Delay of Free Trade Pacts Creates Uncertainty for Manufacturers

May 26, 2011
Proponents say further delays will hinder growth, while critics fear more job losses due to offshoring.

The international market accounts for nearly one-third of Quality Float Works Inc.'s business. This small manufacturer of metal floats used to control fluid levels in industrial applications has grown its export business to 30% from just 3% approximately 10 years ago, said Jason Speer, the company's vice president and general manager.

Speer believes the global market is a critical growth driver for the family-owned business based in Schaumburg, Ill. But without certain free-trade agreements in place, the company cannot take full advantage of all the opportunities available around the world, Speer says.

Speer testified May 25 before the Senate Finance Committee to promote the benefits of a pending free-trade pact with Panama.

Despite its small size, Speer says Panama presents significant potential for Quality Float Works' products, which are used in many developing markets for water storage and purification. Without a free-trade agreement, the company faces a 3% to 10% tariff on all goods sold to Panama, Speer says.

The Obama administration has said it would delay sending pending free-trade pacts with Panama, Columbia and South Korea to Congress until Republicans agree to renew a training program for workers displaced by imports or outsourcing.

Utah Sen. Orrin Hatch, the top Republican on the Finance Committee, testified May 26 that failure to pass the agreements would send a signal to global markets that the United States is "not a trusted ally on trade." Massachusetts Democratic Sen. John Kerry said delaying the South Korean agreement may give European competitors an edge on U.S. exporters, Bloomberg news service reported May 26.

That's what happened to Quality Float Works when it bid on a large contract with a company in South Korea, Speer said.

"We ended up losing it to German firm because we had to add an extra 8% for a tariff," Speer said.

But opponents of the proposed legislation say the trade agreements will lead to few exports from the United States and encourage more offshoring.

"In the context of various other tiny, poor third-world countries we have focused on in years past -- in terms of trade agreements -- these [Columbia and Panama] are really the world economy's lemonade stands," said Alan Tonelson, a research fellow at the U.S. Business & Industry Council. He points to the North American Free Trade Agreement as a prime example where U.S. manufacturers established operations to take advantage of low-cost labor.

"Columbia looks very much like a classic outsourcing agreement," he said. "The market is too small to get excited about stirring more U.S. growth."

Instead, Tonelson said the deal will ensure that U.S. investors can produce their products in Columbia and guarantee Columbia access to U.S. markets.

South Korea, on the other hand, is the world's 10th largest economy and presents another set of competitive challenges because the nation has a system of protections for its businesses that puts the United States at an unfair disadvantage, Tonelson said.

While relocation to emerging markets may be an option for larger manufacturers, Speer said his company doesn't have that luxury and that free-trade agreements make exports more feasible.

"If one of the big companies wants to build a plant [offshore], they can do it," he said. "But the smaller ones have to export from wherever we're at. In a competitive market every 3 to 10% helps us compete. We're the ones creating jobs and will continue creating jobs as the economy continues to rebound."

Tonelson counters by saying some manufacturers may benefit from the free-trade agreements, but the issue is the U.S. economy as a whole - not individual companies.

He also said neither the Columbia nor South Korea deal eliminates or reduces value-added taxes maintained by both countries. South Korea holds a 10% VAT while Columbia's is at 16%.

"This means that every U.S. product headed for one of those markets gets 10 or 16% added to its price tag," Tonelson said. "And because VATs aren't levied on exports, it means that every Korean or Colombian product headed to the U.S. receives a 10 or 16% subsidy. The VAT wasn't dealt with in either case because the U.S. government has long adhered to the precept of international trade law holding that VATs are purely domestic taxes and, therefore, not fair game for trade negotiators. Of course, they can have profound international effects, and as long as they remain in place in the economies of so many of our trade partners, they'll keep distorting bilateral trade flows."

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