American Economic Alert.org - Masthead Fighting For American Companies - Fighting for American Jobs United States Business and Industry Council
Current Trade Deficit:   AmericanEconomicAlert.org - Presented by The Robert A. Stranahan Lectures
CAFTA: The Classic Outsourcing Agreement
Alan Tonelson
Monday, March 07, 2005
Photo of Alan Tonelson
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).
Among other hard truths, the just-released final 2004 trade figures reveal that the case for the Bush administration’s Central America Free Trade Agreement is built on sand. The numbers make clear that CAFTA is anything but a deal capable of promoting net U.S. exports, and therefore raising U.S. employment and wage levels. Instead, CAFTA is an outsourcing agreement, the latest in a series designed to help multinational companies send production overseas to very low-cost countries and sell the output to the United States.

As we’ve noted before, the puny size alone of the market targeted by CAFTA alone mocks the idea that an export bonanza is in store for Americans. Add up the six CAFTA economies and you get a market the size of New Haven, Conn., according to the last year for which such comparisons can be made (2002).

U.S. trade officials have a response. As Assistant U.S. Trade Representative Christopher Padilla told CNN’s Lou Dobbs on March 1, “These are small countries...but they are actually very big markets for our products. In fact, we trade more with Central America than we trade with Brazil or with Australia.”

As Padilla surely knows, however, there are exports and there are exports. And the 2004 trade figures add to the evidence that U.S. exports to the CAFTA 6 are dominated by what might be called “turnaround exports.” That is to say, exports that are not final products which are actually consumed abroad, but parts and components of final products that are assembled or further processed abroad, and then shipped right back for consumption in the United States.
As a result, they don’t service net new demand in foreign markets – which eventually would require domestic employers to expand production, hire new workers, and boost wages. They service the same old demand in the same old market – America’s.

Because the assembly or further processing of these goods used to be done in factories located in the United States, America’s exports to the CAFTA 6 – i.e., to the Central American factories built to replace U.S. factories – are unmistakable signs of outsourcing, lost American jobs, and lower American wages.

An in-depth look at U.S.-Central America trade shows that a handful of industries dominate these turnaround trade flows – textiles, apparel, semiconductors, and semiconductor assembly and testing equipment. American exports with the region in the last two categories has mushroomed recently because Intel set up a semiconductor testing and assembly plant in Cost Rica several years ago. And here's what the numbers show:

From 1997 to 2004, total U.S. goods exports to the CAFTA 6 rose 35.7 percent -- from $11.04 billion to $14.98 billion. During that period, U.S. goods exports to the world as a whole rose 13.05 percent, from $643.22 billion to $727.18 billion – only one-third as fast.

Yet from 1997 to 2004, U.S. turnaround exports to the CAFTA 6 increased from $3.93 billion to $5.29 billion, a 34.7 percent increase. In 1997, turnaround goods represented 35.6 percent of total U.S. goods exports to the CAFTA 6. In 2004, this figure was virtually unchanged -- 35.3 percent.

What these figures also demonstrate is that U.S. trade with the CAFTA 6 is dramatically different from U.S. trade with the rest of the world. During the 1997-2004 period, U.S. turnaround exports to the world as a whole rose 15.22 percent – less than half the rate of their growth in CAFTA trade. Indeed, as a share of total U.S. global exports, these goods rose only from 9.18 percent in 1997 to 9.36 percent in 2004 – or slightly more than 25 percent of the comparable CAFTA totals.

Largely as a result of this turnaround trade, the U.S. trade deficit with the CAFTA 6 rose nearly 60 percent from 1997-2004. That's much slower than the 234 percent increase in the U.S. global deficit during that period, but it also indicates that recent U.S. trade with these countries has added modestly to that global deficit.

Sophisticated CAFTA supporters acknowledge this big wrinkle, but nonetheless portray the agreement as a major plus for the beleaguered U.S. apparel industry. By marrying low-wage, labor-intensive cutting and sewing operations in Central American or similar regions to higher-wage, capital-intensive U.S. fabric production, CAFTA will supposedly better enable U.S. textile companies to compete against super-low cost rivals in China and India. Even if the final markets for the apparel and home furnishing products put together in Central America are back in the United States, hemispheric goods could be priced competitively with Asian goods. And they would use much more U.S.-made textiles as their basic ingredients.

Unfortunately, believing this promise is like believing in the globalization version of the tooth fairy. The American textile industry has heard this scenario since NAFTA back in the early 1990s and in connection with other outsourcing agreements since, like the Caribbean Basin (CBI) and sub-Saharan Africa free trade agreements. And the bleeding has only accelerated for U.S. manufacturers.

The comparisons with CBI are especially instructive, as that deal was a direct precursor of NAFTA and encompassed all the CAFTA countries. Between 1997 and 2004, U.S. global textile exports rose 27.6 percent. During this period, U.S. textile exports to the CAFTA 6 jumped 321.3 percent. (This surge was offset to a great extent by a decline of U.S. apparel exports to the CAFTA 6, reflecting how much industrial capacity the U.S. apparel parts industry has lost in recent years.)

But since CBI went into effect in 2001, U.S. global textile exports have risen only 13.7 percent -- meaning that just over half the increase in textile exports happened before that major expansion of U.S. trade with the Central America-Caribbean region.

Meanwhile, U.S. global textile imports rose 63.6 percent between 1997 and 2004, and the U.S. global trade deficit in this industry in these years has jumped from $2.89 billion to $7.96 billion -- a 175.4 percent increase. Both imports and the deficit rose faster before the Caribbean Basin agreement than after, so expanded U.S. trade with the Central America-Caribbean region seems on balance to have further weakened, not strengthened, the global and home-market competitiveness of U.S. textile makers.

The main reason? All the other outsourcing agreements signed by the Clinton and Bush administrations, like CBI and Africa, remained in place, denying American fabric makers any meaningful gains. The decision to allow global textile and apparel trade quotas to expire at the start of this year put the icing on this grim cake, practically ensuring that the Asian giants will dominate global trade in this sector.

If the Bush administration had developed a trade policy with any sense of priorities, NAFTA or CAFTA or any of the individual outsourcing agreements might have made sense on its own terms. Instead, Bush, like his predecessor, has simply opened the U.S. market to imports indiscriminately. The results are an America strapped with dangerous debt levels and increasingly unable to produce and export itself back to long-term financial health. It’s certainly not a record that Congress should reward by ratifying CAFTA.


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).
Sign up below to have AEA news headlines, articles, and reports delivered directly to your mailbox. 100% free and private.
PDF Download View our plan to save American Manufacturing
PDF Download Multimedia educational shorts on key trade issues