Evidently unable to sell trade expansion with impoverished Central American micro-markets as a bonanza for the U.S. economy, the Bush administration is switching at the 11th hour to a national security pitch for its Central America Free Trade Agreement. Yet CAFTA and the rest of U.S. trade policy is so poorly conceived it can only destabilize and radicalize Central America and other strategic Third World regions, and hobble the war on terrorism.
The national security case for CAFTA and trade liberalization generally claims freer commerce will help build prosperity and democracy in developing countries, stem the flow of their immigrants, narcotics and other problems to U.S. shores, and strengthen them against the appeal of global terrorists and other radical forces.
As President Bush said at a recent Washington CAFTA extravaganza, “For the Western hemisphere, CAFTA would bring the stability and security that can only come from freedom. … The United States was built on freedom, and the more of it we have in our own backyard, the freer and safer and more prosperous America will be.”
Tragically, however, this strategy is already foundering due to the administration’s failure to combat the predatory trade policies of China and other Asian super exporters, which are the main threats to the economic futures of Central America and other development laggards.
These policy defects will severely limit CAFTA’s potential to boost Central American incomes through higher exports to the United States. As supporters keep emphasizing, previous trade deals have already opened wide the U.S. market to most Central American goods. And Central America is already wide open to job-creating foreign investment.
The single exception: textiles and apparel. The independent U.S. International Trade Commission says eliminating U.S. duties will boost Central American net exports (overwhelmingly of apparel) to the U.S. by some $2.2 billion. Most gains will come at the expense of Asia, which will still face U.S. tariffs.
Great news for Central America and a safer future for the U.S.? Hardly. Recent world trade developments have made apparel exporting a dead end for most developing countries.
In particular, when President Bush acquiesced in the Jan. 1 abolition of the longstanding global quotas regulating textile and apparel trade, China and the other Asians stepped up their flooding of world markets with highly subsidized, ultra-cheap exports. The Asians, and especially the Chinese, are fighting towering unemployment. But the Central Americans will face ever-more depressed prices and earnings even if CAFTA’s tariff preferences increase their U.S. market share. So will other Third World apparel exporters.
Nothing in CAFTA — or any other part of current U.S. trade policy — can offset Asian mercantilism. Worse, CAFTA has numerous loopholes that will permit mountains of Asian garments and fabric into the U.S. despite its tariff preferences.
And in an especially cruel irony, the ITC predicts CAFTA will actually reduce by some $330 million Central America shipments to the U.S. of the much more lucrative products, like electrical equipment and industrial machinery, these countries must move into to accelerate progress. As the ITC explains, the increased relative appeal of apparel production will draw foreign capital from the rest of Central America’s embryonic manufacturing base, which receives no new trade breaks. The region will sink even deeper into the apparel ghetto.
On top of its inability to boost Central American export opportunities, CAFTA’s immediate end of most Central American tariffs looms as a major regional economic shock.
Although countries that reduce or eliminate trade barriers usually become wealthier over time, trade liberalization can be highly disruptive in the crucial short run. Efficiency and overall output rise, but so does income inequality.
In Third World countries, moreover, gains flow disproportionately to the tiny minority that can cope with global competition. The less skilled and less educated tend to fall further behind for years and even decades.
By squandering most of their promised Third World export opportunities, the Asian blinders of CAFTA and the rest of U.S. trade policy will only intensify these problems. Indeed, similarly defective policies helped leave Mexico almost defenseless against China’s export invasion of the U.S. market soon after the North American Free Trade Agreement was signed.
Increasing the rich-poor gap, in turn, often undermines political stability and even sparks revolution. Radicalism and anti-Americanism, in fact, often take root not in moribund countries, but those where progress is beginning, and where its fruits can be glimpsed — but not grasped — by the masses.
Classic examples are late-czarist Russia, Cuba in the 1950s and Iran in the 1970s. So is much of contemporary Latin America, following a decade-and-a-half of trade freer trade and markets. The average citizen still has not benefited, however, and new democracies everywhere are faltering.
Trade liberalization with Central America and other strategic Third World regions could buttress U.S. national security. But priority regions cannot be helped if the U.S. market remains indiscriminately open to China and all other comers, and especially if Washington permits their mercantilism to swamp the effects of targeted trade breaks. President Bush rejected such trade liberalization during CAFTA’s negotiation. That’s one more reason Congress should reject CAFTA.
Alan Tonelson, a research fellow at the U.S. Business and Industry Council Educational Foundation, is the author of “The Race to the Bottom.”