CAFTA Falls Short on Economic Arguments

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Mark Weisbrot
Miami Herald, April 16, 2005
Knight-Ridder/Tribune Information Services, April 15, 2005
Duluth News Tribune
, April 18, 2005
Augusta Chronicle
(GA), April 18, 2005
Aberdeen American News,
April 17, 2005

The proposed Central America Free Trade Agreement (CAFTA) is generating a political battle over foreign commercial policy that we haven't seen since NAFTA (the North American Free Trade Agreement) was passed more than a decade ago.

As with NAFTA, there is widespread misunderstanding of the economic issues involved. First there is the label "free trade," which is not an actual description of these accords but a marketing slogan, like "Lose the carbs … not the taste" or McDonalds' "I'm loving it."

In reality, CAFTA will increase some barriers to trade while lowering others. One of the barriers it increases is on patented pharmaceutical drugs. This is the most costly form of protectionism in the world today.

The benefits from free trade in these goods are much appreciated by the millions of Americans who cross the Canadian or Mexican border to get their prescription drugs. But CAFTA will make it more difficult for countries like Guatemala to get access to affordable medicines -- even for life-saving drugs like those needed to treat people with HIV/AIDS.

Here in the United States, labor unions and those who care about working people have made much of the loss of jobs, particularly in manufacturing, that NAFTA and the WTO have caused and that CAFTA would presumably continue. But the much bigger impact for most Americans is on wages.

Over the last 30 years the typical (median) wage in the United States has hardly grown -- only about 9 percent. Productivity -- output per employee -- has grown by 82 percent over the same period. Normally we would expect wages and salaries to grow with productivity. These trade agreements have helped keep wages from growing here, by increasing competition with workers making 60 cents per hour and by making it easier for employers to threaten to move when workers demand their share of rising productivity. The result is that our society is becoming increasingly divided into the "two Americas" that Senator John Edwards made his campaign theme last year in the Democratic presidential primaries.

The Bush administration has appealed to farmers in the U.S., saying that CAFTA will help them by opening up foreign markets to their products. But this argument makes no economic sense: U.S. farmers can sell all the corn they want at the world market price; the only way that opening foreign markets can help them is if it raises the world price. Markets in CAFTA countries -- five Central American countries plus the Dominican Republic -- are too small to affect world prices.

In Washington policy circles, CAFTA is being sold as a boost to economic development for our neighbors to the South. But we have now had 25 years of experience with this kind of economic integration, and the results are in: income per person in Latin America has grown by a meager 12 percent since 1980, as compared to 80 percent the prior 20 years (1960-79). By any economic measure, these reforms -- including NAFTA -- have failed.

CAFTA countries are being promised access to a growing U.S. import market, but this is about to be reversed. Our trade deficit is now so big that it cannot be sustained even at its present level.  Over the next decade, the dollar will fall further and our trade deficit will shrink. Measured in non-dollar currencies, the value of U.S. imports is expected to decline over the next decade. This means that CAFTA countries are making costly concessions for a prize that most likely won't be there.

In sum, the economic arguments for CAFTA just don't hold water. No wonder its proponents rely on slogans, repetition, and millions of dollars of lobbying money to make their case.


Mark Weisbrot is co-director of the Center for Economic and Policy Research.