Free To Trade: How Free Trade Agreements Open Global Markets

Wente Family Estates has been selling wine in the Republic of Korea since the new century began, targeting restaurants and wine clubs. The Livermore, Calif., company’s growing Korean sales reflect changing taste preferences and alcohol consumption habits in that Asian country, a trend fueled in part by increased business and holiday travel to the West. In 2012, U.S. wine exports rose 50 percent over the previous year, reaching $15 million, a surge many wine exporters—Wente Family Estates Vice President of International Sales Michael Parr included—attribute to the Korea-United States (KORUS) Free Trade Agreement that went into effect in March 2012. Among other things, the agreement eliminated Korea’s 15 percent tariff on alcohol.

In the world’s 14th largest market, U.S. wines compete head to head with wines from Chile, Parr notes. Chile had enjoyed a price-point edge in this competition since Korea and Chile signed their own free trade deal in 2003. With the KORUS in place, that gap disappeared and prices dropped about 8 percent at the consumer levels. “That’s helped us build recognition for our wines,” Parr says.

South Korea now ranks second among Asian markets for the San Francisco-area vintner, behind Japan and ahead of Hong Kong and Singapore. Overall, Wente ships to more than 80 markets, primarily through single-market distributors. Exports account for nearly 25 percent of about 500,000 cases per year.

The KORUS FTA, negotiated simultaneously with similar pacts governing trade with Colombia and Panama, is the most impactful of the three agreements the U.S. Trade Representative has signed so far this decade—and clearly the most important trade deal since the mammoth North American Free Trade Agreement (NAFTA) went into effect in 1994, expanding tri-lateral trade between the U.S., Canada and Mexico. The U.S. has now signed pacts with 20 countries, encompassing nearly half of all export sales. The Trade Rep is currently negotiating pacts with two Pacific trade alliances that, when completed, will extend the free trade umbrella to nearly two-thirds of America’s export markets.

The agreements accelerate imports and exports by slashing or eliminating tariffs, while clarifying what Judy Reinke, acting assistant secretary for global markets at the International Trade Administration, calls the “rules of the road”—the largely informal arrangements that govern commerce. To Reinke, the value of free trade agreements defies debate. “U.S. exports to our 20 free trade agreement partners are up 57 percent since 2009,” she notes. “Our exports to the rest of the world are up 44 percent in that same period.”

While U.S. exports to South Korea overall were flat in 2013, trade with Colombia and Panama—2012’s two other free trade partners—continued to rise. With Panama, U.S. exports increased to $10.8 billion last year, up nearly 10 percent from 2012. Results in Colombia have been even stronger, up nearly 19 percent in the agreement’s first year, to $18.6 billion.

“We export to a number of countries around the world, and the free trade agreements have enhanced our sales,” says Ernesto Pinal, executive vice president at nextScan, a manufacturer of scanning equipment based in Boise, Idaho. In 2013, nextScan doubled sales in Colombia while expanding in Mexico, Canada, Israel and Bahrain—all free trade partner countries.

“In Colombia, before the free trade agreement, you had to submit an application in advance,” recounts Pinal. “At Customs they’d look into the classifications to see where your product falls. You’d get your classification. Six months later, your next Customs guy hits you with a different classification and a different tax code. You have to fight it. It took a long time. Now the codes are harmonized. We fill out the code and we ship.” Moved via express carrier, products now stay under 48 hours at Customs. Recalls Pinal: “Customs used to take two to three weeks.”

To Eugene Laney, vice president for International Trade Affairs at DHL Express, the big benefit of free trade is the introduction of what he calls “increased efficiencies” through eliminating the broad range of annoying practices and policies that protect domestic supplies—the hodge-podge of origin quotas, informal favoritism, arbitrary regulations and sheer bureaucratic inertia. With trade deals in force, regulatory bodies on both sides of the trade equation “agree to accept the other country’s certifications,” says Laney. “In this way, markets open up.”

Free trade agreements generally introduce international dispute mechanisms, reducing the risk of doing business in markets where the legal infrastructure is murky. “When you feel you can protect your intellectual property, you’re more comfortable selling into a new market,” adds Laney.

Free trade advocates contend the pacts benefit consumers by widening choices, reducing protectionism and lowering prices. As consumer markets mature, demand for U.S. products rises.

“We ship a lot to South America, and the free trade agreements—especially with Chile and, before that, Mexico—have been good to us,” says Manny Fernandez, executive vice president of Logistics Operations for Flagler Global Logistics in Coral Gables, Florida. Chile’s domestic retail industry has matured in the years since the U.S.- Chile Free Trade Agreement was signed in 2004. U.S.-based chains like Walmart and Home Depot add efficiency to distribution strategies, as middle-class tastes and expectations grow. “In their winter, Chile now buys huge amounts of oranges and lots of other produce from the U.S.,” Fernandez adds. “That wasn’t so before.”

Cast into the national spotlight, each new free trade partner finds itself courted in turn by American companies suddenly eager to initiate or expand business. “Our evidence is that trade agreements drive two-way trade 50 percent higher than it would have been,” says Gary Hufbauer, senior fellow at the Peterson Institute for International Economics in Washington. “Trade peaks in five to eight years, and stays at that level.”

Support for the current round of trade agreements, which would extend free trade terms to Japan and a dozen much smaller economies, is avidly supported by figures like DHL’s Laney. “When the U.S. signs a free trade agreement, we experience a huge increase in commerce,” he says. “Each agreement represents a huge opportunity. Yet even now, many exporters are unaware of the opportunities opening up.”