Why CAFTA Will Not Improve Central American Security and Stability
Kevin L. Kearns and Alan Tonelson
Wednesday, June 29, 2005
In their desperation to conclude another outsourcing-based, anti-US domestic manufacturing free trade
deal, the proponents of CAFTA are advancing yet another specious argument in an attempt to win votes from national-security-minded Members of Congress. The argument is essentially that because CAFTA will allegedly help the economies of the CENTRAL American countries, it will, therefore, also help with their respective national security situations and provide political stability as well.
Just as the flawed economic argument for CAFTA is that it will help American and Central American firms compete better against the Chinese manufacturing juggernaut, this security argument posits that, with the small increase in trade predicted by the U.S. International Trade Commission
, we can stop further Chinese political/military inroads in Latin America, as well as curb the influence of in-place leftist regimes in Cuba, Venezuela, Brazil, and elsewhere. Unfortunately, both sets of arguments rely on faulty economic assumptions and projections, as well as ignore the realities of the respective Central American economic and political situations, not to mention those of China. The way to deal with China is to do so directly, and not to pretend that by linking up with six impoverished surrogates, the majority under IMF controls, the United States is going to stop Chinese advances across the board.
Following is a point-by-point refutation of the main arguments of the CAFTA cheerleaders:
– CAFTA can only promote Central American stability and democracy, and therefore indirectly assist U.S. security, if it creates big net export opportunities for the six CAFTA-DR countries. Simply put, these countries need to grow richer (through the outsourcing of American factories/jobs or the displacement in the U.S. market of exports
from other countries) to promote their growth, prosperity, and stability.
– Creating these factory/job-transfer opportunities requires not only opening the U.S. market to CAFTA-DR products, but also helping the CAFTA-DR countries fend off the often predatory threats from third world rivals, especially China and other Asian super-exporters.
– CAFTA and broader U.S. trade policies fail miserably on both counts because they do not deal directly with China and other predatory countries, nor do they go to the root causes of the problems: currency manipulation, export subsidies
, and intellectual property theft, inter alia..
– As CAFTA supporters repeatedly emphasize, the only new U.S. markets opened by tariff reductions for the CAFTA-DR countries are the textile and apparel markets. Global trade flows in these industries are increasingly dominated by China and the other Asian and South Asian powerhouses – especially since the Jan. 1 expiration of global quotas
supported by the Bush administration.
– At best, if CAFTA does help the Central Americans just maintain their current U.S. market share, the post-quota explosion of subsidized Asian global exports (overwhelmingly in apparel) will continually drag down prices and earnings for them. ( It will also affect other third world producers that may be strategically important to the United States, for example, Bangladesh, the Philippines, and other Latin American countries.)
– At worst (and most likely), the Central Americans will continue to lose ground because CAFTA tariff breaks do not offset
their Asian competitors’ many other advantages: much lower wages, higher labor productivity, more efficient middle management, superior domestic infrastructure, and faster ocean transport, not to mention currency manipulation and numerous industrial and export subsidies.
– A 2004 World Bank study convincingly supports this worst case scenario, predicting that the Asian competition’s advantages will totally offset CAFTA’s lower tariff effects. In addition, a 2004 World Trade Organization report estimated that despite CAFTA, textile and apparel quota elimination in and of itself would reduce the Central American and Mexican share of the U.S. market by 70 percent.
– Therefore, the CAFTA agreement plus Washington’s do-nothing policies vis-a-vis predatory Asian trade practices will doom the Central American countries to a competition they cannot win in a dead-end sector.
– The fact that expectations in the CAFTA countries will have been raised by CAFTA proponents only to be later dashed is particularly explosive politically. The only realistic results from CAFTA’s false promises are falling Central American wages, higher regional unemployment, more politically restive populations, and more emigration to the United States, both legal and illegal.
– Even worse, according to a 2004 U.S. International Trade Commission study, CAFTA’s tight textile and apparel focus will reduce Central American exports to the United States by $230 million in other, more lucrative manufacturing sectors, and by $100 million in services. In other words, concentrating scarce resources on textile and apparel production is a doubly losing proposition for Central America.
– Thus, the combination of CAFTA and America’s do-nothing China/Asia trade and security policies will suck the Central American countries into the current U.S. trade-deficit cycle with China and the rest of the world, further debilitating the security and stability of all seven signatories to the CAFTA trade agreement.
Kevin L. Kearns, President of the USBIC Educational Foundation, is Editor-in-Chief of AmericanEconomicAlert.org. and a former Foreign Service Officer with extensive defense trade experience. Alan Tonelson, a columnist for AmericanEconomicAlert.org, is a Research Fellow at the Foundation. His recent book on globalization, The Race to the Bottom (Westview Press), is now in paperback.