Friday, July 29, 2005
My Take on CAFTA
In the end, I view the passage of CAFTA as a net positive. Both sides in this issue (as they do in EVERY trade pact) vastly overstate the costs or benefits, depending which side of the issue they're advocating. So digging through the claims of the various camps was a bit of hard work, but in the end, I think it's good policy.
Economically, CAFTA will have very little impact from the US's perspective. 80% of imports from CAFTA nations already receive duty-free treatment. The other 20% will have very little impact on US jobs, mostly because we don't compete in the same industries as a Costa Rica or a Honduras, etc. On the other hand, our businesses will now have improved access to CAFTA markets, where our goods currently face substantial duties. This will be, unquestionably, a net positive for the US economy. Not a huge gain, but a net positive none the less.
The main criticism with CAFTA, from a pure policy perspective, is that it's weak on labor. I agree, and it's a shame, because we easily could have included stronger labor standards if we had tried (incorporating labor standards in trade policy is most likely going to be the focus of my masters project). That said, CAFTA is not going to result in a "race to the bottom" in CAFTA countries. Multinationals are seldom able to go into a country and attract workers by offering worse working conditions than the options currently available. While they might not offer US-calibre working standards, they usually offer better standards that what's currently available in the foreign country. Many are recognizing that you will have a more productive workforce if you offer decent standards. Furthermore, name-brand companies are under pressure from labor NGOs, and desperately want to avoid the bad publicity of operating a sweat shop.
The main reason I was almost against CAFTA, was due to the process of how this legislation was created. Traditionally, free trade agreements have been crafted with bipartisan input. In this case, Dems were completely excluded from the process. Completely...as in no input whatsoever. So CAFTA sets a very bad precedent in using free trade to advance a partisan agenda, versus seeking consensus and trying to create as good of a policy as possible.
A further positive that people should consider is the impact of CAFTA on advancing the Doha development round of the WTO. If we wouldn't have passed CAFTA, there was fear that the already sticky Doha negotiations would end. After all, if the US wouldn't agree to what is (from our perspective) an economic no-brainer where we were forced to give up virtually nothing, why would we ever be willing partners in advancing an agenda where we can and should make legitimate sacrifices?
UPDATE: I forgot to mention a few things. First, the expanded intellectual property protection for US drug companies will make drugs more expensive for the Central American countries. The patent system creates huge economic distortions. That's why many economists refrain from calling CAFTA a "free trade" agreement. Hopefully we can reach some sort of supplemental agreement to make sure people aren't dying because their medicine is now too expensive. I haven't seen any reliable studies on how big or small of an effect this will have, so if somebody can point me in the right direction, it would be greatly appreciated.
Second, while I still believe that the number of US workers affected by CAFTA will be quite small, there will still be some job losses. Unfortunately, W has tightened the eligibility criteria for Trade Adjustment Assistance. It would have been nice if he would have loosened the requirements in order to help those who will end up on the losing side of CAFTA.
Finally, I neglected to mention the costs of W's last minute horse-trading. By all accounts, it was open season on pork for those Congressmen whose votes were up for sale. The pork-laden Highway Bill and Energy Bill are testaments to this fact. How many taxpayer dollars were wasted in order to pass CAFTA? It's unknown, but given the size of the CAFTA economies (about the same as New Haven, CT by some estimates), it wouldn't surprise me if the losses from wasteful spending outstripped the potential economic gains from the deal.
Does this change my conclusion? Were Democrats right to vote against it? I think I'm leaning "yes" right now. Can someone out there convince me that my original analysis was correct?
UPDATE 2: Here's the World Bank's take on the effect of expanded IP rules on pharmaceuticals:
Economically, CAFTA will have very little impact from the US's perspective. 80% of imports from CAFTA nations already receive duty-free treatment. The other 20% will have very little impact on US jobs, mostly because we don't compete in the same industries as a Costa Rica or a Honduras, etc. On the other hand, our businesses will now have improved access to CAFTA markets, where our goods currently face substantial duties. This will be, unquestionably, a net positive for the US economy. Not a huge gain, but a net positive none the less.
The main criticism with CAFTA, from a pure policy perspective, is that it's weak on labor. I agree, and it's a shame, because we easily could have included stronger labor standards if we had tried (incorporating labor standards in trade policy is most likely going to be the focus of my masters project). That said, CAFTA is not going to result in a "race to the bottom" in CAFTA countries. Multinationals are seldom able to go into a country and attract workers by offering worse working conditions than the options currently available. While they might not offer US-calibre working standards, they usually offer better standards that what's currently available in the foreign country. Many are recognizing that you will have a more productive workforce if you offer decent standards. Furthermore, name-brand companies are under pressure from labor NGOs, and desperately want to avoid the bad publicity of operating a sweat shop.
The main reason I was almost against CAFTA, was due to the process of how this legislation was created. Traditionally, free trade agreements have been crafted with bipartisan input. In this case, Dems were completely excluded from the process. Completely...as in no input whatsoever. So CAFTA sets a very bad precedent in using free trade to advance a partisan agenda, versus seeking consensus and trying to create as good of a policy as possible.
A further positive that people should consider is the impact of CAFTA on advancing the Doha development round of the WTO. If we wouldn't have passed CAFTA, there was fear that the already sticky Doha negotiations would end. After all, if the US wouldn't agree to what is (from our perspective) an economic no-brainer where we were forced to give up virtually nothing, why would we ever be willing partners in advancing an agenda where we can and should make legitimate sacrifices?
UPDATE: I forgot to mention a few things. First, the expanded intellectual property protection for US drug companies will make drugs more expensive for the Central American countries. The patent system creates huge economic distortions. That's why many economists refrain from calling CAFTA a "free trade" agreement. Hopefully we can reach some sort of supplemental agreement to make sure people aren't dying because their medicine is now too expensive. I haven't seen any reliable studies on how big or small of an effect this will have, so if somebody can point me in the right direction, it would be greatly appreciated.
Second, while I still believe that the number of US workers affected by CAFTA will be quite small, there will still be some job losses. Unfortunately, W has tightened the eligibility criteria for Trade Adjustment Assistance. It would have been nice if he would have loosened the requirements in order to help those who will end up on the losing side of CAFTA.
Finally, I neglected to mention the costs of W's last minute horse-trading. By all accounts, it was open season on pork for those Congressmen whose votes were up for sale. The pork-laden Highway Bill and Energy Bill are testaments to this fact. How many taxpayer dollars were wasted in order to pass CAFTA? It's unknown, but given the size of the CAFTA economies (about the same as New Haven, CT by some estimates), it wouldn't surprise me if the losses from wasteful spending outstripped the potential economic gains from the deal.
Does this change my conclusion? Were Democrats right to vote against it? I think I'm leaning "yes" right now. Can someone out there convince me that my original analysis was correct?
UPDATE 2: Here's the World Bank's take on the effect of expanded IP rules on pharmaceuticals:
- no methodologies have yet been developed to evaluate the welfare impacts of these types of commitments – especially if we consider gains from other aspects of the FTA. While greater IPR protection usually means restrictions on the use of generic drugs, the treaty seems to provide flexibility for government’s [sic] to bypass the usual protections in order to protect public health, through compulsory licensing and the option of parallel imports.
Comments:
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Nordy, I think you're being a little generous with the term "traditionally". I think back to NAFTA negotiations, of which we are both somewhat familiar...and it seems to have been bipartisan because a) the President was a Republican and the majority in Congress was Democrat, and b) a Democrat got elected President, and needed to work with the negotiators from the previous administration...which were from both parties due to reason (a).
Neither of those applies to CAFTA, so I'm not sure you can say that "traditionally" free trade agreements have been bipartisan.
Further, a legitimate question to ask is: why were the Democrats excluded? I don't have hard evidence...and it's late and I've spent 26 of the last 55 hours in the car and not enough in bed...but my hunch is because they spoke so strongly about the PROBLEMS with CAFTA to begin with (environment, labor, etc)...that the Administration viewed them as more trouble than the "bipartisanship points" were worth.
Neither of those applies to CAFTA, so I'm not sure you can say that "traditionally" free trade agreements have been bipartisan.
Further, a legitimate question to ask is: why were the Democrats excluded? I don't have hard evidence...and it's late and I've spent 26 of the last 55 hours in the car and not enough in bed...but my hunch is because they spoke so strongly about the PROBLEMS with CAFTA to begin with (environment, labor, etc)...that the Administration viewed them as more trouble than the "bipartisanship points" were worth.
Nordy-
See my previous post on CAFTA on why you should support it even if the SHORT TERM economic costs to the US are greater than the benefits. Look long term. Think of how developing Central American economies could be beneficial to the US down the road, both economically and politically.
Even beyond that...there was a time limit on this agreement. Bush needed to secure agreement sooner rather than later...and while the horsetrading was unfortunate (remember: I'm a McCain Republican, and hate pork bills), the blame goes to the members of both parties who withheld support...not to the President.
(This goes back to my long held belief: House GOP leadership is a far bigger problem than the President, who is far more moderate than he is given credit for.)
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See my previous post on CAFTA on why you should support it even if the SHORT TERM economic costs to the US are greater than the benefits. Look long term. Think of how developing Central American economies could be beneficial to the US down the road, both economically and politically.
Even beyond that...there was a time limit on this agreement. Bush needed to secure agreement sooner rather than later...and while the horsetrading was unfortunate (remember: I'm a McCain Republican, and hate pork bills), the blame goes to the members of both parties who withheld support...not to the President.
(This goes back to my long held belief: House GOP leadership is a far bigger problem than the President, who is far more moderate than he is given credit for.)
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