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HOLMES: Free trade as a stimulus strategy

- - Thursday, May 14, 2009

ANALYSIS/OPINION:

Most people agree that, when it comes to economic recovery, more economic activity is better than less. When companies buy and sell more goods and services, we get more jobs and growth.

Yet, for some reason, this obvious fact eludes those who want to constrain America's access to overseas markets. At a time when government is spending hundreds of billions of dollars it doesn't have on doubtful "stimulus" initiatives, you've got to wonder why some politicians continue to argue against free trade agreements. After all, these pacts have a proven track record. Trade has created millions of jobs and is responsible for almost a third of the nation's gross domestic product (GDP).

Three free trade agreements (FTA) are currently in play in Washington. Two of them — pacts with Colombia and South Korea — are in trouble due to union opposition. Despite claiming to be in favor of free trade, the Obama administration has not been willing to buck big labor and push for these deals. The third pending agreement, with Panama, has brighter prospects. President Obama seems willing to push Congress on this one because it has the least opposition from Democrats and unions, and also because it is an economic "no-brainer."

The U.S. has a huge trade surplus with Panama, which bought almost $5 billion worth of U.S. goods in 2008. For every dollar of Panamanian imports coming to the U.S., American businesses sell $10 worth of goods and services there. Until this year's crisis, Panama's booming banking, insurance and tourism sectors were fueling economic growth of about 6 percent per year. Efforts to improve financial transparency led the Organization for Economic Cooperation and Development to remove Panama from its blacklist of tax havens and money launderers, making it even more attractive for foreign investment.

But last week, after the White House indicated it could soon send the Panama FTA to Congress for a straight up or down vote, anti-trade House Democrats began mobilizing against it. Panama, they insist, remains a haven for tax evaders. Moreover, they oppose its labor laws, which prevent unions from striking at companies less than 2 years old. These opponents want to use the trade agreement to force a friend to change its laws.

Doubtless to their surprise, 20 members of the New Democrat Coalition in the House disagreed. Led by California's Ellen O. Tauscher, they sent a letter supporting the FTA to Mr. Obama, calling it "economically beneficial for the United States and American businesses."

They are right.

Approving the agreement will give American businesses and farmers greater access to Panama's market. Most Panamanian goods already enter the U.S. duty-free under long-standing trade preference programs, so no U.S. consumer or business would suffer as a result of this agreement. Almost 90 percent of U.S. manufacturing exports to Panama would immediately become duty-free, and any remaining tariffs would phase out over 10 years. Moreover, more than 60 percent of American agricultural exports to Panama would get duty-free treatment upon the agreement's implementation, and any remaining tariffs in that sector would phase out over the next 15 years.

Similar arguments could be made for the trade deals with Colombia and South Korea. But in the end, the larger case for free trade agreements has to be made on the basis of how they help American families and workers, not on the sometimes fine microeconomic and diplomatic points that are lost on most Americans.

More than 57 million Americans are employed by firms that engage in international trade. Why are the unions not out there fighting for free trade agreements to expand their wages and job security?

What's more, free trade agreements account for more than a third of U.S. trade worldwide. The Obama administration should make FTAs a centerpiece of its stimulus effort. Expanding trade - a sector of the economy that accounts for 30 percent of GDP — should be high on the list of things that need to be done.

So far, however, free trade is not on Mr. Obama's to-do list. Indeed, shortly after taking office, he caved to protectionists' pressure and tightened Buy America provisions in the stimulus bill. The rest of the world, rightly remembering the bad marriage between trade protectionism and the Great Depression, howled. Clearly the embrace of the Panama free trade agreement is meant to counter the image of Mr. Obama as a trade protectionist.

I'm all for presidents correcting their mistakes, but trade policy should be based on substance, not image. If the president wants to be seen as a free trader - and even more important, if he wants to stimulate the economy — he should put the South Korea and Colombia deals on the table as well.

Kim R. Holmes, a former assistant secretary of state, is a vice president at the Heritage Foundation (Heritage.org) and co-editor of the "2009 Index of Economic Freedom."