CAFTA as catch can

• Article
• Comments ()
• Click-2-Listen
• Videos

By

This week the Senate is expected to take up CAFTA, the Central American Free Trade Agreement. The White House is putting heavy pressure on Congress to support this agreement, as it should.

But one cannot help feeling its own missteps on trade got this administration to the point where it must pull out all the stops to gain passage of a very modest trade agreement that probably won't have much effect one way or another. In previous administrations, this sort of agreement would have been routine, not requiring extraordinary effort to get passed.

The problem for many free traders like myself is the Bush administration has played politics with trade since Day One, which has seriously damaged the fragile alliance that still supports free trade. It imposed utterly unjustified steel tariffs, torpedoed the Doha Round of multilateral trade talks by backing a huge increase in agriculture subsidies, and has never missed a chance to demagogue China for all our trade woes.

Having destroyed the prospects for a multilateral trade agreement, which was supposed to be primarily about eliminating agriculture subsidies, the Bush administration has tried to salvage some semblance of a free trade agenda by pursuing bilateral trade agreements. Such agreements have been concluded with Australia, Chile, Jordan and Singapore. Talks are under way with Bahrain, Morocco, Panama and groups of countries in Africa and South America.

While the amount of activity is impressive, the results are not very great in terms of opening trade. Moreover, the heavy reliance on bilateral trade agreements may create future problems. Economist Anne Krueger, now the No. 2 official at the International Monetary Fund, summarized the case against preferential trade agreements in 1999 article in the Journal of Economic Perspectives:

Once countries are inside a trading bloc such as NAFTA or the European Union, they have an incentive to support protection against countries outside the bloc.

Protectionists will use bilateral trade agreements to avoid multilateral agreements, which all economists believe are far preferable. Those who benefit from bilateral agreements will henceforth tend to oppose new multilateral deals. Once a trader has gained access to the market in which he is most interested, he will not want to share those benefits with traders in other countries.

Finally, the resources of organizations like the U.S. Trade Representative's Office are limited. If they are busy with bilateral agreements, they have no time or political capital left to pursue multilateral agreements.

Jagdish Bhagwati, America's leading trade economist, has gone so far as to call free trade agreements "a sham" that actually undermine the world trading system. He argues proliferation of such agreements by the U.S. is part of a long-term effort to pursue a unilateral trade policy. "Thanks to the myopic and self-serving policies of the world's only superpower, bilateral free trade agreements are damaging the global trading system," Mr. Bhagwati says.

A 2003 study by the Congressional Budget Office found the economic potential of bilateral agreements very limited. It noted NAFTA, one of the largest such agreements, had virtually no effect on the U.S. trade balance with Mexico even after eight years. However, the study also noted there might be important noneconomic reasons to support free trade agreements. For example, they could support U.S. foreign policy objectives and aid democratic forces in countries with which we have such agreements.