U.S. Free-Trade Agreements (FTAs)

The United States has fourteen FTAs in force with twenty countries. It is also in the process of negotiating a regional FTA, the Trans-Pacific Partnership, with Australia, Brunei Darussalam, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam, as well as the European Union (EU-US FTA).

One of the prominent exceptions to the MFN principle of nondiscrimination in the treatment of imports is that of free-trade areas and other preferential arrangements. This means that imports from countries with which the United States has free-trade or similar arrangements are accorded low- or duty-free status. It also enables U.S. firms to bid on cer­tain government procurements in the FTA partner country; obtain prompt, adequate, and effective compensation if its investment in the FTA partner country is taken by the govern­ment (expropriated); and supply their services in the FTA partner country and participate in the development of product standards in the FTA partner country. These agreements also provide for the protection and enforcement of American-owned intellectual property rights in the FTA partner country (see International Perspective 16.3).

1. The U.S./Israel Free-Trade Agreement (1985)

The agreement between the United States and Israel provides for free or low rates of duty for merchandise imports from Israel provided the imports meet the rules-of-origin require­ments. To qualify for the preferential tariff rate, the product must be grown, produced, or manufactured in Israel and imported directly into the United States and the cost or value of the materials produced in Israel plus the direct costs of processing operations in Israel must be no less than 35 percent of the import value.

2. The North American Free Trade Agreement (NAFTA) (1994)

NAFTA eliminated tariffs on most goods originating in Canada, Mexico, and the United States over a maximum transition period of fifteen years (i.e., through 2008). For most Mexico-U.S. trade, NAFTA eliminated existing duties immediately and/or phased them out over a period of five to ten years. On a few sensitive items, the agreement phased out tariffs over fifteen years. NAFTA duty treatment is applicable only to goods wholly produced or obtained in the NAFTA region, that is, goods produced in the NAFTA region wholly from originating materials. Goods processed or assembled from imported merchandise must contain 60 percent regional value content (transaction value method) or 50 percent value content using the net cost method.

3. U.S./Australia Free Trade Agreement (USAFTA) (2004)

The USAFTA, finalized in 2004 and implemented on January 11, 2005, provides for the elimi­nation of tariffs on more than 97 percent of Australia’s nonagricultural exports (as well as two thirds of U.S. tariffs on agricultural products) on the day the agreement took effect. Remain­ing U.S. tariffs on Australian exports will be phased out over periods between ten and eighteen years. The agreement also provides for annual increases in quotas for Australian exports of beef and dairy products. It outlines rules for determining the origin of goods being traded in order to establish eligibility. The agreement determines “an originating good” as one that is (a) wholly obtained or produced entirely in the country; (b) wholly produced from originat­ing materials; or (c) produced in the country partly from non-originating materials.

The agreement covers other areas such as cross-border trade in services, electronic commerce, investment, protection of intellectual property rights, competition policy, government procure­ment, and labor and environmental standards, as well as provisions for dispute settlement.

4. Free Trade with Central America and the Dominican Republic (CAFTA-DR) (2004)

The United States signed CAFTA-DR with five Central American countries (Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua) and the Dominican Republic in August 2004. These countries make up the second-largest U.S. export market in Latin America, be­hind Mexico. The agreement provides for the elimination of customs duties on originating goods traded between the parties. Duties on most tariff lines covering industrial and con­sumer goods were eliminated as the agreement entered into force. Duties on other goods are to be phased out during a ten-year period. Apparel made in these countries will be duty and quota free if U.S. or regional fabric and yarn are used. Additional access is also provided for their sugar exports to the United States from the Latin American countries through modest increases in quotas.

Source: Seyoum Belay (2014), Export-import theory, practices, and procedures, Routledge; 3rd edition.