Trade Imbalance

Free trade is a perfectly good idea. That’s why CAFTA needs to be junked and reworked.

In all of economics there’s nothing quite so elegant—or widely misunderstood—as the theory of comparative advantage, first laid out by David Ricardo nearly 200 years ago. At the simplest level, the premise is that free and unfettered trade will allow any two countries to specialize their economies, no matter what their raw capabilities are. Specialization enlarges the total pool of goods available, and trade then allows countries to share in that larger pool.

So that’s the theory, and it’s a good one. But does it always work so smoothly in practice? Perhaps not. Take, for instance, the Central American Free Trade Agreement (CAFTA)—an agreement to slash tariffs between the United States and the Dominican Republic, Honduras, Costa Rica, El Salvador, Guatemala and Nicaragua—which is currently being debated in Congress. (CAFTA is being debated in the House today; it passed out of the Senate Finance Committee yesterday by a perilously thin margin and the betting line is that it will be voted down, given that almost all Democrats and many Republicans have refused to support it.) Based on raw numbers alone, the deal looks to prove Ricardo right yet again: CAFTA would potentially add over $2.5 billion to U.S. exports, and cut our trade deficit. But as always, there’s more to life than numbers.

Among other things, CAFTA will phase out Central American tariffs on various staple crops like beans and rice, thus flooding the region with cheaper counterparts from the United States. That influx should, in theory, force Central American farmers to turn away from staple crops and specialize in those goods in which it actually has a comparative advantage, like sugar. In theory, this is all for the best. In practice, however, many of the tariffs would be phased out much too quickly, hence not allowing Central American farmers time to adjust to their new market conditions, along with the sudden drop in prices for, say, their beans and rice. In the short term, farmers will see their incomes plummet, and mass layoffs will quickly follow. The problem is that CAFTA doesn’t contain nearly enough provisions to handle this transition period.

Meanwhile, many farmers could in theory adjust by producing more sugar—that’s where their so-called advantage lies, after all—but here’s where a surprise kicks in. Thanks to the terms of CAFTA, sugar from Central America and the Dominican Republic will be denied meaningful access to American markets, thanks to the clout of U.S. sugar producers. Indeed, the Bush administration, trying to win domestic support for the deal, has been boasting that the deal will allow only a “teaspoon of sugar” a week into the United States. That little glitch violates the spirit of free trade, of course, but then, Ricardo’s grand idea doesn’t often survive first contact with Washington lobbyists.

There are other little surprises nestled inside CAFTA that probably aren’t exactly what Ricardo had in mind. Under the deal, for instance, new restrictions would be placed on makers of generic drugs, generously shielding the United States pharmaceutical industry from competitors abroad. (And, in the process, denying cheap and potentially life-saving drugs to millions in Central America.) The telecommunications industry, for its part, gets valuable intellectual property protections and prized access to Caribbean internet and phone systems. Why these features get called “free trade” is a genuine mystery. What they are, of course, are sops to industries that have strongly backed the Republican party.

Oh yes, and then there’s labor. CAFTA, as it turns out, would end up making working conditions worse in Central America; a fact that seems lost on the free trade-touting liberal media. A New York Times editorial on Monday gushed about a provision in CAFTA “that improves on existing rules by taking fines collected for violations of labor laws and using them to correct labor infractions.” That’s nice. The problem is that the trade agreement actually weakens the very labor laws in question, which means that fewer and fewer abuses would even count as violations. Under CAFTA, Central American governments would no longer need to “afford internationally recognized worker rights,” as they currently are required to do under the Generalized System of Preferences. Instead, they are free to maintain—or even worsen—their own domestic labor laws, laws that even the U.S. State Department has criticized. Central American employers routinely harass, intimidate, fire, and blacklist workers who try to organize unions. In Guatemala, unionist Juan Lopez was recently gunned down by law enforcement officers.

It’s not just that this is inhumane; it also undercuts the whole purpose of freer trade, which, let’s not forget, is to make everyone better off. Indeed, one thing the world has seen throughout the latter half of the century is that increased trade usually leads to an increase in labor standards in a given country. Multinationals entering developing countries, after all, tend to offer better wages and labor rights than what preceded them. Likewise, David Kucera of the International Labor Organization (ILO) has found that higher rates of unionization usually accompany higher investment inflows. Trade ought to be good for workers. Nevertheless, even ardent free-traders like Jagdish Bhagwati admit that there needs to be some sort of extant pressure on companies and developing nations to improve labor standards, whether that comes from wacky left-wing activists abroad or native workers organizing. The trouble with CAFTA is that it removes much of that pressure by loosening labor laws.

Now the pro-CAFTA argument here, much-loved by so-called free-traders, is that developing countries need to have shoddy labor laws, because if they had higher standards, all of the sudden they wouldn’t be able to compete with countries that repress their workers, like China. But that argument has always been dubious. Again, citing David Kucera, there’s no evidence that multinationals or foreign investors systematically favor countries with lower labor standards. (There are other factors for companies to consider besides the wage bill when deciding where to move—the transparency of the government, for instance, or what technology is available.) The idea that workers in Central America “need” rock-bottom working conditions doesn’t hold up. At the very least, they should have the right to organize and speak out in the workplace. Right now, they get virtually nothing.

Ricardo’s grand idea was almost certainly correct. Trade is a good thing. But people won’t sit around quietly and wait for the long-term benefits so long as nothing is done to alleviate the short-term pain. An administration that cares more for helping out its pharmaceutical buddies than for easing the transition for Central American farmers, or improving working conditions abroad, is only going to reduce support for trade over time, both at home and abroad. CAFTA needs to be junked and reworked so that Ricardo’s grand idea can line up more closely with reality, and earn the support of the world, rather than its resentment.


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