Asian breaks would offset CAFTA gains

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Asian breaks would offset CAFTA gains
Sunday, July 24, 2005
KEVIN L. KEARNS and ALAN TONELSON

Although the nation's agricultural community is deeply split over the Central America Free Trade Agreement, many leading commodity and agri-business interests have been among the deal's strongest backers. The powerful American Farm Bureau Federation, for example, calls CAFTA "a golden opportunity to balance the scales of trade access."

Unfortunately, close scrutiny reveals this sales pitch to be a bill of goods. Indeed, AFFB's centerpiece CAFTA study, "A Vote for DR-CAFTA is a Vote for Agriculture," is a monument to sophistry, not scholarship.

Even the study's labeling is misleading. "A Vote for DR-CAFTA" is anything but an examination of the agreement's trade effects alone - as opposed to the U.S. International Trade Commission's official analysis of CAFTA released last August. Instead, it is a study of trade effects based on wishful thinking about Central America's future.
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Focusing solely - and properly - on trade effects, the ITC predicts $328 million in increased U.S. agriculture exports to the region when CAFTA is fully implemented (that is, 20 years from now). That long-run increase represents a measly 0.5 percent of 2004 U.S. global agriculture exports, and less than 20 percent of last year's U.S. agriculture exports to the CAFTA countries. Due to this negligible export increase, CAFTA would raise the average American farmer's income by a grand total of $100 - in 20 years.

The Farm Bureau's prediction of $1.52 billion in CAFTA-generated export gains will also take 20 years to achieve. Yet, even this best-case, long-run increase represents only 2.4 percent of last year's U.S. global agriculture exports and would raise the average American farmer's income by only $500 dollars in 20 years.

No one, however, should take the $1.52 billion figure seriously. The Farm Bureau admits that its projections for less than half the specific export commodities (representing $676 million) are based on "detailed analysis." According to the organization, such analysis for the rest of the projected export increase "is not possible." These projections are based on the groundless assumption that exports will increase "at the same average pace" estimated for the other products.

The Farm Bureau also admits that its entire study rests on CAFTA income growth projections that greatly exceed those from other authoritative sources. It justifies this gap - of 20 percent compared to the World Bank's predictions, for example - by claiming that CAFTA will result in "improved political stability" and strengthen "other, more conventional macroeconomic factors." More specifically, it expects that CAFTA will encourage Central America to transfer "resources from agriculture to higher-return activities such as light manufacturing."

This prediction, however, utterly ignores global economic forces likely to overwhelm CAFTA's narrow tariff effects. In fact, it pretends that most of the rest of the world economy simply doesn't exist.

Because most of the United States' CAFTA tariff cuts are concentrated in textiles and apparel, these are the only sectors that realistically could boost Central American export earnings and thus enable these countries to afford U.S. agriculture products and other imports. Yet textile and especially apparel production increasingly look like economic dead ends.

With the end of global quotas last Jan. 1, China and other Asian super-exporters - as every independent study predicted - began dumping oceans of subsidized textile and apparel products on world markets. This mammoth, rapidly growing glut is already depressing textile and apparel export prices. At best, therefore, the CAFTA countries and other, small Third World apparel exporters will face ever lower export earnings.

At worst (and most likely), the Central Americans will keep losing world market share because CAFTA's tariff breaks do not offset their Asian competitors' many other advantages, like much lower wages, higher labor productivity, and faster ocean transport, not to mention currency manipulation and numerous subsidies.

A 2004 World Bank study convincingly supports this worst-case scenario, predicting that the Asians' 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.

At least as troubling, the combination of Central American expectations being raised by CAFTA proponents and then dashed by reality is political dynamite. The only realistic results from CAFTA's false promises are falling Central American wages, higher unemployment, and therefore more political instability - not to mention fewer imports of ag and other products from the United States.

A sensible U.S. trade policy - one that sets priorities and deals effectively with China, rather than indiscriminately opening the U.S. market to fair and unfair traders alike - could indeed strengthen American agriculture and help Central America in the process. Yet President Bush hasn't offered Congress such a trade policy. That's one big reason why Congress should reject CAFTA. Kevin L. Kearns, a former foreign service officer with extensive Central America experience, is president of the U.S. Business & Industry Council. Alan Tonelson, research fellow at the council, is the author of "The Race to the Bottom" (Westview Press).