Trade Primer: Qs and As on Trade Concepts, Performance, and Policy
Prepared for Members and Committees of Congress
The 110th Congress has a full legislative and oversight agenda on international trade. The agenda
may include considering legislation to implement a number of free trade agreements, possible
renewal of trade promotion authority (TPA), as well as oversight of U.S. trade relations with
China. This report provides information and context for many of these topics. It is intended to be
read primarily by Members and staff who may be new to trade issues.
This report is divided into four sections in a question-and-answer format: trade concepts, U.S.
trade performance, formulation of U.S. trade policy, and trade and investment issues. Additional
suggested readings are provided in an appendix.
The first section, on “Trade Concepts,” deals with why countries trade, the consequences of trade
expansion, and the relationship between globalization and trade. Key questions address the
benefits of specialization in production and trade, efforts by governments to influence a country’s
comparative advantage, how trade expansion can be costly and disruptive to workers in particular
industries and skill categories, and some unique characteristics of trade between developed
The second section, on trade performance, focuses on the U.S. trade deficit and its impact on
industries. Several questions address the causes of trade deficits, the role of foreign trade barriers,
and how the trade deficit can be reduced. In terms of business impacts, the questions focus on
which U.S. industries appear to be the most and least competitive, and on the relative size of the
The third section deals with the roles played by the Executive Branch, Congress, the private
sector, and the Judiciary in the formulation of U.S. trade policy. Information on how trade policy
functions are organized in Congress and the Executive Branch, as well as the respective roles of
individual Members and the President, is provided. The formal and informal roles of the private
sector and the involvement of the Judiciary are also covered.
The fourth section, on U.S. trade and investment policy, asks questions related to trade
negotiations and agreements and to imports, exports, and investments. The justification, types,
and consequences of trade liberalization agreements, along with the role of the World Trade
Organization, are treated in this section. The costs and benefits of imports, exports, and
investments are also discussed, including how the government deals with disruption and injury to
workers and companies caused by imports and its efforts to both restrict and promote exports.
The motivations and consequences of foreign direct investment flows are also discussed. This
report will not be updated.
Trade Expansion and Globalization..........................................................................................1
U.S. Trade Performance..................................................................................................................5
U.S. Trade Deficit.....................................................................................................................5
Formulation of U.S. Trade Policy..................................................................................................13
Role of Congress.....................................................................................................................13
Role of the Executive Branch.................................................................................................14
Role of the Private Sector.......................................................................................................15
Role of the Judiciary...............................................................................................................16
U.S. Trade and Investment Policy Issues......................................................................................17
Trade Negotiations and Agreements.......................................................................................17
List of Questions...........................................................................................................................27
U.S. Trade Performance..........................................................................................................28
Formulation of U.S. Trade Policy...........................................................................................28
U.S. Trade and Investment Policy Issues................................................................................29
Figure 1. Employees on Nonagricultural Payrolls by Major Industry, 1960-2006........................12
Table 1. U.S. Exports, Imports, and Merchandise Trade Balances 2002-2006...............................6
Table 2. Top U.S. Trading Partners Ranked by Total Merchandise Trade in 2006..........................9
Table 3. U.S. Industries with the Largest Trade Surpluses and Deficits in 2006...........................10
Table 4. Recent Peaks and Current Employment for Industries With Heavy Import
Compe tition ................................................................................................................................ 13
Author Contact Information..........................................................................................................31
Economic theory indicates that trade occurs because it is mutually enriching. It has a positive
economic effect like that caused by technological change, whereby economic efficiency is
increased, allowing greater output from the same amount of scarce productive resources. By
allowing each participant to specialize in producing what it is more efficient at and trading for
what it is less efficient at, trade can increase economic well-being above what would be possible
without trade. There is a broad consensus among economists that trade expansion has a favorable
effect on overall economic well-being, but the gains will not necessarily be distributed equitably.
Moreover, although most economists hold that the benefits to the overall economy exceed the
costs incurred by workers who lose their jobs, some economists argue that the benefits are often
overestimated and the costs are often underestimated.
The idea of comparative advantage was developed by David Ricardo early in the 19th century and
its insight remains relevant today. Ricardo argued that specialization and trade are mutually
beneficial even if a country finds it is more efficient at producing everything than its trading
partners. If one country produces a given good at a lower resource cost than another country, it
has an absolute advantage in its production. (The other country, of course, has an absolute
disadvantage in its production.) If all productive resources were highly mobile between countries,
absolute advantage would be the criterion governing what a country produces and the pattern of
any trade between countries. But Ricardo demonstrated that because resources, particularly labor
and the skills and knowledge it embodies, are highly immobile, a comparison of a good’s absolute
cost of production in each country is not relevant for determining whether specialization and trade
should occur. Rather, the critical comparison within each country is the opportunity cost of
producing any good—how much output of good Y must be forgone to produce one more unit of
good X. If the opportunity costs of producing X and Y are different in each economy, then each
country has a comparative advantage in the production of one of the goods. In this circumstance,
Ricardo predicts that each country can realize gains from trade by specializing in producing what
it does relatively well and in which it has a comparative advantage and trading for what it does
relatively less well and in which it has a comparative disadvantage.
Most often, differences in comparative advantage between countries occur because of differences
in the relative abundance of the factors of production: land, labor, physical capital (plant and
equipment), human capital (skills and knowledge including entrepreneurial talent), and
technology. Standard economic theory predicts that comparative advantage will be in activities
that make intensive use of the country’s relatively abundant factor(s) of production. For example,
the United States has a relative abundance of high-skilled labor and a relative scarcity of low-
1 This section was prepared by Craig K. Elwell, Specialist in Macroeconomics, Government and Finance Division,
skilled labor. Therefore, the United States’ comparative advantage will be in goods produced
using high-skilled labor intensively such as aircraft and comparative disadvantage will be in
goods produced using low-skilled labor intensively such as apparel. In addition to differences in
factor endowments, differences in productive technology among countries create differences in
relative efficiency and may be a basis for comparative advantage. Nevertheless, some high skilled
services jobs, such as computer programming and graphic design, can today be easily done in a
country such as India because of the revolution in telecommunications.
Government actions to influence comparative advantage can be grouped in two broad categories:
policies that indirectly nurture comparative advantage, most often by compensating for some
form of market failure, but not targeted at any specific industry or activity; and policies that aim
to directly create and nurture comparative advantage in particular industries. Indirect influence on
comparative advantage can emanate from government policies that eliminate corruption, enforce
property rights, remove unnecessary impediments to market transactions, assure macroeconomic
stability, build transport and communication infrastructure, support mass education, and assist
technological advance. Policies that try to exert a direct influence on comparative advantage may
include infant industry policies, industrial policies, or strategic trade policies. They all have the
essential goal of identifying and nurturing particular industries that are thought to have extra-
ordinary economic potential. In this view, realizing that potential requires initial government
support, including protection from foreign competition. The efficacy of direct government efforts
to shape comparative advantage is likely to vary significantly according to stages of economic
development. China and India, for example, have used industrial policies to restructure their
economies and enable them better to take advantage of world markets.
A nation’s terms of trade—the ratio of an index of export prices to an index of import prices—is a
measure of the export cost of acquiring desired imports. Increases and decreases in its terms of
trade indicate whether a nation’s gains from trade are rising or falling. A sustained improvement
in the terms of trade expands what our income will buy on the world market and can make a
significant contribution to the long-term growth of economic welfare. Similarly, a falling terms of
trade raises the export cost of acquiring imports, which reduces real income and the domestic
living standard. Although trade is considered a process of mutual benefit, each trading partner’s
share of those benefits can change over time, and movement of the terms of trade is an indicator
of that changing share.
Like technological change and other market forces, international trade creates wealth by inducing
a reallocation of the economy’s scarce resources (capital and labor) into relatively more efficient
exporting industries that have a comparative advantage and away from less efficient activities that
have a comparative disadvantage. This reallocation of economic resources is often characterized
as a process of “creative destruction,” generating a net economic gain to the overall economy, but
also being disruptive and costly to workers in adversely affected industries that compete with
imports. Many of these displaced workers bear significant adjustment costs and many may find
work only at a lower wage. Although economic analysis almost always indicates that the
economy-wide gains from trade exceed the costs, the perennially tough policy issue is how or
whether to secure those gains for the wider community while dealing equitably with those who
are hurt by the process. Economists generally argue that facilitating the adjustment and
compensating for the losses of those harmed by market forces, including trade, is economically
less costly than policies to protect workers and industries from the negative impacts of trade.
While it is debatable how well existing worker assistance policies have worked, funding is also a
longstanding issue. The Peterson Institute for International Economics, for example, estimates the
lifetime costs of worker displacement to be roughly $50 billion year, but calculates that the
United States spends about $2 billion per year to address the costs connected to displacement.
Trade creates and destroys jobs in the economy just as other market forces do. Economy-wide,
trade creates jobs in industries that have a growing comparative advantage and destroys jobs in
industries that have a growing comparative disadvantage. In the process, the economy’s
composition of employment changes, but there may not be a net loss of jobs due to trade.
Consider that over the course of the last economic expansion, from 1992 to 2000, U.S. imports
increased nearly 240%, but total employment grew by 22 million jobs and the unemployment rate
fell from 7.5% to 4.0% (the lowest unemployment rate in more than 30 years.).
International trade can have strong effects, good and bad, on the wages of American workers.
Concurrent with the large expansion of trade over the past 25 years, real wages (i.e., inflation
adjusted wages) of American workers grew more slowly than in the earlier post-war period, and
inequality of wages between the skilled and less skilled worker rose sharply. Trade based on
comparative advantage tends to increase the return to the abundant factors of production—capital
and high-skilled workers in the United States—and decrease the return to the less-abundant 2
factor—low-skilled labor in the United States. Therefore, it is reasonable to expect that, other
factors constant, the large increase in trade over this period, particularly increased trade with
economies with vast supplies of low-skilled labor, could harm the wages of low-skilled U.S.
workers. However, other economic factors such as technological change and the shifting structure
of production among emerging economies may have mitigated the potential adverse effect of
trade on wages. While there may be no strong evidence that expanding trade has depressed the
average wages of U.S. workers, some evidence suggests that increased trade may have caused 3
10% to 20% of the increase in wage inequality. Many observers believe the larger share of
increased inequality of U.S. wages was likely caused by advancing technology’s tendency to pull
up the wages of high-skilled workers and increased immigration’s tendency to push down the
wages of low-skilled workers.
A sizable portion of world trade sees countries exporting and importing to each other goods from
the same industry. This phenomenon is called intra-industry trade. This type of trade is
particularly characteristic of the large flows of products between advanced economies, which
have very similar resource endowments. This suggests that there is another basis for trade than
2 Only 10% of the U.S. labor force has less than a secondary level of education as compared to over 60% below this
level in China’s labor force. See U.S. Department of Labor, Bureau of Labor Statistics, Current Population Survey,
2006 and Barro, Robert and Jong-Wha Lee, “International Data on Educational Attainment,” NBER Working Papers
7911, September 2000.
3 For a survey of this evidence see Douglas Irwin, Free Trade Under Fire, Princeton University Press, 2002, pp. 90-97.
comparative advantage behind intra-industry trade: the exploitation of economies of scale.
Economies of scale exist when a production process is more efficient (i.e. has lower unit cost) the
larger the scale at which it takes place. This scale economy becomes a basis for trade because
while the United States and Germany, for example, could be equally proficient at producing any
of a wide array of goods such as automobiles and pharmaceuticals that consumers want, neither
has the productive capacity to produce the full range of goods at the optimal scale. Therefore, a
pattern of specialization tends to occur with countries producing and trading some sub-set of
these goods at the optimal scale.
A significant attribute of intra-industry trade is that it tends not to generate the strong effects on
the distribution of income that can occur with trade based on comparative advantage. This
attribute may explain why the large trade expansion that took place in the 1950-1980 period was
less politically contentious than has been true for trade expansion since 1980. The earlier period
was dominated by rising trade between advanced economies with similar endowments of
productive resources and similar levels of technology. Therefore, trade at that time was largely an
expansion of intra-industry trade that had no relatively abundant factor of production to exploit.
As a consequence, it had little adverse affect on the return to the factors of production, including
the wages of U.S. workers. In contrast, a much larger portion of the trade expansion since 1980
has been with less-developed economies with their relative abundance of low-skilled and priced
labor—a likely source of downward pressure on wages in the developed economies.
Globalization has come to represent many things, but economic globalization refers specifically
to the increasing integration of national economies into a world wide trading system.
Globalization involves trade in goods and services, and trade in assets (i.e. currency, stocks,
bonds, and real property), as well as the transfer of technology, and the international flows
(migration) of labor. Since 1950, world trade in merchandise has consistently grown faster then
world production. In the recent period of 1990-2005 world trade in merchandise grew at about 4
6.0% per year as compared to about 2.0% for world output. As a result, world exports as a
percent of world GDP rose from about 12% to about 32%. In the United States global integration
has advanced quickly, with imports as a share of GDP rising from about 10% in the 1950s to
about 17% today. More recent but far more dramatic has been the growth of international trade in
assets. In the 1990s gross capital flows leaped by 300% as compared to a 63% advance of trade in
goods. The rising economic integration of the world economy has been facilitated by two types of
events: the myriad of technical advances in transport and communication that have reduced the
natural barriers of time and space that separate national economies; and national and multi-
national policy actions that have steadily lowered various man-made barriers (i.e. tariffs, quotas,
subsidies, and capital controls) to international exchange.
A supply chain is the interrelated organizations, resources, and processes that create and deliver a
product to the final consumer. A global supply chain organized mostly by multinational
corporations (MNCs) means that products that were once produced in one country may now be
4 See International Monetary Fund, World Economic Outlook, June 2006.
produced by assembling components fabricated in several countries. This supply chain has meant
that as much as 30% of the recent growth of world trade has been through trade in intermediate
products. Not only does such geographically fragmented production raise the level of trade
associated with a particular final product, it also tends to raise the level of trade with both
developing countries and developed countries. This growth of the global supply chain has been
facilitated by technological advances that have increased the speed and lowered the cost of
international transport and, perhaps most importantly, accelerated the international flow of
information that allows MNCs to coordinate geographically fragmented production with relative
ease. In addition, government action has achieved a substantial reduction of various man-made
trade barriers and promoted movement toward a market based economy.
A greater degree of international economic integration can add to disruptive forces in the
marketplace, including concerns that an estimated 30 to 40 million high-wage and high-skilled
U.S. service sector jobs may now be vulnerable to “outsourcing” over time. Although this
increased integration is unlikely to have a negative effect on overall employment rate or the
average worker wage, greater volatility of worker incomes and employment is a possible effect.
While the precise causes remain unclear, some evidence for the United States indicates a steady 5
rise in wage and employment volatility since the 1980s. In response to this rise, some argue that
because increased volatility raises the economic risk attached to employment and earnings, the
“social safety net” that protects workers from periodic market disruptions should be expanded
The U.S. trade deficit is the difference between the value of U.S. exports and U.S. imports. The
deficit on trade in goods (merchandise) that reached a record $836 billion in 2006 is what the
media generally calls the trade deficit. The United States, however, usually runs a surplus in trade
in services with the world. By adding net exports of services to the calculation, the trade deficit
on goods and services was $764 billion in 2006. Adding in net transfers of investment income and
remittances by individuals to foreign countries gives the broader measure of the trade deficit that
is called the current account. In 2006, the current account deficit was $857 billion.
The data on imports and exports are reported in two ways that give similar but different numbers.
When goods or services pass through U.S. borders, the Customs Service compiles the figures
from shipping manifests and other documents and reports it to the U.S. Census Bureau. The
5 See Dani Roderik, Has Globalization Gone too Far? Institute for International Economics, 1997.
6 This section was prepared by Dick K. Nanto, Specialist in Industry and Trade, Foreign Affairs. Defense, and Trade
Bureau then produces data on imports and exports and calculates the trade deficit on a Census
basis. The detail in these data allows the import and export flows to be broken out into trade by
countries, sectors, and major ports. The Census data are then adjusted to a balance-of-payments
basis by accounting for military sales, adding private gift parcels, including foreign official gold
sales from U.S. private dealers, and making other refinements. The following table shows U.S.
trade data on both a Census and balance-of-payments basis.
Table 1. U.S. Exports, Imports, and Merchandise Trade Balances 2002-2006
(billions of U.S. dollars)
Census Basis Balance-of-payments Basis
Year Exports Imports Balance Exports Imports Balance
2002 693.5 1,163.6 -470.1 681.8 1,164.7 -482.9
2003 724.8 1,257.1 -532.3 713.1 1,260.7 -547.6
2004 818.8 1,469.7 -650.9 807.5 1,472.9 -665.4
2005 906.0 1,673.5 -767.5 894.6 1,677.4 -782.8
2006 1,037.3 1,855.4 -818.1 1,023.7 1,859.8 -836.1
Source: U.S. Department of Commerce, Bureau of Economic Analysis, U.S. International Transactions Accounts
The fundamental cause of the U.S. trade deficit is excess spending by U.S. consumers, business,
and government. In essence, Americans consume more than they produce. This allows other
countries to sell more to the United States than they buy from the United States. Economists
characterize this as a lack of savings by U.S. consumers, business, and government. Households
buy much on credit; businesses invest much with borrowed funds; and the government runs
budget deficits. As long as foreigners (both governments and private entities) are willing to loan
the United States the funds to finance the lack of savings in the U.S. economy, the trade deficit
can continue. The United States, however, accumulates more and more debt.
Trade barriers tend to affect bilateral trade in specific products and with particular countries, but
they do not necessarily affect the size of the overall U.S. trade deficit. For example, trade with
Burma or North Korea is non-existent or small because of U.S.-imposed export barriers. Foreign
countries also impose barriers to imports and limit foreign access to their markets by a variety of
measures. Some barriers are overt, such as high tariffs or import quotas. Others are less visible,
such as income tax audits by tax authorities of persons buying foreign automobiles or controls
over foreign exchange that prevent citizens wishing to purchase imports from obtaining the
foreign currency necessary. If, for example, a government requires exporters to sell their dollars
to the government at a fixed exchange rate, and that government invests the dollars in U.S.
securities rather than allowing businesses and consumers to use the dollars to buy American
exports, then this combination of government intervention in currency markets plus exchange
controls can increase the size of the U.S. trade deficit.
Foreign trade barriers also can affect the profitability of U.S. exporters and thereby influence the
size of the overall U.S. trade deficit. If U.S. exporters are able to sell more to a country that has
lowered its trade barriers, the exporting companies can increase their profits, hire more American
workers, and possibly increase the overall U.S. saving rate. This can occur only if the economy is
operating at less than full employment.
Without sufficient inflows of capital, a trade deficit causes other parts of the economy to adjust,
particularly the country’s exchange rate—for the United States, this is the value of the dollar
relative to that of the Chinese yuan, Japanese yen, Canadian dollar, British pound, or European
euro. The way the adjustment mechanism works is that the excess of U.S. imports causes a
surplus of U.S. dollars to flow abroad. If these dollars are then converted to other national
currencies, their excess supply tends to lower their price (exchange rate) relative to other
currencies, and the value of the dollar depreciates. This causes imports to be more expensive for
American consumers and U.S. exports to be cheaper for foreign buyers. This process gradually
causes U.S. imports to decrease and exports to increase and for the trade deficit to be diminished.
The dollar, however, may not be exchanged for foreign currencies because of its special status in
global financial markets and because the U.S. economy is viewed both as a safe haven for storing
wealth and as an attractive destination for investments. In some countries, the dollar is used as a
medium of exchange, and in most countries it is used as a reserve currency by central banks.
Foreign governments can intervene to keep the value of their currency from appreciating relative
to the dollar by buying excess dollars and sending them back to the United States by buying
Treasury securities or other U.S. assets. This is what China has been doing. In Japan’s case, the
government has not intervened since the spring of 2004 to keep the value of the yen low, but
private Japanese investors are causing the same result by investing their savings overseas where 7
interest rates are higher (financiers also are borrowing in Japan and lending the funds abroad).
The surplus of dollars, therefore, may not cause the dollar to depreciate and for the trade deficit to
The U.S. trade deficit is financed by borrowing from abroad. This takes the form of net financial
inflows into the United States. In 2006, U.S. net financial inflows amounted to $719 billion.
Foreigners acquired $1,765 billion in assets in the United States, while Americans acquired
$1,046 in assets abroad. Foreigners purchased an additional $29 billion in Treasury securities and
$621 billion in other securities, while increasing their deposits at U.S. banks by $441 billion and
acquiring $13 billion in U.S. currency. Foreigners also invested $184 billion in their companies
located in the United States.
The U.S. trade deficit is a dual problem for the economy. In the long term, it generates debt that
must be repaid by future generations. Meanwhile, the current generation must pay interest on that
debt. Whether the current borrowing to finance imports is worthwhile for Americans depends on
whether those funds are used for investment that raises future standards of living or whether they
are used for current consumption. If American consumers, business, and government are
borrowing to finance new technology, equipment, or other productivity enhancing products, the
7 See Nakamae, Tadashi. Weak Yen Conundrum. The International Economy, Winter 2007, pp. 42-45.
deficit can pay off in the long term. If the borrowing is to finance consumer purchases of clothes,
household electronics, or luxury items, it pushes the repayment of funds for current consumption
on to future generations without investments to raise their ability to finance those repayments.
In the short term, the trade deficit could lead to a large and sudden fall in the value of the dollar
and financial turmoil both in the United States and abroad. The current account deficit now
exceeds 6% of GDP and is placing downward pressure on the dollar. If foreign investors stop
offsetting the deficit by buying dollar-denominated assets, U.S. interest rates would have to rise to
attract more foreign investment. Rising interest rates can cause havoc in financial markets and
also may raise inflationary pressures. Global financial markets are now so closely intertwined that
turmoil in one market can quickly spread to other markets in the world.
U.S. deficits in trade can continue for as long as foreign investors are willing to buy and hold U.S. 8
assets, particularly government securities and other financial assets. Their willingness depends
on a complicated array of factors including the perception of the United States as a safe haven for
capital, relative rates of return on investments, interest rates on U.S. financial assets, actions by
foreign central banks, and the savings and investment decisions of businesses, governments, and
households. The policy levers that influence these factors that affect the trade deficit are held by
the Federal Reserve (interest rates) as well as both Congress and the Administration (government
budget deficits and trade policy), and their counterpart institutions abroad.
In reducing the U.S. trade deficit, the policy tool kit includes direct measures (trade policy) that
are aimed at imports, exports, and the exchange rate, and indirect measures (monetary and fiscal
policies) aimed at U.S. interest rates, saving rates, budget deficits, and capital flows. Monetary
and fiscal policy, however, usually address conditions in the U.S. macroeconomy and generally
consider the trade deficit only as a secondary target. It is ironic that the most effective method of
reducing the trade deficit is through monetary and fiscal policy, yet monetary and fiscal policy is
rarely determined by the trade deficit.
Trade policy consists of the strategies, goals, and initiatives by governments to change the laws,
regulations, and agreements that provide the framework for international trade and to take action
to remedy distortions in the movement of goods, services, and capital flows across national
borders. U.S. trade policy operates along three paths: (1) in opening markets abroad for U.S.
exporters, (2) in protecting U.S. industries from imports that are unfairly traded (sold at prices
lower than those in the exporting country) or from import surges that cause, or threaten to cause,
substantial harm, and (3) trying to ensure that exchange rates are not manipulated by other nations
to hinder the process by which trade is brought into balance or to gain competitive advantage.
Currently, U.S. trade policy to open markets abroad is conducted at three levels: through bilateral
negotiations and trade/investment agreements, through establishing free-trade agreements, and
8 See Mann, Catherine L. Is the U.S. Trade Deficit Sustainable? Washington, Institute for International Economics,
1999. 224 p. See also: CRS Report RL33274, Financing the U.S. Trade Deficit, by James K. Jackson. CRS Report
RL31032, The U.S. Trade Deficit: Causes, Consequences, and Cures, by Craig K. Elwell.
through multilateral negotiations under the WTO. Trade policy plays a proactive role in leveling
the playing ground for U.S. business, a remedial role in correcting distortions in trade caused by
foreign government intervention, and a reactive role in addressing specific problems raised by
U.S. businesses. The specifics of U.S. trade policy are discussed in the section on U.S. Trade and
Investment Policy below.
Trade policy aims at reducing the U.S. trade deficit by increasing U.S. exports or decreasing U.S.
imports. U.S. trade policy, however, operates under multiple constraints. Trade policy, for
example, can affect specific trade flows but the overall trade deficit tends to be determined by
macroeconomic conditions (savings and investment flows). The U.S. government, moreover,
faces legal obligations, political resistance, and other constraints on policy aimed at decreasing
imports or increasing exports. Free market principles and U.S. law, for example, preclude the
government from moving against big box retailers that sell low-cost imports from China. U.S.
obligations under the World Trade Organization preclude arbitrary increases in import tariffs or
large direct subsidies for U.S. exporters, and only under special circumstances, usually related to
national security or severe offenses to international humanitarian values (e.g., genocide) does the
United States block trade with a specific country (e.g., Cuba or Burma).
As shown in the following table, in 2006, Canada was America’s largest merchandise trading
partner, but China passed Mexico to take second place in the ranking. Fourth was Japan, then
Germany, and the United Kingdom.
Table 2. Top U.S. Trading Partners Ranked by Total Merchandise Trade in 2006
(Millions of U.S. Dollars)
Rank Country Total Trade Balance Exports Imports
1 Canada 533,997 -72,835 230,581 303,416
2 China 342,997 -232,549 55,224 287,773
3 Mexico 332,426 -64,092 134,167 198,259
4 Japan 207,740 -88,442 59,649 148,091
5 Germany 130,392 -47,753 41,319 89,073
6 UK 98,830 -8,044 45,393 53,437
7 South Korea 78,285 -13,374 32,455 45,830
8 France 61,366 -12,931 24,217 37,149
9 Taiwan 61,238 -15,191 23,023 38,215
10 Malaysia 49,082 -23,982 12,550 36,532
11 Venezuela 46,177 -28,153 9,012 37,165
12 Brazil 45,617 -7,161 19,228 26,389
13 Italy 45,219 -20,086 12,567 32,652
14 Saudi Arabia 39,497 -23,881 7,808 31,689
15 Ireland 37,155 -20,125 8,515 28,640
16 India 31,917 -11,735 10,091 21,826
17 Thailand 30,624 -14,319 8,152 22,472
Rank Country Total Trade Balance Exports Imports
18 Nigeria 30,147 -25,686 2,231 27,916
19 Russia 24,500 -15,066 4,717 19,783
20 Sweden 17,967 -9,714 4,126 13,841
21 Algeria 16,594 -14,391 1,102 15,492
22 Indonesia 16,482 -10,326 3,078 13,404
23 Chile 16,350 -2,770 6,790 9,560
24 Colombia 15,973 -2,557 6,708 9,265
Source: Data from U.S. Department of Commerce.
Note: Total trade = imports + exports. Data are on a Census basis. Imports are on a Customs basis.
25. Which industries appear to be the most competitive as measured by the size of their
trade surpluses? Which are the least competitive as measured by their trade deficits?
The international competitive advantage of specific industries can be measured in a number of
ways—one of which is their trade balances. Other measures include profitability, value added,
productivity, employment, and technological change. The table below shows the balance of trade
for U.S. industries (as defined by 2-digit Harmonized System tariff classifications). By this
measure, the industries with the largest surpluses, in 2006, include aircraft and spacecraft, cereals,
optical and medical instruments; plastic, chemical products, grains/seed/fruit, cotton/yarn/fabric,
animal feed, and wood pulp. These U.S. industries can be considered the most competitive in
international trade. The table also shows those industrial sectors with the largest deficits in trade.
These include mineral fuel and oil, motor vehicles, electrical machinery, machinery, woven and
knit apparel, furniture and bedding, toys and sports equipment and footwear.
Despite the large trade deficit by the mineral fuel and oil sector, the major oil companies remain
quite competitive. They are multinational firms who, themselves, do much of the importing of
crude oil for their refineries often from their own sources of oil. The deficit in trade in electrical
machinery, moreover, may reflect more the global supply chain of multinational producers who
may be located in the United States and have competitive products but manufacture their
Table 3. U.S. Industries with the Largest Trade Surpluses and Deficits in 2006
(Million U.S. Dollars)
Largest Trade Surpluses Largest Trade Deficits
Description 2006 Description 2006
1 Aircraft, Spacecraft 49,161.4 Mineral Fuel, Oil, etc -298,638.1
2 Cereals 12,392.6 Vehicles, Not Railway -122,675.9
3 Optics, Medical Instruments 11,376.8 Electrical Machinery -83,322.0
4 Plastic 8,351.1 Machinery -61,912.8
5 Misc. Chemical Products 8,058.8 Woven Apparel -36,130.1
Largest Trade Surpluses Largest Trade Deficits
Description 2006 Description 2006
6 Misc Grain, Seed, Fruit 7,976.0 Knit Apparel -33,018.8
7 Cotton+yarn, Fabric 4,944.3 Furniture and Bedding -32,229.6
8 Food Waste; Animal Feed 3,276.2 Toys and Sports Equipment -20,362.7
9 Woodpulp, Etc. 2,679.6 Other Special Import Provisions -20,194.1
10 Tanning, Dye, Paint, Putty 2,462.3 Footwear -18,332.2
11 Ores, Slag, Ash 2,107.6 Pharmaceutical Products -17,112.9
12 Meat 2,098.7 Wood -16,384.8
13 Hides and Skins 2,018.5 Iron and Steel -16,255.9
14 Soap, wax, etc; Dental Prep 1,888.9 Iron/steel Products -14,936.6
15 Miscellaneous Food 1,592.2 Beverages -13,491.0
16 Tobacco 1,194.7 Precious Stones, Metals -12,497.8
17 Ships and Boats 1,144.9 Organic Chemicals -10,036.6
18 Arms and Ammunition 1,122.2 Special Other -9,062.1
19 Railway; Traffic Sign eq 969.7 Aluminum -8,878.2
20 Photographic/Cinematography 866.7 Misc Textile Articles -8,694.2
21 Knit, Crocheted Fabrics 671.6 Leather Art Saddlery; Bags -8,339.2
22 Book, Newspaper; Manuscript 636.4 Rubber -7,929.3
23 Other Base Metals, etc. 526.0 Copper and Articles Thereof -7,641.6
24 Edible Fruit and Nuts 516.3 Fish and Seafood -6,354.4
25 Wadding, Felt, Twine, Rope 484.7 Paper, Paperboard -5,572.2
Source: CRS. Underlying data from U.S. Department of Commerce. Data are on a Census Basis.
Imports are often blamed for what is perceived as the shrinking of the U.S. manufacturing sector.
Media reports of factories being closed, workers laid off, and the plethora of labels on
merchandise that indicate the product was made in China, Italy, or any of a number of foreign
countries reinforce that perception. Employment in U.S. manufacturing has declined moderately
over the past 46 years. In 1960, 15.4 million persons were employed in manufacturing. That 9
number peaked at 19.4 million in 1979 and has declined to 14.2 million in 2006. (See Figure 1
below.) Since total U.S. employment has risen, however, manufacturing employment as a share of
total nonfarm employment has dropped from 29% in 1960 to 10% in 2006.
Most of the new jobs are being created by the service sector. In 1960, 35.1 million persons
worked in service-producing industries. By 2006, employment in services had more than tripled
to 113 million persons.
9 These data are based on reports from employing establishments and do not include proprietors, self-employed
persons, unpaid family workers, private household workers, and those employed in agriculture.
Figure 1. Employees on Nonagricultural Payrolls by Major Industry, 1960-2006
1960 65 70 75 80 85 90 95 2000 2006
Source: U.S. Department of Labor. Based on reports from employing establishments.
Even with reduced employment, production by the manufacturing sector as a whole continues to
rise, although production in some sectors has been stagnant or declining. What appears to be
happening depends on the industry, but studies of de-industrialization generally conclude that it is
being caused primarily by developments internal to the economy and not by trade. These include
technological change, the shift in consumer demand from manufactured products toward services
as incomes rise, and the declining relative price of manufactured items. Import competition has
played a role in certain industries. One study concludes that import competition has contributed
less than one-fifth to the relative decline of manufacturing in the advanced economies and has 10
had little effect on the overall volume of manufacturing output in those countries.
The industries that are incurring large deficits in their balance of trade are under heavy
competition from imports and have been reducing employment. Table 3 shows certain of those
industries with the recent peaks in their employment and their employment in 2007. The peak
dates range from 1991 to 2004, while the declines since then range from 299.8% for the apparel
industry to 165.0% for textile mills, and to 7.5% for furniture and related products.
10 Brady, David and Ryan Denniston, “Economic Globalization, Industrialization and Deindustrialization in Affluent
Democracies,” Social Forces, 85 no. 1 (Sep 2006): pp. 297-310, 312, 315-316, 318, 320-327.
Table 4. Recent Peaks and Current Employment for Industries With Heavy Import
Industry Recent Peak Peak Employment 2007 Employment Change
Motor Vehicles and Feb. 2000 1,330.3 1,015.7 -23.6%
Electrical Equipment Jul. 2000 595.8 436.6 -26.7%
Computer and Jan. 2001 1,872.2 1,394.0 -25.5%
Machinery Mar. 1998 1,522.9 1,212.8 -20.4%
Textile Mills Feb. 1995 480.9 181.5 -62.3%
Textile Product Mills May 2004 179.9 157.1 -12.7%
Apparel Dec. 1991 917.6 229.5 -75.0%
Furniture and Apr. 2004 575.3 535.3 -7.0%
Plastics and Rubber Feb. 2000 959.9 794.0 -17.3%
Source: U.S. Bureau of Labor Statistics. Most Recent Industry-specific Peak and Through Employment and
Change. Accessed March 6, 2007.
The role of Congress in formulating international economic policy and regulating international
trade is based on express powers set out in Article 1, section 8 of the U.S. Constitution, “to lay
and collect taxes, duties, imposts and excises” and “to regulate commerce with foreign nations,
and among the several states,” as well as the general provision to “make all laws which shall be
necessary and proper” to carry out these specific authorities. Congress exercises this power in
many ways, among the most important being the enactment of tariff schedules and trade remedy
laws, and the approval and implementation of reciprocal trade agreements.
Because of the revenue implications inherent in most trade agreements and policy changes, the
House Ways and Means Committee and Senate Finance Committee have responsibility for trade
matters. Each Committee has a subcommittee dedicated exclusively to trade issues. Other
11 Prepared by J. F. Hornbeck, Specialist in International Trade and Finance, Foreign Affairs, Defense, and Trade
Division; and Jeanne J. Grimmett, Legislative Attorney, American Law Division.
committees may have a role should trade agreements, policies, and other trade issues include
matters under their jurisdiction.
U.S. trade policy is founded on statutory authorities, as passed by Congress. These include laws
authorizing trade programs and governing trade policy generally in areas such as: tariffs, non-
tariff barriers, trade remedies, import and export policies, political and economic security, and
trade policy functions of the Federal Government. Congress also sets trade negotiating objectives
in law, requires formal consultation from and opportunity to advise on trade negotiations with the
Executive Branch (in part through the Congressional Oversight Committee—COG), and conducts
oversight hearings on trade programs and agreements to assess their conformity to U.S. law and
Individual Members affect trade policy first as voting representatives who determine collectively
the statutes governing trade matters. They may also exercise influence as sitting Members on
relevant committees, in testimony before those committees, whether as a Member of it or not, and
in exercising informal influence over other Members through the exercise of the political
authority and power invested in them by the electorate.
TPA (formerly fast track) refers to a statutory mechanism under which Congress authorizes the
President to enter into reciprocal trade agreements governing tariff and non-tariff barriers, and
allows their implementing bills to be considered under expedited (fast track) legislative
procedures, provided the President observes certain statutory obligations in negotiating trade
agreements, including notifying and consulting Congress. The purpose of TPA is to preserve the
constitutional role of Congress with respect to consideration of implementing legislation for trade
agreements that require changes in domestic law, while also bolstering the negotiating credibility
of the Executive Branch by assuring the trade implementing bill will receive expedited and
The President directs overall trade policy in the Executive Branch and performs specific trade
functions granted him in statute. The principal adviser to the President on trade matters is the
United States Trade Representative (USTR). A cabinet-level appointment, the USTR has primary
responsibility for developing and coordinating the implementation of U.S. trade policy (19 U.S.
12 Prepared by J. F. Hornbeck, Specialist in International Trade and Finance, Foreign Affairs, Defense, and Trade
Division, and Jeanne J. Grimmett, Legislative Attorney, American Law Division.
Congress created the USTR in 1962 (originally as the Office of the Special Representative for
Trade Negotiations) to heighten the profile of trade and provide better balance between
competing domestic and international interests in the formulation and implementation of U.S.
trade policy and negotiations, which were previously managed by the U.S. Department of State.
The USTR has primary responsibility for trade policy decisions within the executive branch;
however, they often involve areas of responsibility that fall under other cabinet-level departments,
at times requiring a multi-department process. To implement this process, Congress established
the Trade Policy Committee, chaired by the USTR and consisting of the Secretaries of
Commerce, State, Treasury, Agriculture, Labor, and other department heads as the USTR deems
appropriate. The USTR subsequently established two sub-cabinet groups—the Trade Policy
Review Group (TPRG) and the Trade Policy Staff Committee (TPSC). The Executive Branch also
solicits advice from a three-tiered congressionally-established trade advisory committee system
that consists of private sector and non-Federal government representatives.
The Executive Branch executes trade policy in a variety of ways. It negotiates, implements, and
monitors trade agreements, and has responsibility for customs enforcement, collection of duties,
implementation of trading remedy laws, budget proposals for trade programs and agencies, export
and import policies, and agricultural trade, among others.
The President is responsible for influencing the direction of trade legislation, signing trade
legislation into law, and making other specific decisions on U.S. trade policies and programs
where he deems the national interest or political environment requires his direct participation.
This can take place in many areas of trade policy, such as requesting TPA/fast track authority,
initiating critical trade remedy cases, meeting or communicating with foreign Heads of State or
Government, and other areas subject to or requiring high political visibility.
The formal role of the private sector in the formulation of U.S. trade policy is embodied in a
three-tiered committee system that the Congress has provided in section 135 of the Trade Act of
1974, as amended. These committees advise the President on negotiations, agreements and other
matters of trade policy. At the top of the system is the 45-member Advisory Committee for Trade
Policy and Negotiations (ACTPN) consisting of presidentially-appointed representatives from
local and state governments and representatives from the broad range of U.S. industries and labor.
The USTR administers the ACTPN in cooperation with the Departments of Agriculture,
Commerce, Labor, and other relevant departments. At the second tier are industry-specific policy
advisory committees, each one consisting of representatives of a specific U.S. industry who
13 Prepared by William H. Cooper, Specialist in International Trade and Finance, Foreign Affairs, Defense, and Trade
provide advice on their specific industry. The third tier consists of sector-specific representatives
who provide technical advice. The USTR and the relevant department Secretary appoint members
of the sector-specific committees in the latter two tiers.
39. What is the informal role that the private sector plays in the formulation of U.S. trade
The private sector helps shape U.S. trade policy in a number of informal ways. For example,
representatives from industry and non-government organizations may be invited to testify or ask
to testify before congressional committees on trade matters. Private sector representatives are also
invited or request to testify before the United States International Trade Commission (USITC),
the U.S. Department of Commerce, or other government bodies to provide assessments of the
potential impact of pending trade actions, such as an antidumping or countervailing duty orders,
on their industries and sectors. Private sector organizations also lobby Congress and the
Executive Branch to forward their interests in U.S. trade policy actions and agreements.
Trade is becoming a larger and increasingly integral part of the U.S. economy. Virtually all kinds
of agricultural and manufactured goods are tradeable—they can be exported and imported. In
addition, a growing number of services—once considered non-tradeable because of their
intangibility—can be bought and sold across borders because of technology advancements, such
as the internet. As a result, how U.S. trade policy is shaped and implemented can affect a broad
spectrum of people in the United States. For some industries, firms, and workers, congressional
decisions to support a particular free trade agreement or Department of Commerce rulings on
antidumping cases, subsidies, and other cases could affect both employment and growth. Those
decisions could also influence product choices of U.S. consumers. Consequently, groups
representing the multinational national corporations, small businesses, farmers, workers,
consumers, and other segments of the economy strive to make sure that their clients’ views on
trade policy decisions are represented.
Legal challenges may be brought in federal court by importers, exporters, domestic manufacturers
and producers, and other parties affected by governmental actions and decisions concerning trade.
Cases may involve, for example, customs classification decisions, agency determinations in
antidumping and countervailing duty (CVD) proceedings, presidential decisions to (or not to)
restrict imports under trade remedy statutes, or the constitutionality of state economic sanctions.
The federal government may also initiate legal proceedings against individuals and firms to
enforce customs laws or statutory restrictions on particular imports and exports. Some trade
statutes may preclude judicial review. For example, most preliminary determinations in
antidumping and CVD proceedings and governmental actions involving the implementation of 15
WTO and free trade area agreements may not be challenged in federal court. While most federal
14 Prepared by Jeanne J. Grimmett, Legislative Attorney, American Law Division.
15 For further information, see CRS Report RS22154, WTO Decisions and Their Effect in U.S. Law, by Jeanne J.
cases involving trade laws are heard in the U.S. Court of International Trade (see below), cases
may also be filed in other federal courts depending on the cause of action or proceeding involved.
Court decisions may significantly affect U.S. trade policy when they examine whether an agency
has properly interpreted its statutory mandate, determine whether an agency has acted outside the
scope of its statutory authority, decide how much deference should be granted the Executive
Branch under a particular statute, or rule on whether a trade statute violates the U.S. constitution.
The U.S. Court of International Trade (USCIT) is an Article III federal court located in New York
City with exclusive jurisdiction over a number of trade-related matters, including customs
decisions, antidumping and countervailing duty determinations, import embargoes imposed for
reasons other than health and safety, and the recovery of customs duties and penalties. Formerly
known as the Customs Court, the USCIT was renamed in the Customs Court Act of 1980, which
also significantly enlarged its jurisdiction. The court consists of nine judges, no more than five of
whom may be from the same political party. Judges are appointed by the President with the
consent of the Senate. USCIT decisions are appealable to the U.S. Court of Appeals for the
Federal Circuit and to the U.S. Supreme Court. Statutory provisions related to the USCIT may be
found at 28 U.S.C. §§ 251-258 (establishment) and 28 U.S.C. §§ 1581-1585 (jurisdiction).
The United States negotiates trade liberalizing agreements for economic and commercial reasons,
• to encourage foreign trade partners to reduce or eliminate tariffs and non-tariff
barriers and, in so doing, increase market access for U.S. exporters;
• to gain an advantage for U.S. exporters over foreign competitors in a third-
• to increase access to lower cost imports that help to control inflation and offer
domestic consumers a wider choice of products; and
• to encourage trading partners, especially developing countries, to rationalize their
trade regimes, and thereby improve the efficiency of their economies.
The United States has also negotiates trade liberalizing agreements for political/national security
• to strengthen established alliances;
• to forge new strategic relationships; and
16 This section was prepared by William H. Cooper, Specialist in International Trade and Finance, Foreign Affairs,
Defense, and Trade Division.
• to establish a presence in a geographic region.
In general, reciprocal trade agreements can be categorized by the number of countries involved:
bilateral agreements, such as free trade agreements (FTAs), are between two countries; regional
agreements, such as, the North American Free Trade Agreement (NAFTA), involve three or more
countries in a geographic region; and multilateral agreements, such as those negotiated in the
World Trade Organization (WTO), involve many countries from virtually all regions.
Economic theory suggests and empirical studies have generally concluded that economies as a
whole benefit when trade barriers are removed because economic resources (land, labor, and
capital) are employed more efficiently. However, economic theory and studies also point out that
the benefits of trade liberalization are not distributed evenly within an economy and not even
among economies. Some industries, firms, and workers “lose” if they cannot adjust to the
increased foreign competition resulting from the trade agreement or if particular provisions of the
trade agreement disadvantages their interests. Other industries, firms, and workers “win” if they
can take advantage of new market opening opportunities presented by the trade agreement or if
particular provisions of the trade agreement favors or promotes their interests.
The World Trade Organization (WTO) is a 150-member body that establishes through
negotiations and implements the multilateral system of rules on trade in goods and services and
on other trade-related matters and adjudicates disputes under the rules. A fundamental principle of
the WTO is non-discrimination in trade among the members. The WTO was established in
January 1995 as a part of the agreements reached by the signatories to the General Agreement on
Tariffs and Trade (GATT) at the end of the Uruguay Round negotiations. The WTO’s primary
purpose is to administer the roughly 60 agreements and separate commitments made by its
members as part of the GATT (for trade in goods), the General Agreement on Trade in Services
(GATS—for trade in services), and the agreement on trade-related aspects of intellectual property
If a WTO Member believes that another Member has adopted a law, regulation, or practice that
violates a WTO agreement, the Member may initiate dispute settlement proceedings under the
WTO Dispute Settlement Understanding. The process begins with consultations and, if these fail
to resolve the dispute, the Member may request that the WTO establish a dispute panel. A panel
report may be appealed to the WTO Appellate Body by either disputing party. If the defending
Member is found to have violated a WTO obligation, the Member will be expected to remove the
challenged measure. If this is not done by the end of the established compliance period, the
prevailing Member may request authorization from the WTO to take temporary retaliatory action.
In most cases, retaliation consists of tariff increases on selected products from the defending
Member. To date, over 350 complaints have been filed since the WTO agreements entered into
force, with the majority of disputes resolved through consultations and negotiations rather than
the panel process.
WTO decisions do not have direct effect in U.S. law. Thus, in the event a U.S. statute is found to
violate a WTO obligation, the dispute findings may not be implemented except through
legislative action. Where an administrative action is successfully challenged, the United States
Trade Representative (USTR) decides what, if any, compliance action will be taken. If sufficient
statutory authority exists to amend or modify a regulation or practice or to issue a new
determination in a challenged administrative proceeding, the USTR may direct the agency
involved to make the change, provided that certain statutory procedures for such actions are 17
Since the GATT was signed in 1947, its signatories (member countries) have revised and
expanded the trade rules in various rounds of negotiations. The Doha Development Agenda
(DDA)is the ninth round and the first under the WTO. It is named after the city where it was
launched in November 2001—Doha, Qatar. The WTO members included “development” in the
title to reflect their intention to emphasize issues of importance to developing countries. The
negotiations have primarily focused on three areas—agriculture, non-agricultural goods, and
services, although members have conducted negotiations in other areas as well, such as rules. As
of this writing, negotiators have not been able to reach agreements and conclude the round.
At a minimum, FTAs are agreements between/among two or more countries under which they
agree to eliminate tariffs and non-tariff barriers on trade in goods and services among them, but
each country maintains its own trade policies and regulations, including tariffs, on trade outside
the FTA. FTA partner countries may also agree to reduce barriers or otherwise establish rules of
behavior in other economic activities—investment, intellectual property rights (IPR), labor rights
and environmental protection.
50. How do FTAs that the United States has negotiated generally differ from those
negotiated among other countries?
The FTAs that the United States negotiates are often more comprehensive than those that are
negotiated among other countries, particularly developing countries. The standard U.S. FTA
model includes not only the elimination of tariffs on trade in goods among the FTA partners, but
also reduction of barriers on trade in services, rules on foreign investment, requirements for
intellectual property rights protection, and provisions on labor rights and environment protection.
These rules may not necessarily guarantee “free trade,” but may condition or influence the terms
of competition in specific markets.
A TIFA is an agreement between the United States and another country (for example Afghanistan)
or group of countries (for example, ASEAN) to consult on issues of mutual interest in order to
promote trade and investment among the participants. Most U.S. TIFAs are with developing
countries. The United States and its TIFA partner(s) agree to establish a joint ministerial-level
council as the overall mechanism for consultation with the possibility of establishing issue-
17 Uruguay Round Agreements Act, P.L. 103-465, §§ 123(g), 129, 19 U.S.C. §§ 3535(g), 3538.
oriented working groups. A TIFA is a non-binding agreement and does not involve changes in
U.S. law; therefore, TIFAs do not require congressional approval. In some cases, TIFAs have led
to FTA negotiations.
Some goods that are imported into the United States, such as bananas or crude oil, cannot be
produced at home or produced in sufficient quantities to satisfy domestic demand. Many other
goods and services are imported because they can be produced less expensively or more
efficiently by other countries.
Consumers can benefit through access to a wider variety of goods at lower costs. Producers can
benefit through access to lower priced components or inputs that can be utilized in the production
process. Longer term, imports can also provide pressures for companies to reduce costs through
innovation and research and development, thereby serving as a spur to economic growth.
By providing increased competition to companies producing similar or competing products,
imports can contribute to job losses and business failures. If these job losses and company failures
are concentrated in a region, imports can also be a cause of considerable economic distress in a
The government tries to help producers and workers who are adversely affected by trade though
application of various trade remedy laws. These laws include responses to unfair trade practices
and to increased levels of injurious imports, as well as the Trade Adjustment Assistance program.
Two primary trade remedy laws aimed at unfair trade practices are the antidumping (AD) and
countervailing duty (CVD) laws. Other trade remedy laws include Section 201 (see below),
Section 301 (focuses on violations of trade agreements or other foreign practices that are
unjustifiable and restrict U.S. commerce), and Section 337 (focuses on unfair practices in import
trade such as patent and copyright infringement).
The purpose of the CVD law is to offset any unfair competitive advantage that foreign
manufacturers or exporters might enjoy over U.S. producers as a result of receiving a subsidy. As
defined by the WTO, a subsidy is a financial contribution, such as a loan, grant, or tax credit,
18 This section was prepared by Vivian C. Jones and Mary Jane Bolle, Specialists in International Trade and Finance,
Foreign Affairs, Defense, and Trade Division.
provided by a government or other public entity that confers a benefit on manufacturers or
exporters of a product. Countervailing duties, if imposed, are designed to equal the net amount of
the foreign subsidy and are levied upon importation of the subsidized goods into the United
Dumping generally refers to a situation where goods are sold in one export market at prices lower
than the prices at which comparable goods are sold in the home market of the exporter, or in its
other export markets. It is thought that companies dump products to gain market share or to deter
competition. U.S. law provides for the assessment and collection of antidumping duties when an
administrative determination is made that foreign goods are being dumped or sold at less than fair
value in the United States and that such imports are materially injuring a U.S. industry.
U.S. trade law (chapters 1 and 2 of the Trade Act of 1974, as amended) provides the President
with the authority to provide domestic industry with temporary import relief, which could include
tariffs and quotas, if it is found to be seriously injured from surges of imports that do not
necessarily involve unfairly traded products. This provision is based on the recognition that
liberalization of trade barriers could cause individual sectors of the U.S. economy economic
adjustment problems, and that domestic industries should provide a period of relief to allow them
to adjust to changed competitive conditions. The U.S. International Trade Commission
investigates and recommends on import relief cases, and the President takes final action.
The first trade adjustment assistance program was adopted as part of the Trade Expansion Act of
1962. In proposing the program, the Kennedy Administration argued that “those injured by trade
competition should not be required to bear the full brunt of the impact. Rather, the burden of
economic adjustment should be borne in part by the federal government ... [because] there is an 19
obligation to render assistance to those who suffer as a result of national trade policy.”
The current trade adjustment assistance program has three parts: Part A for workers, Part B for
firms, and Part C for farmers. Under Part A, certified workers may be eligible for remedial
education, wage reimbursement, job search and relocation allowances, and tax credits for health
insurance costs. Under Part B, firms may be eligible for technical assistance to help them develop
strategies to remain competitive in the changing international economy. Under Part C, farmers 20
impacted by competing imports may be eligible for cash benefits.
19 Trade Adjustment Assistance: The More We Change the More It Stays the Same, by Howard Rosen, in C. Fred
Bergsten and the World Economy, edited by Michael Mussa, Peterson Institute for International Economics, December
2006, pp. 79-113.
20 See Trade Act of 2002, P.L. 107-210, August 6, 2002, Division A: Trade Adjustment Assistance.
to all dislocated workers?
Some observers have suggested extending TAA to all dislocated workers—roughly defined as 21
workers who lose their job involuntarily, for reasons not related to job performance. Supporters
point to an inequity in eligibility among trade-related job losers: Many who lose their jobs
directly or indirectly to trade are not eligible for benefits under the current TAA program. These
include (1) virtually all service sector job losers; (2) certain manufacturing sector job losers,
depending on the country to which the job is outsourced, whether the United States has a trade
agreement with it, and whether or not imports of “like”or “directly competitive” articles are
expected to increase; (3) some job losers in “upstream” supply operations and “downstream” user
operations; (4) those who lose their jobs to a decline in U.S. exports; and (5) those who lose their
jobs to automation designed to increase exports or improve competitiveness against imports.
Supporters also argue for an expanded and simplified program of eligibility in order to eliminate
the difficulties of administering a program with such a complex set of eligibility criteria.
Opponents question why trade-related job losses should be treated any differently than non-trade
related job losses; some oppose any adjustment programs “because they imply that there is
something wrong with the operation of the free market.” The National Association of
Manufacturers reportedly has warned, “Business enterprises and their employees are continuously
affected for better or for worse by all sorts of events beyond their control.... All experience warns 22
that programs of this type inevitably expand and proliferate.” Others my be concerned with
definitions, administering such a complex program, and its fiscal impact.
From the perspective of individual companies, export markets provide opportunities to expand
production runs and reduce costs. Companies may also be able to sell goods and services at
higher prices than they can obtain at home. From the perspective of individual workers, jobs in
export-oriented industries often provide higher than average wages.
From an economic perspective that views higher levels of consumption as being the goal of
economic activity, countries export goods and services in order to earn the foreign currency with
which they can buy imports. Exports, according to this view, are foregone production that could
have been consumed domestically.
Economists maintain that the overall level of U.S. exports is determined primarily by the same
macroeconomic conditions that generate the U.S. trade deficit. These include the level of savings
21 Rosen, op. cit., p. 101, footnote 32.
22 Rosen, op. cit., p. 80-81.
23 Prepared by Angeles Villarreal, Analyst in International Trade and Finance and Dick K. Nanto, Specialist in Industry
and Trade, Foreign Affairs, Defense, and Trade Division.
and investment, the foreign exchange rate, and willingness of foreigners to invest in U.S. assets.
U.S. exports also depend on economic growth rates in major markets. The higher the rate of
economic growth in Asia (particularly Japan and China), Europe (particularly Germany, the U.K.,
and France), Canada, and Latin America, the more people in those markets are likely to buy U.S.
exports, other things being equal.
The level of American exports in specific sectors depends both on the overall level of exports and
on an interplay of factors such as the relative competitiveness of the American industry, trade
barriers abroad, and sometimes the degree of U.S. export promotion. The higher the overall level
of exports, the more individual sectors are likely to sell abroad, but given the impact of
macroeconomic factors, export surges by a particular sector often are offset by a decline in
exports by other sectors. In a world of floating exchange rates, a large export surge will cause
foreigners to buy more dollars to pay for those exports. This raises the demand for dollars and
increases its price relative to other currencies. Since the United States does not intervene in
currency markets to fix its exchange rate, the higher value of the dollar makes U.S. exports more
expensive and may reduce their sales.
For many years, the U.S. government has promoted exports by providing credit, finance, and
insurance programs that are administered by the Export-Import Bank, the Department of
Agriculture, and the Overseas Private Investment Corporation. In addition, the Department of
Commerce through the Foreign Commercial Service in the International Trade Administration of
the Department of Commerce acts to promote U.S. exports of goods and services, particularly by
small and medium-sized companies. Nearly every country promotes its exports as well.
Congress has authorized the President to control the export of various items for national security,
foreign policy, and economic reasons. Separate programs and statutes for controlling different
types of exports exist for nuclear materials and technology, defense articles and services, and
dual-use goods and technology. Under each program, licenses of various types are required before
an export can be undertaken. The Departments of Commerce, State, and Defense administer these
Generally, the two main kinds of capital flows are foreign direct investments and foreign portfolio
investments. Foreign direct investments involve the acquisition of real assets such as real estate, a
manufacturing plant, or controlling interest in an ongoing enterprise by a person or entity from
another country. Foreign portfolio investments involve purchase of foreign equities or bonds,
loans to foreign residents, or the opening of foreign bank accounts. Direct investments involve a
24 Prepared by James K. Jackson, Specialist in International Trade and Finance, Foreign Affairs, Defense, and Trade
long-term commitment and usually have direct employment stimulation advantages for the host
country while portfolio investments are extremely liquid and can be withdrawn often times at the
click of a computer mouse. In addition, there are official capital flows generated by governments
for various purposes such as humanitarian assistance and other foreign aid.
It depends. Recent data indicate that from 1985 to 2005, global trade in goods and services, as
measured by exports, doubled from $6 trillion a year to $12 trillion a year. During the same
twenty-year period, capital flows, as measured in the balance of payments accounts (direct,
portfolio, and other official investments), more than quadrupled from $1.1 trillion a year to $5.2
trillion a year. But during this time period, there also has been an explosion in growth in other
types of capital flows, known as foreign exchange and over-the-counter derivatives markets.
These markets facilitate trade in foreign exchange and other types of assets. While the capital
flows associated with these markets do not directly relate to transactions in the balance of
payments, they do affect the international exchange value of the dollar, which in turn affects the
prices of goods and services and the cost of securities. A survey in 2004 by the world’s leading
central banks indicated that the daily trading of foreign currencies totals more than $1.9 trillion.
For the most part, firms invest abroad to increase their profits. Economists and other experts
generally conclude, however, that a broad range of factors influence a firm’s decision to invest
abroad. The major determinants of foreign direct investment are the presence of ownership-
specific competitive advantages in a transnational corporation, the presence of locational
advantages such as resource endowments or low-cost labor in a host country, and the presence of
superior commercial benefits in an intra-firm relationship as opposed to an arm’s-length
relationship between investor and host country. Multinational firms apparently are motivated by
more than a single factor, and likely invest abroad not only to gain access to a low-cost resource
but to improve their efficiency or to improve their market share.
From 1990 to 2005, the stock, or the cumulative amount, of foreign direct investment in the world
grew from $1.8 trillion to $10.7 trillion, or by nearly 600 percent. This rapid growth arises from a
number of factors. One of the most important factors has been a change in public policies toward
foreign direct investment among most countries. Foreign direct investment has come to be viewed
favorably not only by the economically advanced countries, but also by developing economies,
which now often compete to bring in much-needed capital, technology, and technical expertise.
Currently, about three-fourths of all direct investment is placed among the highly developed
economies where consumer tastes and workers wages are comparable.
Generally, economists argue in favor of unimpeded international flows of capital, such as direct
investment, because they estimate that such flows positively affect both the domestic (home) and
foreign (host) economies. For the home country, direct investment benefits the individual firms
that invest abroad, because they are better able to exploit their existing competitive advantages
and to acquire additional skills and advantages. Direct investment also seems to be associated
with a strengthened competitive position, a higher level of skills of the employees, and higher
incomes of firms that invest abroad. Host countries benefit from inward direct investment because
the investment adds permanently to the capital stock and often to the skill set of the nation. Direct
investment also brings technological advances, since firms that invest abroad generally possess
advanced technology, processes, and other advantages. Such investment also boosts capital
formation and contributes to a growth in a competitive business environment and productivity. In
addition, direct investment contributes to international trade and integration into the global
trading community, since most firms that invest abroad are established multinational firms.
Concerned observers argue that U.S. direct investment abroad supplants U.S. exports, thereby
reducing employment and wages in the U.S. economy. While it appears unlikely that the overall
U.S. employment level is affected by direct investment flows, jobs in particular companies and
sectors can be eliminated when a company decides to produce similar products abroad. For
example, if a U.S. auto company closed an assembly line in the United States and opened one in
Mexico assembling the same product line, U.S. auto assembly jobs are lost. Similarly, while
inward flows of foreign direct investment tend to create new jobs, there sometimes is concern that
the new foreign owners may not serve as stable and dependable community partners as the
previous nationally-based ownership.
Bilateral investment treaties (BITs) are agreements between two countries for the reciprocal
encouragement, promotion and protection of investments in each other’s territories. Most treaties
contain basic provisions that cover the following areas: scope and definition of investment,
admission and establishment, national treatment, most-favored-nation treatment, fair and
equitable treatment, compensation in the event of expropriation or damage to the investment,
guarantees of free transfers of funds, and dispute settlement mechanisms, both state-state and
investor-state. U.S. BITs have to be ratified by the Senate.
The Committee on Foreign Investment in the United States (CFIUS) is an interagency committee
that serves the President in overseeing the national security implications of foreign investment in
the economy. CFIUS was established by an Executive Order of President Ford in 1975 with broad
responsibilities and few specific powers. Legislation currently pending in Congress could affect
the role and membership of CFIUS.
CRS Report RS20088, Dispute Settlement in the World Trade Organization: An Overview, by
Jeanne J. Grimmett.
CRS Report RS21554, Free Trade Agreements and the WTO Exceptions, by Jeanne J. Grimmett,
Todd B. Tatelman, and James E. Nichols.
CRS Report RS22154, WTO Decisions and Their Effect in U.S. Law, by Jeanne J. Grimmett.
CRS Report 97-896, Why Certain Trade Agreements Are Approved as Congressional-Executive
Agreements Rather Than as Treaties, by Jeanne J. Grimmett.
CRS Report RL31032, The U.S. Trade Deficit: Causes, Consequences, and Cures, by Craig K.
CRS Report RL31356, Free Trade Agreements: Impact on U.S. Trade and Implications for U.S.
Trade Policy, by William H. Cooper.
CRS Report RL32371, Trade Remedies: A Primer, by Vivian C. Jones.
CRS Report RL32461, Outsourcing and Insourcing Jobs in the U.S. Economy: Evidence Based
on Foreign Investment Data, by James K. Jackson.
CRS Report RL32964, The United States as a Net Debtor Nation: Overview of the International
Investment Position, by James K. Jackson.
CRS Report RL33144, WTO Doha Round: The Agricultural Negotiations, by Charles E.
Hanrahan and Randy Schnepf.
CRS Report RL33274, Financing the U.S. Trade Deficit, by James K. Jackson.
CRS Report RL33743, Trade Promotion Authority (TPA): Issues, Options, and Prospects for
Renewal, by J. F. Hornbeck and William H. Cooper.
CRS Report RL33388, The Committee on Foreign Investment in the United States (CFIUS), by
James K. Jackson.
CRS Report RL33463, Trade Negotiations During the 110th Congress, by Ian F. Fergusson.
CRS Report RL33553, Agricultural Export and Food Aid Programs, by Charles E. Hanrahan.
CRS Report RL33577, U.S. International Trade: Trends and Forecasts, by Dick K. Nanto,
Shayerah Ilias, and J. Michael Donnelly.
CRS Report 98-928, The World Trade Organization: Background and Issues, by Ian F. Fergusson.
Burtless, Gary, Robert Z. Lawrence, and Robert Litan, Globaphobia, (Washington, DC: The
Brookings Institution, 1998).
Destler, I. M., American Trade Politics, Institute for International Economics, Washington, DC,
The Economist, “Globalization and Its Critics,” September 27, 2001.
Friedman, Thomas, The Lexus and the Olive Tree (London: Harper Collins, 2000).
Mankiw, N. Gregory, Principles of Economics (New York: Dryden Press, 1997).
Mann, Catherine L., Is the U.S. Trade Deficit Sustainable? Institute for International Economics,
Washington, DC, 1999.
Office of the United States Trade Representative, 2007 Trade Policy Agenda and 2006 Annual
Report (March 2007), at http://www.ustr.gov/Document_Library/Reports_Publications/2007 /
Office of the United States Trade Representative, 2006 National Trade Estimate Report on
Foreign Trade Barriers (March 2006), at http://www.ustr.gov/Document_Library/
Reports _Publications /2006/2006_NT E_Repor t/Section_Index.html .
Stiglitz, Joseph, Globalization and Its Discontents, Yale University Press, 2003.
U.S. Congress. House Ways and Means Committee. Overview and Compilation of U.S. Trade
Statutes, Parts I and II, June 2005
U.S. International Trade Commission, The Year in Trade 2005; Operation of the Trade
Agreements Program (Pub. 3875, Aug. 2006), at http://hotdocs.usitc.gov/docs/pubs/
Wolf, Martin, Why Globalization Works (New Haven: Yale University Press, 2004).
World Trade Organization, Dictionary of Trade Policy Terms (Cambridge, UK: Cambridge
University Press, 2003).
25. Which industries appear to be the most competitive as measured by the size of their trade
surpluses? Which are the least competitive as measured by their trade deficits?
50. How do FTAs that the United States has negotiated generally differ from those negotiated
among other countries?
61. What are the arguments for and against extending Trade Adjustment Assistance (TAA) to all
Raymond J. Ahearn Vivian C. Jones
Specialist in International Trade and Finance Specialist in International Trade and Finance
firstname.lastname@example.org, 7-7629 email@example.com, 7-7823
Mary Jane Bolle Dick K. Nanto
Specialist in International Trade and Finance Specialist in Industry and Trade
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William H. Cooper M. Angeles Villarreal
Specialist in International Trade and Finance Specialist in International Trade and Finance
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J. F. Hornbeck Craig K. Elwell
Specialist in International Trade and Finance Specialist in Macroeconomic Policy
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James K. Jackson Jeanne J. Grimmett
Specialist in International Trade and Finance Legislative Attorney
firstname.lastname@example.org, 7-7751 email@example.com, 7-5046