Another chance to open markets and expand trade

Posted: Mar 21, 2005 12:00 AM

Most economists agree that free trade benefits all the parties involved eventually. Yes, there are short-run disruptions as economies that were formerly closed to one another begin to interact and trade more freely. Some jobs are displaced and some industries lose the comparative advantage they enjoyed under the protection of being insulated from foreign competition.

Free traders cannot ignore these disruptions because people live in the short run. Even in developed economies such as the United States, many people live from week to week, paycheck to paycheck, where any financial disruption can be a potential disaster. They can't afford to lose their jobs or their businesses for the greater good.

So when, in the short run, more open trade and foreign competition cause some people to lose their jobs and some businesses to fail, an immediate political backlash sets in against free trade. Unless assistance is provided to the short-term losers from more open trade, the sentiment for free trade is easily poisoned. It becomes more difficult to get democratically elected governments to expand trade further, and in some cases intensely concentrated pressure from the short-term losers in the last round of trade-opening agreements succeed in scuttling future rounds, and at times convince the government actually to erect new protectionist barriers.

History clearly demonstrates that countries with open markets who trade freely with other countries experience higher rates of economic growth and higher standards of living. What a tragedy it would be if the long-run prosperity of the nation is mortgaged for some short-term protection. That's why I applaud the Bush administration for doing everything possible to ease the short-term disruption that occurs during the adjustment process after protectionist barriers are lowered and markets are opened.

Since the North America Free Trade Agreement went into effect in 1994, it has been a huge success. According the the Cato Institute, the value of bilateral U.S. trade with Mexico since 1993 has practically tripled, rising from $81 billion to $232 billion. U.S. trade with Mexico is growing twice as fast as U.S. trade with the rest of the world. Canada and Mexico are now our No. 1 and No. 2 trading partners, respectively. Yet we are still experiencing some of that backlash as the 15-year phaseout of the pre-NAFTA tariffs moves into its final stages.

It's that backlash that motivates much of the opposition to a new free-trade agreement recently negotiated with six of our Central America neighbors - Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras and Nicaragua - called the Central America Free Trade Agreement, or CAFTA for short.

This opposition exists even though almost 80 percent of products from Central America already enter the United States duty-free, partly because of unilateral preference programs such as the Caribbean Basin Initiative and the Generalized System of Preferences.  What's new about CAFTA is that it opens markets to the remaining 20 percent of goods and services, and for the first time opens markets for farm products from the United States.

The economic benefits of CAFTA would be considerable. The United States exports more than $15 billion annually to CAFTA countries. That makes Central America and the Dominican Republic together our 13th-largest export market, larger than Russia, India and Indonesia combined. According to the office of the U.S. Trade Representative, the American Farm Bureau Federation estimates CAFTA could expand U.S. farm exports by $1.5 billion a year.
Manufacturers also would benefit, especially in sectors such as information technology products, agricultural and construction equipment, paper products, pharmaceuticals, and medical and scientific equipment.

The potential benefits of freer trade and more open markets are too large to pass up. In addition to CAFTA's direct economic benefits to American consumers and manufacturers, it also offers a huge opportunity to help promote economic growth in the region.

There are substantial political benefits for the United States that flow directly from higher economic growth in the region. More open markets will aid development of the rule of law in our six trading partners that are parties to the agreement and allow for strong rules promoting the protection of intellectual property rights and investment. Greater economic growth will make it easier for the parties to combat the international drug trade. And improved economies in the region will relieve some of the pressure that produces illegal immigration into the United States as people are able to find jobs and start businesses in their home countries where most of them prefer to remain.

CAFTA has been approved by the legislatures in three of the seven countries that are parties to it - El Salvador, Guatemala and Honduras. Others are lining up a vote sometime this spring. Our new trade representative, Rob Portman, has quite an act to follow in former U.S. Trade Representative Robert Zoellick, but he is up to it. One of his first challenges will be to bring CAFTA up for a vote in Congress by Memorial Day, May 30.

Rather than simply opposing CAFTA, opponents worried about short-term disruption that might be produced by opening the remaining 20 percent of trade between the United States and its Central American neighbors should put ideas on the table to mitigate that disruption. Just saying no to free trade and open markets is not an option anymore.