Summer, 2005

From the Editor

Close Call On CAFTA

The recent battle over the Central American Free Trade Agreement (CAFTA) shows that the traditional positions of Democratic Party and the Republican Party have made almost a complete switch. Whereas Republicans were once perceived as isolationist and Democrats were seen as internationalist, the Republicans long ago shed their isolationism. Unfortunately the Democrats’ neo-isolationism on economic matters is endangering future economic growth and world peace.

Just look at the numbers: in 1993 a total of 102 Democrats voted to ratify the North American Free Trade Act (NAFTA); even as late as 1997, fully 147 Democrats voted to grant China Most Favored Nation trade status. For CAFTA the Democrats rounded up a grand total of 15, yes 15, votes.

In the crucial vote in the House of Representatives in which CAFTA passed by just two votes, not one single Democrat in the state of California voted for CAFTA — not one! This is astounding being that California is one of the most export-oriented of states. It truly is a state open to trade, ideas, people — but, apparently, none of this swayed even a single Democratic member of the House.

Why? Because the consensus in favor of trade has broken down. It was not CAFTA that opponents were really voting against. They would have voted against any trade agreement put on the table. The American Left has become convinced that free trade agreements are undermining its agenda by making the cost of any social regulation too high. In other words, the Left believes that trade creates a so-called “race to the bottom” in which employment, environmental and other standards are depressed as each country attempts to maintain its competitiveness when industry and jobs can easily relocate to whatever jurisdiction maintains the lowest standards.

Economically this argument really makes no sense. What economists call “Comparative Advantage” is well established as a route to prosperity. Comparative advantage basically explains that if a country is good at growing pineapple and another good at growing apples, the pineapple grower is better off buying apples from the apple grower and vice versa than both trying to grow both products.

So if one country has less expensive labor, that may be its comparative advantage, while another country may have better technology. What the Left wants to do is require that international trade agreements make all U.S. trade partners maintain U.S. standards on minimum wage and so forth. Which is basically the same thing as saying that these countries, unable to exploit their own comparative advantage, should wallow in poverty forever.

In the CAFTA case, the whole argument was somewhat bizarre. CAFTA is an agreement that covers, in addition to the United States, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and the Dominican Republic. Because of the U.S.’s Caribbean Basin Initiative, almost 80% of exports from these countries to the U.S. already enter duty free, so, seen through the prism of a short-term win/lose perspective, the U.S. is the winner in the agreement as its exports often pay high duties.

The truth, though, is that thinking of winning and losing in this simple-minded way is nonsensical.

The U.S. cannot have a secure neighborhood if the countries around its borders are impoverished. The primary benefit of CAFTA is that it will disrupt long established patterns in the societies of the Caribbean countries entering into the agreement. It will disrupt sinecures for the privileged in these nations and make lower priced goods available to the citizens. In fact, Belize didn’t join specifically to avoid these consequences and will become poorer because of this political cowardice.

It is good that CAFTA passed. It modestly helps U.S. consumers by opening the trade door a little wider, and it dramatically helps the people of the Caribbean nations by requiring that these countries do things like dismantle national monopolies and open government contracting to transnational bids. In effect, the agreement serves to reduce the arena in which corruption can operate.

But the close margin, the enormous efforts President Bush had to extend to get the agreement through Congress and, especially, the almost total lack of support on the Democratic side of the aisle means that the prospect for future trade agreements is most troubled.

As the World Trade Organization’s 148 member nations struggle to advance the so-called Doha round of talks, this is especially troubling. After all, the combined Gross Domestic Product of the CAFTA parties is less than 1% of the U.S. national output. If the opposition was so intense and came so close to prevailing, how can the U.S. provide leadership in urging the world on a course to free trade and prosperity?  EXP