The Folly of a Free Trade Pact with Central America

AmericanEconomicAlert.org ^ | Wednesday, April 07, 2004 | Alan Tonelson

[Willie Green]

For education and discussion only. Not for commercial use.

The Bush administration is hailing its new planned Central American Free Trade Agreement as a “cutting edge” trade deal that will “expand U.S. opportunities in an important regional market.” Instead, CAFTA shows that U.S. trade policy has become completely divorced from the main needs of the U.S. economy, U.S. manufacturers, and American workers.

New markets for American products would indeed greatly benefit a U.S. economy still fragile after three sluggish years and a manufacturing sector that remains severely depressed. But the idea that the five Central American signatories of CAFTA can become these new markets doesn´t pass the laugh test.

El Salvador, Guatemala, Honduras, Nicaragua, and Costa Rica are not only among the world´s poorest countries, they´re among its smallest economies as well. Measured by their ability to buy U.S. products, their combined economic output totaled only $62 billion, according to the latest (2002) data. That´s less than the output of Orlando, Fla. or Bergen County, N.J.

The collective economies of the five Central American CAFTA countries are also half the size of San Diego and Phoenix. And U.S. Trade Representative Robert Zoellick´s decision to tack the Dominican Republic onto CAFTA doesn´t help much. Adding its $23.2 billion economy to the Central American 5 creates a total market still smaller than the economies of the metropolitan areas of Tampa-St. Petersburg, Fla., San Jose, Cal., and St. Louis, Mo.  ($87.5 billion, $88.3 billion, and $92.2 billion, respectively).

How in the world can economies this small, filled with people so poor, be important markets for U.S. exports, and growth engines for the $10 trillion U.S. economy?

Recent experience, however, teaches that poor, tiny countries can become major suppliers for the U.S. market, especially if CAFTA-like trade deals attract export-oriented investment seeking penny-wage workforces lacking the right to press for decent pay and working conditions. For example, from 1996 to 2003, U.S. goods imports from the six countries in question rose by nearly 63 percent, to $16.862 billion. U.S. goods exports to these countries increased by a seemingly healthy 51 percent during this period. But many of these shipments consisted of fabric sent to Central America for sewing once done in the United States, then returned to America to be sold as final products.

Essentially, U.S. companies are exporting to Central America the materials for garment production work that used to be done in U.S. factories. The results? No new final markets for U.S.-made products, the loss of tens of thousands of working-class American jobs, and higher U.S. trade deficits and international debts. At a time when manufacturing employment is feeble, U.S. debts are nearing alarming levels, and the dollar´s future strength consequently is in doubt, these are the last outcomes America needs.

The CAFTA countries won´t benefit from the new deal, either. The U.S. market for the labor-intensive goods they need to specialize in is already saturated with the imports of all the other third world countries and regions that have recently expanded trade with America – notably China. As no less than the U.S. International Trade Commission has recently reported, when global apparel quotas are removed in January, 2005, the Central Americans will face even more competitive pressure from China and its virtually endless supply of cheap labor.

The Bush administration could help workers in the United States and at least some third world regions if it would limit overall imports by setting some trade liberalization priorities. That way, the main trade liberalization benefits for third worlders could be channeled to countries of special interest – like our hemispheric neighbors in Central America or Mexico or the Caribbean.

But the White House has so far refused, and once the quotas come off, its message to Central America will undoubtedly be the same as its recent message to African exporters worried about Chinese competition: That´s your problem.

To revive its manufacturing sector and all the economic and national security benefits it generates, the United States urgently needs a new set of trade policies. Defeating the misguided Central American Free Trade Agreement is the place to start.

Alan Tonelson is a Research Fellow at the U.S. Business & Industry Educational Foundation and the author of The Race to the Bottom: Why a Worldwide Worker Surplus and Uncontrolled Free Trade are Sinking American Living Standards (Westview Press).

[Toddsterpatriot]

Yes, Todd, they will buy something from America, eventually: T-bonds, as I posted above.

And when that t-bond matures it turns into.....dollars. Sounds like they hold dollars which are worth what, exactly?

[ninenot]

Whatever they will buy in oil that day.

[ninenot]

Whatever they will buy in oil that day.

[Havoc]

There are other choices and I ain't talkin Nader.

[Toddsterpatriot]

Whatever they will buy in oil that day.

Great. The oil seller uses the dollars to buy what?

[american spirit]

Isn't it also interesting that since this free trade idiocy came on the scene roughly 20 yrs. ago that personal, corporate and fedgov debt has skyrocketed and along with that the loss of whole industries to foreign competition that has no problem using child or slave labor. With NAFTA we've seen a flood of illegal immigration when we were promised a much different result for the Mexican economy. With these illegals coming in here we now see employers around the country letting go Americans so that they can pay illegals under the table and EVADE a whole bunch of payroll taxes. Now if you're unable to see the linkage in these nation destructing policies then I strongly suggest some reverse rectal cranial inversion exercises.

[Toddsterpatriot]

Isn't it also interesting that since this free trade idiocy came on the scene

Yeah, those countries that restrict trade have much better economies. Can you name some of those countries doing better than the U.S.?

[american spirit]

We're running huge budget and trade deficits plus it's now estimated the fedgov has over 40 TRILLION $ (and counting) of unfunded liabilities (that's a debt we'll have to confront down the road), millions of jobs lost in the last two decades and you actually want to compare that track record with someone else? You've got to be joking!

[Toddsterpatriot]

Yeah, thanks for that list of countries doing better. Very helpful.

[monday]

"But you don't have the balls to come up here and try, do you?"

Threats and dares, the debating methods of the schoolyard bully. You don't mind if ignore you do you? I expect you are used to it.

[monday]

"We're running huge budget and trade deficits plus it's now estimated the fedgov has over 40 TRILLION $ (and counting) of unfunded liabilities (that's a debt we'll have to confront down the road), "

Our Govt would have 40 Trillion in unfunded liabilities even if it completely shut down trade with other countries. Politicians are responsible for that, not foreign companies or countries.

[american spirit]

Didn' think you had any stones to debate the issue.

[american spirit]

Who do you think created these idiotic trade policies that has resulted in so many lost industries, jobs and incredible amounts of debt.....the tooth fairy?

[Toddsterpatriot]

Didn' think you had any stones to debate the issue.

Forget stones, how about some facts?

Give me some countries that are practicing what you preach and are doing better than the United States.

Shouldn't be hard for you to do.

[american spirit]

Keep bobbing and weaving skippy, when you get a clue I'd like to see you defend how current policies are so beneficial to our country.....I won't hold my breath.

[Toddsterpatriot]

I'd like to see you defend how current policies are so beneficial to our country.....I won't hold my breath.

Well, all I can point to is the success of the American economy versus economies that restrict trade. Is America the greatest economy in the world or not?

[american spirit]

Right now we're the world's largest debtor nation, our dollar has lost significant value, we've become increasingly dependent on foreign capital and products to even keep the system afloat. Is there anything that can be read into these aspects of our current situation that we can point to as being postive for our future?....obviously not.

My point is we are still the world's greatest nation in many ways but the sad facts are we've sized up, set up and are in the process of being sold out by the political/fedgov elite and their multinational corporate masters. NAFTA & GATT were just the beginning....I highly suggest you study the ramifications of this upcoming 'FTAA' and think about how it will impact our constitutional and legal rights. The FTAA is nothing more than the American equivalent to the EU and everything that implies.....if it goes through, we'll be reduced to nothing more than a banana republic.

[american spirit]

Right now we're the world's largest debtor nation, our dollar has lost significant value, we've become increasingly dependent on foreign capital and products to even keep the system afloat. Is there anything that can be read into these aspects of our current situation that we can point to as being postive for our future?....obviously not.

My point is we are still the world's greatest nation in many ways but the sad facts are we've sized up, set up and are in the process of being sold out by the political/fedgov elite and their multinational corporate masters. NAFTA & GATT were just the beginning....I highly suggest you study the ramifications of this upcoming 'FTAA' and think about how it will impact our constitutional and legal rights. The FTAA is nothing more than the American equivalent to the EU and everything that implies.....if it goes through, we'll be reduced to nothing more than a banana republic.

[Toddsterpatriot]

Right now we're the world's largest debtor nation, our dollar has lost significant value, we've become increasingly dependent on foreign capital and products to even keep the system afloat.

You bash free trade and yet you worry about the value of the dollar. So, basically, these foreign companies and countries have all these dollars. And the value is dropping. I'd think you'd be happy. These evil foreigners are losing.

So, we buy a lot of foreign products. What can the foreigners do with the dollars they get? Sit there and watch them drop in value?

If they hurry and buy American goods, that's good for us, right?

As far as FTAA impacting our Constitution, exactly how?

The threat to America is uncontrolled illegal immigration and uncontrolled government spending, not free trade.

[InABunkerUnderSF]

All the free trade pact I have seen this country make have been total pants downers for the middle class.

In this case, you are more correct than you may know. Honduras and Costa Rica make most of the underwear worn in the US today. Most of the garment companies in Honduras, Guatemala, El Salvador and Nicaragua are Chinese owned. This was China's way of getting around garment quotas. The irony is, many of those plants are owned by the PLA and were first established during Reagan's Caribbean Basin Initiative - an attempt to stem the flow of communism in Central America by beefing up their economies in the 1980s.

The plants in Costa Rica tend to be US owned, unionized and have decent health and safety environments. Their counterparts in the rest of Central America are often just big tin sheds surrounded by razor wire fences, with their own diesel generators, a few overhead lights and a lot of sewing machines.

If you support CAFTA this kind of treatment for workers, along with higher profits for the PLA, is what you are supporting.

The good news for the US economy is that, with the exception of Costa Rica, the business climate in Central America is so corrupt and the economies are so week that I don't think any free trade agreement could make them a threat to the US economy.