to establish a Free Trade Area of the Americas.”[36] This strategy, originally called “competitive liberalization” and later “complementary liberalization,” was also pursued in other regions to generate pressure for other regional agreements as well as pressure to successfully conclude the multilateral Doha Round. Interest in generating momentum for the FTAA was specifically stated as a U.S. objective in negotiations with Chile, the Dominican Republic, Bolivia, Colombia, Ecuador, Peru, and Panama.

Negotiations for the FTAA were far advanced by April 2001, when the Summit of the Americas was held in Quebec. The thirty-four nations participating in the negotiations were working in nine separate groups: market access, agriculture, services, investment, intellectual property rights, government procurement, subsidies and antidumping, competition policy, and dispute settlement. In February 2003, the United States made a far-reaching offer to eliminate duties and open up trade, and the outlook for the negotiations looked promising.

However, by the time of the fourth summit held in 2005, it was becoming clear that negotiations were at an impasse. In the Summit Declaration, the difference in view between the countries was apparent, as some members called for continued negotiations, while “other member states maintain that the necessary conditions are not yet in place for achieving a balanced and equitable free trade agreement with effective access to markets free from subsidies and trade-distorting practices.”[37]

The primary cause of the impasse was disagreement on handling trade in agricultural products. In particular, Brazil was unwilling to open its market for U.S. goods and services unless the United States limited its agricultural subsidies and reduced its agricultural trade barriers significantly. Both Brazil and the United States recognized that the only way politically the United States could cut agricultural subsidies was in the multilateral Doha Round where all countries, and particularly the EU, would also reduce their subsidies. Accordingly, it was clear at that time that further progress on the FTAA would have to wait for progress in the Doha negotiations.

A minor factor in the collapse of the FTAA negotiations was the growing influence of Venezuela’s Hugo Chávez, who had long been a critic of the FTAA, which he saw as an extension of U.S. imperialism. In place of the FTAA, Chávez advocated the Bolivarian Alternative for the Americas (Bolivariana para los Pueblos de Nuestra América), which was based on a socialist model and had been launched in 2004 by Cuba and Venezuela. At the 2005 summit, Chavez organized a counter meeting which he called the “Summit of the People.”

In the face of the FTAA impasse, the United States redoubled its focus on bilateral FTA negotiations already under way in the Americas. In November 2003, the U.S. trade representative had notified Congress of his intent to negotiate agreements with Columbia, Peru, Ecuador, and Bolivia, which were members of the Andean Pact, along with Venezuela. (Venezuela announced its intent to pull out of the Andean Pact in 2006.) In addition to gaining access for U.S. exporters, the letter of intent noted that an FTA with the Andean countries would “enhance our efforts to strengthen democracy,” “advance our goals of helping the Andean countries to combat narcotrafficking,” and “lend momentum to concluding the Free Trade Area of the Americas.”[38]

The Office of the U.S. Trade Representative (USTR) also notified Congress of the intent to negotiate with Panama in November 2003. Stated reasons were that an “FTA with Panama will contribute to our efforts to strengthen democracy and support for fundamental values throughout the region. . . . Panama is a valued partner in the achievement of other important U.S. interests as well, including the fight against narcotrafficking, terrorism, and money laundering. Indeed, an FTA will serve to strengthen not only economic ties but also political and security ones.”[39]

In February 2004, the USTR had notified Congress of the intent to negotiate agreements with Costa Rica, El Salvador, Honduras, Guatemala, Nicaragua, and the Dominican Republic. A Department of State press release described these agreements as being “about much more than trade.” “U.S. security is connected to development in the hemisphere. Criminal gangs, drug trafficking, even trafficking in persons create dangerous transnational networks. The CAFTA-DR offers a way to treat the cause of the problem, rather than just the symptoms.”[40]

Asia

Prior to the Trans-Pacific Partnership negotiations, foreign policy objectives had not been as important in shaping the United States’ FTA negotiations with Asian countries as had been the case for its Middle Eastern agreements. The impetus for its trade agreements with the Asian countries had been primarily to promote U.S. commercial interests.

In October 2002, President Bush announced the Enterprise for ASEAN Initiative, which set out the U.S. objective of entering into FTAs with the individual member countries of the Association of Southeast Asian Nations (ASEAN) that are also members of the WTO. To date, the United States has negotiated an FTA with Singapore and had been in negotiations for an FTA with Malaysia and Thailand. The letter of intent to negotiate with Singapore does not mention any foreign policy objectives, whereas the letters of intent to negotiate with Malaysia and Thailand only briefly note that the countries have been partners in the global war on terrorism.

The letter of intent to negotiate an agreement with Australia noted that the agreement would “further deepen the ties between our societies and strengthen the foundation of our security alliance.”[41] The letter of intent for South Korea also emphasized commercial interests, but noted that “we are partners in the global war on terrorism, and the extensive ties between the U.S. and Korean armed forces bolster U.S. strategic interests in the region.”[42]

U.S. insistence on including the investor-state dispute settlement provisions created problems for both the Australian and South Korean negotiations. Australia refused to include these provisions in the U.S.-Australian FTA. The South Korean negotiators resisted their inclusion but finally agreed. However, when the government sought approval of the agreement from the South Korean Parliament, the opposition party refused to support the agreement unless the investor-state dispute settlement provisions were removed, and the government ultimately had to ram the agreement through on a straight party-line vote.

U.S. negotiations for a Trans-Pacific Partnership (TPP) agreement do have an extremely important foreign policy aspect.  China represents the major geopolitical challenge for the United States today, and China’s neomercantilist policies are damaging the U.S. economy.  The United States needs to find a way to persuade China to adopt economic policies that do not injure its trade partners, and a successful TPP that limits the scope for neomercantilist policies could be important in this regard if China decides to join the TPP at some point in the future.  The issue of whether the TPP furthers U.S. foreign policy objectives is explored in Chapter 10.

Conclusion

Trade agreements were seen as an important foreign policy tool immediately after World War II and again after the terrorist attacks of September 11, 2001. After 9/11, U.S. policymakers came to believe that promoting democracy and economic development were important in the “war on terror” and that trade agreements were an important tool for promoting democracy and development.

The argument that a properly constructed trade agreement can promote democracy does seem to have some merit. A trade agreement can promote a greater reliance on the rule of law and greater private-sector involvement in policy; a trade agreement can also encourage economic growth, which many feel is important if a country is to become more democratic. There are many more direct tools for promoting democracy than trade agreements, of course, such as foreign assistance to civil society groups working for democracy, sanctions against countries that rig elections, and public condemnation of nondemocratic acts, and the impact of a trade agreement would seem to be more long term than these other tools.

If U.S. trade agreements are to be an effective foreign policy tool, however, the United States should be prepared to be more flexible in the future, rather than insisting on a one-size-fits-all model. Its demands to include the investor-state dispute mechanism complicated negotiations with a number of countries, and insisting on full investment access was a nonstarter with the UAE.

Today, negotiations for the TPP have important foreign policy implications. China’s neomercantilist trade policies are a threat to the stability of the world trade system. The United States needs to address these policies, but it must do so in a way that does not make China a future enemy. The TPP has always been seen as an agreement that other countries belonging to the Asia-Pacific Economic Cooperation forum—such as China, South Korea, and Indonesia—will want to join.  These countries will have to agree to the TPP rules, which are much stronger than the World Trade Organization rules, and they will have to negotiate with the TPP countries for even stronger rules, if they are to be able to join.

[1] It should be noted that scholars disagree about the extent to which the Tariff Act of 1930 raised tariffs and contributed to the Depression.

[2] Robert A. Pollard and Samuel F. Wells Jr., “1945–1960: The Era of American Economic Hegemony,” in Economics and World Power, edited by William Becker and Samuel F. Wells Jr. (New York: Columbia University Press, 1984), 334–35.

[3] Cordell Hull, The Memoirs of Cordell Hull, Volume 1, edited by Andrew Henry Thomas Berding (New York: Macmillan, 1948), 81.

[4] The five trade rounds were Geneva (1947), Annecy (1949), Torquay (1950), Geneva (1956), and Dillon (1960–61).

[5] Dwight D. Eisenhower, Mandate for Change, The White House Years, 1953–1956 (New York: Doubleday, 1963), 208.

[6] “Truman Doctrine: President Harry S. Truman’s Address Before a Joint Session of Congress, March 12, 1947, Yale Law School, Avalon Project, http://avalon.law.yale.edu/20th_century/trudoc.asp.

[7] See the report by Congressman Morris K. Udall: “The Trade Expansion Act of 1962: A Bold New Instrument of American Policy,” University of Arizona, http://www.library.arizona.edu/exhibits/udall/congrept/87th/620517.html.

[8] Public Law 87-794, Oct. 11, 1962, Sec. 102, Statement of Purposes.

[9] Executive Office of the President, “Statement of President John F. Kennedy,” October 11, 1962, http://www.jfklink.com/speeches/jfk/publicpapers/1962/jfk449_62.html.

[10] Ibid.

[11] Edward Hudgins, “Executive Memorandum #53: The Case for a U.S.-Israel Free Trade Area,” Heritage Foundation, May 22, 1984, http://www.heritage.org/research/reports/1984/05/the-case-for-a-us-israel-free-trade-area.

[12] Executive Office of the President, “Letter from President William Clinton to U.S. Congress,” November 3, 1993.

[13] Condoleezza Rice, “Rethinking the National Interest,” Foreign Affairs, July–August 2008, 2, 3.

[14] Executive Office of the President, “Statement of President George W. Bush,” February 26, 2003, 3, http://georgewbush-whitehouse.archives.gov/news/releases/2003/02/20030226-11.html.

[15] “The National Security Strategy of the United States of America,” March 2006, 3, http://georgewbush-whitehouse.archives.gov/nsc/nss/2006/.

[16] Ibid., 6, 7.

[17] Available at http://georgewbush-whitehouse.archives.gov/news/releases/2004/02/20040220-10.html.

[18] Rice, “Rethinking,” 12.

[19] “Statement of Robert B. Zoellick, U.S. Trade Representative, before the Committee on Finance, U.S. Senate,” March 5, 2003, 19.

[20] Ibid., 17.

[21] Quan Li and Rafael Reuveny, “Economic Globalization and Democracy: An Empirical Analysis,” British Journal of Political Science 33 (2003): 29–54; Francisco Rodriguez and Dani Rodrik, Trade Policy and Economic Growth: A Skeptic’s Guide to Cross-National Evidence, NBER Working Paper W7081 (Cambridge, Mass.: National Bureau of Economic Research, 1999).

[22] Ernesto Lopez-Cordova and Christopher Meissner, The Globalization of Trade and Democracy, 1870–2000, NBER Working Paper 11117 (Cambridge, Mass.: National Bureau of Economic Research, 2012), http://www.nber.org/papers/w11117; Daniel T. Griswold, “Trading Tyranny for Freedom: How Open Markets Till the Soil for Democracy,” Cato Institute, http:cato.org/pubs/tpa/tpa-026.pdf.

[23] Eva Bellin, “Democratization and Its Discontents: Should America Push Political Reform in the Middle East,” Foreign Affairs, July–August 2008, 112–19, at 119.

[24] John Sewell, “The New Realism: Globalization, Development and American National Interests,” unpublished paper, August 21, 2004, 6.

[25] USTR, press release, https://ustr.gov/archive/Document_Library/Fact_Sheets/2003/Middle_East_Free_Trade_Initiative.html.

[26] As of February 2, 2012, the United States had bilateral investment treaties, which are designed to protect private investment and promote market-oriented policies, with forty countries. The United States had trade and investment framework agreements with thirty-nine countries, and these provide an avenue for mutual and regular discussions of trade and investment issues.

[27] The Maghreb countries are generally considered to include Algeria, Morocco, and Tunisia, and the Gulf Cooperation Council countries are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and UAE.

[28] “Proposed Middle East Initiatives,” White House Fact Sheet, May 9, 2003.

[29] “Remarks by President Bush at the Commencement Address at the University of South Carolina,” May 9, 2003.

[30] USTR, press release, December 10, 2004, https://ustr.gov/about-us/policy-offices/press-office/press-releases/archives/2004/december/united-states-egypt-and-israel-launch-hi.

[31] Bessma Momani, “A Middle East Free Trade Area: Economic Interdependence and Peace Considered,” University of Waterloo, November 2007, 12, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1026742.

[32] The United States’ concerns with South and Central America, of course, go back at least to President Monroe’s 1823 address to Congress, when he warned European powers not to interfere in the affairs of the newly independent Latin American states. More recently, prior to the fall of the Berlin Wall, U.S. interests in South and Central America centered on containing Communism. In 1961, President Kennedy announced the Alliance for Progress to establish economic cooperation between North and South America. The ten-year plan “to build a hemisphere where all men can hope for a suitable standard of living and all can live out their lives in dignity and in freedom” was intended to counter the emerging communist threat from Cuba. Though the Alliance for Progress did not envision trade liberalization, it did call for a substantial increase in U.S. foreign aid, which unfortunately was not forthcoming as the Vietnam War heated up.

[33] President Bush’s remarks are available at http://www.presidency.ucsb.edu/ws/index.php?pid=18644.

[34] Declaration of Principles, http://www.ftaa-alca.org/summits/miami/declara_e.asp.

[35] “Letter of Intent to Negotiate a Free Trade Area of the Americas from the USTR Robert Zoellick,” October 1, 2002, https://ustr.gov/archive/assets/Document_Library/Press_Releases/2002/October/asset_upload_file944_1908.pdf.

[36] “Letter of Intent to Negotiate an FTA with Chile, from Robert Zoellick,” October 1, 2002.

[37] “Summit Declaration,” http://www.summit-americas.org/iv_summit/iv_summit_dec_en.pdf.

[38] Letter to the Senate from the U.S. trade representative, Robert Zoellick, November 18, 2003.

[39] Ibid.

[40] U.S. Department of State, “CAFTA-DR: Strengthening Freedom, Democracy, and Security,” press release [n.d.].

[41] Letter from Robert B. Zoellick, U.S. trade representative, “Intent to Initiate Free Trade Negotiations with Australia,” to U.S. House of Representatives, November 13, 2002.

[42] “U.S. Trade Representative Letter to Hon. Ted Stevens, President Pro Tempore, U.S. Senate, on ‘Free Trade Agreement—Republic of Korea,’” CongressionalRecord 152, no. 11 (February 2, 2006): S504.

Chapter Updates

 

Home

Chapter 1: U.S. Trade Policy in Crisis

Chapter 2: America's Trade Agreements

Chapter 3: Trade Agreements and Economic Theory

Chapter 4: Trade Agreements and U.S. Commercial Interests

Chapter 5: Foreign Policy: The Other Driver

Chapter 6: Economic Development: A Missed Opportunity

Chapter 7: Uneasy Neighbors: Trade and the Environment

Chapter 8: The Labor Dilemma

Chapter 9: The Way Forward

For more information or questions contact William Krist at william.krist@wilsoncenter.org