income earned by the U.S. company managing the supply chain would tend to rise. Any increase in profits to the U.S. company could be repatriated to the United States or could be reinvested abroad. 34
The net effect on a supply chain and the U.S. trade balance because of a cut in tariffs under an FTA, therefore, depends on the relative magnitude of the tariff reductions on each side, the nature of and location of the supply chain, and the responsiveness of trade flows to tariff reductions. In general, however, since U.S. tariffs tend to be lower than those of FTA partner countries, the greater benefit of trade liberalization arguably will go to U.S.-based companies.
For an American company with a global production network, the more countries that participate in a free trade area the better. Such a “common market” with no internal tariffs not only eliminates the need to pay duties as components and final products circulate within the national borders defining the FTA, but it also reduces the required documentation and calculations to determine country of origin. U.S. multinational companies generally support efforts to establish regional free trade areas and to eliminate border barriers. 35
The growing maze of bilateral FTAs, however, pose a different problem for businesses, particularly for their operations in other countries. For example, Thailand has become a manufacturing location for many companies. Thailand has had held talks with the United States on establishing a bilateral FTA, has signed a limited FTA with China, has a framework agreement with India, and has broad FTAs with Australia and New Zealand and with other members of the Association of Southeast Asian Nations. It also is in FTA discussions with Japan, India, and Peru. If each FTA that has been implemented has different provisions and rules, the cost of complying with rules of origin requirements or the paperwork involved in documenting that the goods fall under the FTA may exceed the lower tariffs provided by the FTA. Some international businesses have indicated that because of the “nuisance” cost of complying with rules of origin or other requirements in FTAs, they just pay the usual tariff rather than try to qualify for a lower FTA rate.36 This is an argument for the U.S. approach of using a “template” for FTAs in order to ensure consistency across such agreements.
Other aspects of international trade and investment policy include the right of establishment of foreign-owned businesses in countries and the right to national treatment. In essence, these rights ensure that foreign-owned and domestic companies are treated equally both in terms of the right to establish and operate a business and in terms of applicable laws and government action. National treatment also may allow governments to prohibit foreign companies from doing anything not allowed for domestic companies. With the exception of foreign investment that raises security or antitrust complications ,37 the United States provides both national rights of establishment and national treatment as do the countries that are members of the WTO. The more
34 Note that this analysis does not take into account possible offsetting effects to a change in trade flows induced by a tariff change. For example, increased exports could lead to a stronger dollar which then reduces U.S. exports.
Numerous interviews by the author with businesses involved in global markets. Interviews by the author in 2006 and 2008 in Shanghai, China; Taipei, Taiwan; and Tokyo, Japan.
37 CRS Report RL34561, Foreign Investment and National Security: Economic Considerations, by James K. Jackson. CRS Report RL33103, Foreign Investment in the United States: Major Federal Statutory Restrictions, by Michael V. Seitzinger