www.americaneconomicalert.org

CAFTA HERALDS END OF DOMINANCE OF FREE TRADE THEORY
By William R. Hawkins
Thursday, August 04, 2005

Many commentators have remarked that the very narrow passage of the Central America Free Trade Agreement (CAFTA) in the U.S. House of Representatives casts doubts on the ability of larger trade agreements, such as whatever may come from the World Trade Organization Doha Round, to be adopted. But the issue is even more seminal, for the battle over CAFTA marked the end of “free trade� as an ideology that can command the support of a majority in either political party.

The United States is suffering trade deficits that will likely hit $700 billion this year, and has lost millions of manufacturing jobs to foreign rivals. Incomes have stagnated for most Americans, driving the household savings rate to zero. It is clear to most Congressmen, as it has been to most American for some time, that “free trade� has failed its real world test. Those pundits whose economic notions are still limited to academic theories picked up from some introductory classes taught decades ago by graduate teaching instructors may still sputter on about “free trade� and “comparative advantage.� But as Alexander Hamilton once noted, such ideas have been “rejected by every man acquainted with commercial history."

An August 3 editorial in the Los Angeles Times called the Democrats “the protectionist party� because they voted 188-15 against CAFTA. They are not in bad company, since George Washington, Abe Lincoln and Teddy Roosevelt were also protectionists. But the editorial failed to note that a majority of Republicans also did not support CAFTA on the basis of “free trade.� A week before the vote, the Congress Daily survey of the House could find only 100 GOP Members willing to support the agreement. All the lobbying by the advocates of globalization and transnational business, from the Chamber of Commerce, the National Association of Manufacturers, the Business Roundtable, and K Street firms, had failed to produce a majority even within the GOP. Even when the roll call vote started, a majority was not ready to endorse “free trade.�

What ultimately brought another 102 Republicans on board were arguments not just different from, but opposite to, the ideology of David Ricardo. According to Majority Whip Roy Blunt (R-MO), the strongest argument for winning over GOP members was foreign policy. The argument was that to help cement democracy in Central America, CAFTA would create a trade bloc that could fend off Chinese competition, giving protection to regional industry.

The discussion of trade blocs and geopolitics is a refreshing advance over the empty rhetoric of “free trade.� To make this new line at all credible from leaders who had paid no attention to such vital elements of world affairs in the past, legislation strengthening U.S. trade laws against Chinese goods was passed as a precondition for gaining more GOP votes for CAFTA.

Rep. Jim Kolbe, a notorious believer in both “free trade� and “open borders� for illegal immigration, also felt the need to resort to other arguments. He called CAFTA “a little trade agreement with small economic consequences for our country. But it is a huge national security issue with enormous implications for our entire foreign policy.� He warned that Hugo Chavez, the anti-American leader of Venezuela, “would like nothing more then to pick up the pieces of an economic policy in the region shattered by the defeat of CAFTA.�

Commerce Secretary Gutierrez argued that all six CAFTA countries supported the United
States with respect to its Iraq policy, “They supported us – now they're looking for our support.� Tying trade to diplomatic alignments is as old as recorded history, but it is not ‘free trade.� Indeed, classical proponents of “free trade� like the French economist J. B. Say called for an end to the diplomatic corps, arguing that “it is not necessary to have ambassadors. This is one of the ancient stupidities which time will do away with.� Commerce was to replace geopolitics, not be incorporated into it. Yet, the classical liberal view has always proved untenable in a world of contending states. The impact of trade and investment on national wealth and production capacity can affect the balance of power and thus cannot be ignored by statesmen (though corporate elites without concern for these larger issues would like to operate outside their supervision).

Economic “protectionism� is thus a sub-set of the more general responsibility of government to protect national security. As Princeton political science professor Joanne Gowa has concluded from her study of history, “The play of power politics is an inexorable element of any agreement to open international markets, because of the security externalities that trade produces....trade enhances the potential military power of any country that engages in it....because trade generate security externalities, adherence to a policy of free and non-discriminatory trade may not be optimal.� It is this factor that should dominate all discussion of trade related to China.

A more local appeal of protectionism was used to win the votes of Congressmen who had textile or sugar interests in their districts, which were endangered by the terms of CAFTA as written or by an unfettered China. Some GOP members said they had secured a written commitment from USTR Portman that new CAFTA terms would be negotiated, so that pockets and linings used in apparel that enters the United States duty-free must come from the United States or the Central American region. The Nicaraguan government was pressured to agree to limit its use of a special "tariff preference level" that allows it to source certain fabric from Asia. The main selling point of CAFTA, that apparel assembled in Central America for export to the United States would have to use American-made fabric, is an affront to “free trade� theory, but a sound example of how Washington can use access to its rich market as leverage in gaining control over foreign production. Other promises involved limiting imports of socks and sugar.

Yet, these pledges that CAFTA would not really be just another “free trade� fiasco but an exercise in managed trade to gain advantages over rivals was not enough to win a majority. Skepticism from past dealings with an indifferent, corporate-dominated GOP leadership undermined the credibility of the pledges. Certainly the experience with the bill to allow countervailing duty suits against China and to increase monitoring of Beijing’s compliance with trade rules was not encouraging. Ways and Means Committee chairman Bill Thomas again proved his loyalty to those with Chinese trading interests by bringing the bill to the floor under a closed rule so that those who wanted to offer amendments that would strengthen its provisions against China and in favor of American producers could not do so. Thomas knew as well as anyone that “anti-Chinese� amendments would pass overwhelmingly.

To win the last handful of votes needed, partisan pleas to support the president in a time of war (reinforced by personal calls from George W. Bush), and threats/rewards regarding Committee assignments, chairmanships, and pork projects were all used. Blunt said GOP leaders' decision to hold off on filing the highway bill conference report had been effective as leverage to keep members in line to vote for CAFTA,

So in the end, “free trade� doctrine had little to do with passing CAFTA, and much to do with rallying opposition to the bill as “more of the same� in a failed trade policy. The trade issue is now being dominated by demands that policy seek actual advantages for American and allied economies in a world of cut-throat competition where “the invisible hand� cannot be trusted to generate benefits. The “hot� topic in trade this year has not been CAFTA, but China where introduced legislation is strongly in the direction of restricting trade and protecting U.S. industrial and security interests. This is a healthy trend, and long overdue, but not unexpected as “free trade� has always failed the needs of a Great Power like the United States that must closely to favorable economic policies if it intends to stay on top.