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Free Trade Agreements: Impact on U.S. Trade and Implications for U.S. Trade Policy

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Free trade areas (FTAs) are arrangements among two or more countries under which they agree to eliminate tariffs and nontariff barriers on trade in goods among themselves. However, each country maintains its own policies, including tariffs, on trade outside the region.

In the last few years, the United States has engaged or has proposed to engage in negotiations to establish bilateral and regional free trade arrangements with a number of trading partners. Such arrangements are not new in U.S. trade policy. The United States has had a free trade arrangement with Israel since 1985 and with Canada since1989, which was expanded to include Mexico and became the North American Free Trade Agreement (NAFTA) effective in January 1994.

The United States has been conducting negotiations with 33 Western Hemispheric countries with a stated goal of forming a Free Trade Area of the Americas (FTAA) by 2005 and with various Asian and Pacific-Rim countries to achieve free trade and investment by 2020. U.S. interest in bilateral and regional free trade arrangements has surged and the Bush Administration has accelerated the pace of negotiations since the enactment of the Trade Promotion Authority in August 2002. On January 1, 2004, U.S. FTAs with Chile and Singapore entered into force. In 2004, agreements with Australia and Morocco were signed and approved by the Congress. The agreement with Australia entered into force on January 1, 2005, and the agreement with Morocco entered into force on January 1, 2006. An agreement with Bahrain was signed on September 14, 2004, for which Congress passed and the President signed implementing legislation (H.R. 4340/P.L. 109-169, January 11, 2006). An agreement with Central American countries and one with the Dominican Republic were also signed and combined into DR-CAFTA. The House and Senate passed implementing legislation for DR-CAFTA on July 27 and 28, 2005, respectively, and President Bush signed it into law on August 2, 2005 (P.L. 109-182). FTA negotiations have been completed with Colombia, Peru, and Oman. The Senate passed S. 3569, a bill to implement the U.S.-Oman FTA on June 29, 2006, and the House passed H.R. 5684 on July 20, 2006. The United States is pursuing FTA negotiations with other trading partners.

These efforts are of direct interest to Congress. U.S. participation in free trade agreements can occur only with the concurrence of the Congress. In addition, FTAs will affect the U.S. economy, with the impact varying across sectors.

FTAs raise some important policy issues for the second session of 109th Congress as it considers implementing legislation and monitors negotiations as part of its oversight responsibilities: Do FTAs serve or impede U.S. long-term national interests and trade policy objectives? Which type of an FTA arrangement meets U.S. national interests? What should U.S. criteria be in choosing FTA partners? Are FTAs a substitute for or a complement to U.S. commitments and interests in promoting a multilateral trading system via the World Trade Organization (WTO)? Experts differ sharply over these questions. This report will be updated as events warrant.