Tuesday, July 19, 2005

The House Ways and Means Committee marked up the Central America Free Trade Agreement (CAFTA) June 30, but the pact does not have the votes to pass on the floor.

The sticking point are Republican members concerned not only with the mounting trade deficit, which will likely top $700 billion this year, but the lack of action by the administration against the largest bilateral part of the trade imbalance, China. The issue is not just economics, but national security, as Beijing uses the gains from trade — the inflow of capital and technology — to support a foreign policy agenda that threatens major U.S. national interests.

CAFTA proponents have tried to square the circle by arguing it is part of an anti-China strategy. The agreement will supposedly create a trade bloc that will protect infant industries of Central America from Chinese competition so democratic governments can put down roots. This harkens back to the Caribbean Basin Initiative during the Reagan administration. CBI used trade preferences to strengthen anti-communist regimes against Soviet-fomented revolutions.

Last month Robert Zoellick, the U.S. Trade Representative who negotiated CAFTA, wrote in The Washington Post that a CAFTA defeat would send “jobs in apparel production and similar industries to China.” New USTR Rob Portman in the Wall Street Journal wrote, “The trade agreement will allow us to compete more effectively with China.”

The discussion of trade blocs and geopolitics is a refreshing advance over the usual rhetoric of “free trade,” but is it credible? The political question is whether those making the argument are sincere. The technical question is whether CAFTA would create a trade bloc strong enough to fend off the Chinese. Unfortunately, the answer to both is no.

CIA Director Porter Goss has warned Beijing is tilting the Asian balance of power against the U.S. Defense Secretary Donald Rumsfeld made the same case in congressional testimony and at a June 4 international conference in Singapore. Yet, administration policy has been weak.

The Pentagon’s annual report on China’s military modernization has been repeatedly delayed as the State Department and other agencies try to water it down. The Treasury refuses to officially declare Beijing is manipulating its currency, since that would mandate serious negotiations. Treasury Secretary John Snow has persuaded Senate sponsors to hold off a vote until fall on legislation that would apply countervailing duties on Chinese goods to offset the undervalued yuan. The Commerce Department is reluctant to challenge China at the World Trade Organization. On May 27, the USTR rejected a petition by 12 senators and 18 House members to launch a formal trade investigation into the effect of Chinese currency practices.

Ways and Means Committee Chairman Bill Thomas, California Republican, gave the game away at a June 8 Chamber of Commerce breakfast. He reportedly downplayed trade problems with Beijing but said some token measures on China might be needed to win votes on CAFTA. The Chamber and the National Retail Federation are lobbying for CAFTA, but against confronting Beijing.

How far Mr. Thomas will go to protect Chinese interests was shown in another June 30 vote. The House adopted a non-binding “sense of the Congress resolution” stating the obvious: that the acquisition of the American-based Unocal oil company by the state-owned Chinese National Overseas Oil Company could threaten national security. The vote passed 398-15, but Mr. Thomas was one of the 15.

Mr. Thomas has promised a vote before CAFTA on a bill by Rep. Phil English, Pennsylvania Republican, that includes some “anti-Chinese” provisions. There is to be increased monitoring of Chinese intellectual property theft, a Treasury definition of currency manipulation and the application of countervailing duty law to “nonmarket economies” on a case-by-case basis. But these meager reforms will hardly put a dent in the overall problem.

CAFTA cannot work without limiting Chinese penetration of the U.S. market. A U.S. International Trade Commission report in 2003 found Central American workers only half as productive as their Chinese counterparts; and middle management less efficient. CAFTA wages, though very poor by U.S. standards, are still double those of Chinese workers. And while Central America is close to U.S. markets, China has a superior logistical infrastructure and its ships transit the Pacific faster each year.

A World Bank study showed the additional benefits Central American textile exporters would have from a CAFTA-type arrangement were almost eliminated when world textile quotas expired at the end of 2004. Quotas assured Central America a share of the U.S. market. In open competition, a WTO report estimated Mexico’s (despite NAFTA) and Central America’s share of the U.S. market could shrink about 70 percent.

Republican members of Congress concerned with a menacing China are wise to withhold support for CAFTA until they see something meaningful done about Beijing. An early vote on CAFTA would allow the China issue to be shelved.

The only way to deal with the Chinese threat is directly, by limiting imports under U.S. trade law. Then, perhaps, there would be room in the American market for more worthy trading partners. But until then, the U.S. cannot add millions more to the pool of cheap labor fighting for the American market via CAFTA and expect anything good to come of it.

William R. Hawkins is senior fellow for national security studies at the U.S. Business and Industry Council.

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