Free Trade Poised for Global Explosion
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Over the past two years, as global economic growth has slowed and terrorism has forced nations to police their borders more closely, some trade experts and businesspeople have predicted that economic globalization--the opening of markets and freer flow of goods, information, and people--would slow down. Yet over the past two months, the United States, along with several of its trading partners, appear to have proved these naysayers wrong. In recent months, America has signed free trade deals with Chile and Singapore, has moved toward a deal with Central America, and has made progress on other trade agreements. All these deals will have a significant impact on U.S. small businesses, which comprise more than 95 percent of all American exporters.
Neither Singapore nor Chile is among the world's 10 largest economies, but they both have become regional economic powerhouses and major markets for American products. Now both will slash their tariffs on more than 80 percent of American goods and reduce most other barriers to American companies and products; the United States will do the same for Singaporean and Chilean businesses. One of the most economically open and business-friendly countries in Asia, Singapore "is trying to make itself into a financial services and shipping hub for the whole region," says Sherman Katz, an expert in international business at the Center for Strategic and International Studies, a Washington, DC, think-tank. "So there is a lot of room for smaller American financial companies or logistics firms to get into the Singapore market."
Singapore also is aggressively trying to position itself as one of the world's leading locations for biotechnology development. The city-state is developing an enormous science park near its national university and offering tax breaks and other incentives to biotech companies that locate facilities in Singapore. Accordingly, America's biotech industry, which is the world's most advanced and is dominated by smaller firms, will have an opportunity to increase exports of biotech-related services, research and equipment to Singapore.
American companies also could use Singapore, which has a population of only 4 million, as a base to export to other, larger Southeast Asian nations, which are developing their own intra-regional free trade deal. Some of the other Southeast Asian countries like Indonesia, with a population of more than 200 million, or Thailand, with a population of more than 60 million, are potentially huge markets, Katz says. Once Southeast Asia has its own internal free trade deal, American companies might be able to piggyback on the U.S-Singapore agreement to gain tariff-free access to countries like Thailand and Indonesia.
What's more, notes Ming-Jer Chen, a business professor and expert in Asian business at the University of Virginia's Darden School of Business Administration in Charlottesville, Virginia, Southeast Asia and China probably will sign a free trade agreement sometime in the next few years, providing opportunities for American businesses to leverage the Singapore agreement as a means of avoiding Chinese tariffs.
Like Singapore, Chile does not possess an enormous population, but it has pursued sound economic and political policies and has become the richest nation in South America, with growth rates of more than 6 percent annually between 1985 and 2001. Accordingly, Chile will be a major market for American high-tech manufacturing equipment and luxury goods, and many of these higher-end items are sold by small firms.
Indeed, the National Association of Manufacturers estimates that more than 90 percent of companies that sell to South America are small or midsized businesses. And as Robert Zoellick, America's chief trade negotiator, has noted, since Chile is one of the world's leading agricultural nations, the trade agreement will provide a large export opportunity for small U.S. producers of farm machinery. Zoellick has noted that, because Chile already had a free trade deal with Canada, until the U.S.-Chile agreement, Canadian tractors sold in Chile faced no tariffs, while American tractors faced tariffs of more than $13,000 each.
Perhaps more important than the immediate impact of the Chile and Singapore deals, trade specialists say, the agreements will put pressure on other key trading partners to ink agreements with Washington. "It's clear that part of the Bush administration's strategy is to sign as many of these bilateral trade deals as possible, so countries or regions that don't have deals with us feel they have to get one," says William LeoGrande, dean of American University's School of Public Affairs http://www.american.edu/spa in Washington, DC, and author of Our Own Backyard: The United States in Central America, 1977-1992.
The strategy already seems to be paying dividends. In early January, the U.S. officially opened negotiations to create a free trade agreement with five Central American nations within the next year. Though generally ignored by the U.S. media and much of the American public, Central America is a major trading partner. The countries in the region import nearly $9 billion worth of U.S. goods each year, more than India and Russia combined, and the World Bank predicts the region will grow by 4.5 percent this year--strong growth, given the depressed global economic climate. Economists believe a Central American common market could add as much as $1 billion to growth in the region, and Jeffrey Schott, an economist at the Institute for International Economics, a Washington, DC, research organization, notes that eliminating "common external tariffs and other domestic regulatory restrictions...would open substantial new trading opportunities for U.S. firms."
And over the past decade, most countries in the region have developed relatively stable political and economic climates; in recent years Central America's most forward-thinking states have enacted economic reforms that reduced barriers to entry and privatized state enterprises. Several Central American countries are even considering abandoning their local currencies and adopting the U.S. dollar (Panama "dollarized" nearly a century ago), a move that would make it easier for American exporters to operate in the region.
As with South America, small companies dominate U.S. trade with Central America, comprising more than 90 percent of all exporters to the region. Many of these exporters are small Hispanic-owned U.S. companies. These Hispanic-owned businesses would be in a prime position to benefit from a trade deal with Central America, since many of them are run by managers who are fluent in Spanish; who retain family links in El Salvador, Guatemala, Nicaragua and other countries; and who are already sending remittances and other investments back to Central America. (There are more than 1 million immigrants from El Salvador alone in the United States, and they send back more than $1.5 billion in remittances.)
In particular, small Hispanic-run IT companies could prosper by exporting services to Central America and outsourcing facilities there, since many Central American companies are offering incentives to lure American tech companies. Panama is building an $85 million information technology zone for companies that locate in the country, while Costa Rica, the wealthiest and most stable nation in Central America, has already lured Intel and a raft of smaller IT companies by promising them an eight-year tax exemption and other goodies. And as e-commerce develops, these Hispanic small businesses will be able to bypass some of the physical infrastructure problems in Central America. Morgan Stanley estimates that e-commerce in Latin America will represent $7.6 billion worth of business this year.
Overcoming the Hurdles
A free trade agreement with Central America would not be without obstacles. The region still lacks high-quality roads and rails, though Mexican president Vicente Fox has announced a plan to help upgrade Central America's infrastructure. Corruption and weak civil services can make it difficult for small foreign companies to obtain permits and other necessary licensing in Central America. However, businesspeople who deal with countries in the region say graft has become less of an issue for American firms there. Indeed, global corruption-fighter Transparency International, in its annual report on the region, notes, "The region finally seems to be coming to grips with the fact that its long history of corruption hinders development." (Costa Rica in particular receives high marks from Transparency International for fighting graft.) And several Central American countries have made a strong push to upgrade their civil services. Nicaragua, a country notorious for red tape, has even banned afternoon siestas for civil servants, which used to last from 2 p.m. and 5 p.m., a major disruption in the day.
Other nations have followed Central America's lead. Australia recently announced it would begin talks on a free trade agreement with the United States, a deal that would dwarf the Singapore and Chile agreements, since Australia is one of the world's biggest markets for American manufactured goods, purchasing roughly $12 billion worth each year. In fact, Australia is one of the few countries in the world that the United States has a manufactured goods surplus with. In November, Washington also announced that it was beginning work on a potential U.S.-Morocco free trade deal, an agreement the National Foreign Trade Council, a coalition of small and large exporters, said would provide significant opportunities for American travel operators, as Morocco is a major tourist destination.
Ultimately, trade specialists say, inking bilateral deals will promote the Bush administration's major trade objective: a free trade agreement encompassing all the countries in the Western Hemisphere (save Cuba). Known as the Free Trade Area of the Americas (FTAA), the agreement would be the biggest trade deal since the inauguration of the European Union. Because of the size and complexity of the FTAA, negotiators from all the North and South American countries have been hammering out the deal for over five years, and some businesspeople worried that the recent election of populist leaders in Ecuador and Brazil would further stall the process. Yet despite the swing left, few Latin American nations have instituted protectionist measures, and FTAA negotiators are speeding up their pace. At a recent forum at the Center for Strategic and International Studies, Rubens Barbosa, ambassador to the United States from Brazil, one of the countries that historically had been skeptical of an FTAA, said that there was "great progress" taking place in FTAA negotiations. The bilateral deals are pushing the FTAA negotiators to hurry up, and they will probably finish the agreement by 2006, says LeoGrande: "An FTAA would radically change commerce in the hemisphere."
Joshua Kurlantzick is foreign editor of The New Rupublic and a frequent contributor to Entrepreneur.