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Thesis & Antithesis

A critical perspective on energy, international politics & current affairs

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greekdefaultwatch@gmail.com Natural gas consultant by day, blogger on the Greek economy by night. Trained as an economist and political scientist. I believe in common sense and in data, and my aim is to offer insight written in language that is clear and convincing.

30 July 2005

CAFTA passes, trade loses

On July 28, the US House passed the Central American Free Trade Agreement (CAFTA), by a vote of 217 to 215; all the same, this was the most depressing sign for world trade since the collapse of the Cancun talks in September 2003.

CAFTA is a marginal trade treaty: 80% of the goods coming from the CAFTA countries (Nicaragua, Costa Rica, El Salvador, Guatemala, Honduras and the Dominican Republic) enter America tariff free (under the Caribbean Basin Initiative). Even the import tariffs for American products have decreased from an average 45% in 1985 to about 7% (1).

At the same time, “a University of Michigan study found that [CAFTA] would increase U.S. gross domestic product by a modest 0.2 percent and boost Central America's by a substantial 4.4 percent” (2). And, as Mary Anastasia O’Grady, of the Wall Street Journal, wrote, “the treaty's main contribution to regional development is that it will help Centrals gain access to imports, thereby raising living standards and increasing the competitiveness of Central American economies” (3).

What is depressing is that politicians are unwilling or unable to discuss trade intelligently. Hence, the familiar arguments about the migration of industry, about job losses, about receding sovereignty, and about a ballooning trade deficit are rehashed in the press. Without being placed in a proper context, they give the popular impression that economic arguments are outdated—that because trade theory goes back a century and a half to David Ricardo, presumably the ideas are no longer valid.

This is silly; what is more, it is dangerous. As the Wall Street Journal reported, only 15 Democrats supported CAFTA, compared with 21 who gave President Bush fast-track authority in 2001, 112 who voted to grant China Most-Favored Nation status in 1997, and 102 who voted for NAFTA (4). It would be too much to suggest that Democrats have changed their minds because they are disillusioned with NAFTA (and they have little reason to be; ref. 5).

What is more likely is that the Democrats are unable to stand their own on trade; with Bill Clinton they exercised trade leadership, without him, they have yet to find a coherent stance. Which is the most depressing of all. One of the cornerstones of America’s liberal foreign policy has been the linkage between prosperity and peace. As America looks for security abroad, it needs to be reminded that the avenue to security often passes through prosperity. Losing a bipartisan consensus on trade can also undermine America’s interests at home and abroad. As the Washington Post noted,

“In the past few years … an attempt has been made to revive the political challenge once represented by Mr. Castro. It centers on Venezuela's Hugo Chavez, who combines Castroite rhetoric with the financial clout of Venezuelan oil. Mr. Chavez has spread his money around the region, sponsoring anti-American and anti-democratic movements and promoting alternatives to U.S. initiatives” (6).

In other words, there plenty of room here to avoid narrow partisan politics. A past column by Thomas Friedman comes to mind, one he wrote amidst the outsourcing mania last year:

“What am I saying here? That it's more important for young Indians to have jobs than Americans? Never. But I am saying that there is more to outsourcing than just economics. There's also geopolitics. It is inevitable in a networked world that our economy is going to shed certain low-wage, low-prestige jobs. To the extent that they go to places like India or Pakistan -- where they are viewed as high-wage, high prestige jobs -- we make not only a more prosperous world, but a safer world for our own 20-year-olds” (7).

There is always much more to trade than economics; which is why CAFTA might have passed, but the logic of trade has lost.

References:
(1) “Another Such Victory,” The Economist, 28 July 2005
(2) Sebastian Mallaby, “CAFTA deserves to pass,” Washington Post, 25 July 2005
(3) Mary Anastasia O’Grady, “Costa Rica's Tough Unions Make It a Cafta Holdout,” Wall Street Journal, 15 July 2005
(4) “Trading Places,” Wall Street Journal, 29 July 2005
(5) “CAFTA’s benefits,” Wall Street Journal, 27 July 2005
(6) “The Stakes in CAFTA,” Washington Post, 26 July 2005
(7) Thomas Friedman, “30 Little Turtles,” New York Times, 29 February 2005

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