Free Trade Poised for Global Explosion With free trade deals with Chile and Singapore already inked and possibly more on the horizon, U.S. small businesses stand to benefit.
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Over the past two years, as global economic growth has slowedand terrorism has forced nations to police their borders moreclosely, some trade experts and businesspeople have predicted thateconomic globalization--the opening of markets and freer flow ofgoods, information, and people--would slow down. Yet over the pasttwo months, the United States, along with several of its tradingpartners, appear to have proved these naysayers wrong. In recentmonths, America has signed free trade deals with Chile andSingapore, has moved toward a deal with Central America, and hasmade progress on other trade agreements. All these deals will havea significant impact on U.S. small businesses, which comprise morethan 95 percent of all American exporters.
Neither Singapore nor Chile is among the world's 10 largesteconomies, but they both have become regional economic powerhousesand major markets for American products. Now both will slash theirtariffs on more than 80 percent of American goods and reduce mostother barriers to American companies and products; the UnitedStates will do the same for Singaporean and Chilean businesses. Oneof the most economically open and business-friendly countries inAsia, Singapore "is trying to make itself into a financialservices and shipping hub for the whole region," says ShermanKatz, an expert in international business at the Center for Strategic andInternational Studies, a Washington, DC, think-tank. "Sothere is a lot of room for smaller American financial companies orlogistics firms to get into the Singapore market."
Singapore also is aggressively trying to position itself as oneof the world's leading locations for biotechnology development.The city-state is developing an enormous science park near itsnational university and offering tax breaks and other incentives tobiotech companies that locate facilities in Singapore. Accordingly,America's biotech industry, which is the world's mostadvanced and is dominated by smaller firms, will have anopportunity to increase exports of biotech-related services,research and equipment to Singapore.
American companies also could use Singapore, which has apopulation of only 4 million, as a base to export to other, largerSoutheast Asian nations, which are developing their ownintra-regional free trade deal. Some of the other Southeast Asiancountries like Indonesia, with a population of more than 200million, or Thailand, with a population of more than 60 million,are potentially huge markets, Katz says. Once Southeast Asia hasits own internal free trade deal, American companies might be ableto piggyback on the U.S-Singapore agreement to gain tariff-freeaccess to countries like Thailand and Indonesia.
What's more, notes Ming-Jer Chen, a business professor andexpert in Asian business at the University of Virginia'sDarden School ofBusiness Administration in Charlottesville, Virginia, SoutheastAsia and China probably will sign a free trade agreement sometimein the next few years, providing opportunities for Americanbusinesses to leverage the Singapore agreement as a means ofavoiding Chinese tariffs.
Like Singapore, Chile does not possess an enormous population,but it has pursued sound economic and political policies and hasbecome the richest nation in South America, with growth rates ofmore than 6 percent annually between 1985 and 2001. Accordingly,Chile will be a major market for American high-tech manufacturingequipment and luxury goods, and many of these higher-end items aresold by small firms.
Indeed, the National Association of Manufacturers estimates thatmore than 90 percent of companies that sell to South America aresmall or midsized businesses. And as Robert Zoellick, America'schief trade negotiator, has noted, since Chile is one of theworld's leading agricultural nations, the trade agreement willprovide a large export opportunity for small U.S. producers of farmmachinery. Zoellick has noted that, because Chile already had afree trade deal with Canada, until the U.S.-Chile agreement,Canadian tractors sold in Chile faced no tariffs, while Americantractors faced tariffs of more than $13,000 each.
The Payoff
Perhaps more important than the immediate impact of the Chileand Singapore deals, trade specialists say, the agreements will putpressure on other key trading partners to ink agreements withWashington. "It's clear that part of the Bushadministration's strategy is to sign as many of these bilateraltrade deals as possible, so countries or regions that don'thave deals with us feel they have to get one," says WilliamLeoGrande, dean of American University's School of PublicAffairs http://www.american.edu/spa in Washington, DC, and authorof Our Own Backyard: The United States in CentralAmerica, 1977-1992.
The strategy already seems to be paying dividends. In earlyJanuary, the U.S. officially opened negotiations to create a freetrade agreement with five Central American nations within the nextyear. Though generally ignored by the U.S. media and much of theAmerican public, Central America is a major trading partner. Thecountries in the region import nearly $9 billion worth of U.S.goods each year, more than India and Russia combined, and the WorldBank predicts the region will grow by 4.5 percent this year--stronggrowth, given the depressed global economic climate. Economistsbelieve a Central American common market could add as much as $1billion to growth in the region, and Jeffrey Schott, an economistat the Institute forInternational Economics, a Washington, DC, researchorganization, notes that eliminating "common external tariffsand other domestic regulatory restrictions...would open substantialnew trading opportunities for U.S. firms."
And over the past decade, most countries in the region havedeveloped relatively stable political and economic climates; inrecent years Central America's most forward-thinking stateshave enacted economic reforms that reduced barriers to entry andprivatized state enterprises. Several Central American countriesare even considering abandoning their local currencies and adoptingthe U.S. dollar (Panama "dollarized" nearly a centuryago), a move that would make it easier for American exporters tooperate in the region.
As with South America, small companies dominate U.S. trade withCentral America, comprising more than 90 percent of all exportersto the region. Many of these exporters are small Hispanic-ownedU.S. companies. These Hispanic-owned businesses would be in a primeposition to benefit from a trade deal with Central America, sincemany of them are run by managers who are fluent in Spanish; whoretain family links in El Salvador, Guatemala, Nicaragua and othercountries; and who are already sending remittances and otherinvestments back to Central America. (There are more than 1 millionimmigrants from El Salvador alone in the United States, and theysend back more than $1.5 billion in remittances.)
In particular, small Hispanic-run IT companies could prosper byexporting services to Central America and outsourcing facilitiesthere, since many Central American companies are offeringincentives to lure American tech companies. Panama is building an$85 million information technology zone for companies that locatein the country, while Costa Rica, the wealthiest and most stablenation in Central America, has already lured Intel and a raft ofsmaller IT companies by promising them an eight-year tax exemptionand other goodies. And as e-commerce develops, these Hispanic smallbusinesses will be able to bypass some of the physicalinfrastructure problems in Central America. Morgan Stanleyestimates that e-commerce in Latin America will represent $7.6billion worth of business this year.
Overcoming the Hurdles
A free trade agreement with Central America would not be withoutobstacles. The region still lacks high-quality roads and rails,though Mexican president Vicente Fox has announced a plan to helpupgrade Central America's infrastructure. Corruption and weakcivil services can make it difficult for small foreign companies toobtain permits and other necessary licensing in Central America.However, businesspeople who deal with countries in the region saygraft has become less of an issue for American firms there. Indeed,global corruption-fighter Transparency International, in its annualreport on the region, notes, "The region finally seems to becoming to grips with the fact that its long history of corruptionhinders development." (Costa Rica in particular receives highmarks from Transparency International for fighting graft.) Andseveral Central American countries have made a strong push toupgrade their civil services. Nicaragua, a country notorious forred tape, has even banned afternoon siestas for civil servants,which used to last from 2 p.m. and 5 p.m., a major disruption inthe day.
Other nations have followed Central America's lead.Australia recently announced it would begin talks on a free tradeagreement with the United States, a deal that would dwarf theSingapore and Chile agreements, since Australia is one of theworld's biggest markets for American manufactured goods,purchasing roughly $12 billion worth each year. In fact, Australiais one of the few countries in the world that the United States hasa manufactured goods surplus with. In November, Washington alsoannounced that it was beginning work on a potential U.S.-Moroccofree trade deal, an agreement the National Foreign Trade Council, a coalition ofsmall and large exporters, said would provide significantopportunities for American travel operators, as Morocco is a majortourist destination.
Ultimately, trade specialists say, inking bilateral deals willpromote the Bush administration's major trade objective: a freetrade agreement encompassing all the countries in the WesternHemisphere (save Cuba). Known as the Free Trade Area of theAmericas (FTAA), the agreement would be the biggest trade dealsince the inauguration of the European Union. Because of the sizeand complexity of the FTAA, negotiators from all the North andSouth American countries have been hammering out the deal for overfive years, and some businesspeople worried that the recentelection of populist leaders in Ecuador and Brazil would furtherstall the process. Yet despite the swing left, few Latin Americannations have instituted protectionist measures, and FTAAnegotiators are speeding up their pace. At a recent forum at theCenter for Strategic and International Studies, Rubens Barbosa,ambassador to the United States from Brazil, one of the countriesthat historically had been skeptical of an FTAA, said that therewas "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, saysLeoGrande: "An FTAA would radically change commerce in thehemisphere."
Joshua Kurlantzick is foreign editor of The New Rupublicand a frequent contributor to Entrepreneur.
