http://www.truthabouttrade.org/article.asp?id=4144

Cafta Is No Cure-All For Central America

by: John Lyons, Staff Reporter of The Wall Street Journal

Mexico City - When the U.S. Congress begins debate on a free-trade accord with Central America and the Dominican Republic this month, expect speeches extolling how the pact will help fight narcotics trafficking and terrorism, ease illegal immigration, and boost economic development.

Proponents of the Central American Free Trade Agreement argue that it will help the region consolidate an impressive transformation from the civil wars of the 1980s to the predominantly stable, pro-market democracies of today. "We've got to help the young democracies develop," President Bush said Friday at Gaston College in North Carolina.

But even if the pact wins congressional approval, the region still will have a long way to go on the road to economic and political development. Mexico's meltdown a year after joining the 1994 North American Free Trade Agreement shows that free-trade deals alone don't guarantee stability.

Central America faces a more daunting challenge than Mexico did a decade ago. The countries are far poorer, less educated and more lacking in infrastructure than Mexico. In Nicaragua, an impeachment drive has the pro-U.S. government teetering, with the socialist Sandinista party angling for a comeback. El Salvador and Honduras are struggling with violent international gangs, which may scare off potential investors. The Dominican Republic is just coming off a debt default with roots in a massive embezzlement scheme that brought down a major bank. Guatemala has a growing problem with narcotraffickers, while Costa Rica, long the star of the region, has balked at ratifying the deal as labor unions threaten paralyzing protests.

Further lessening the region's appeal to international investors: Central America is fragmented by tedious and often inscrutable customs regulations, while inadequate ports and roads hobble access to U.S. markets.

Trade concessions can help fuel growth by opening the U.S. market to imports from poor nations. Nafta dismantled a number of trade and investment barriers with Mexico. Automobile and auto-parts makers in Mexico were given a special status that enabled Mexico to become a major manufacturing center for the U.S. and Canada.

The trade gains helped Mexico triple its nonoil exports over the past decade, as foreign investment surged. Even so, Mexico's economy has languished in recent years as businesses in China and India emerged as fierce competitors for the U.S. market. Mexican economists argue that the country is backsliding because it failed to couple increased trade with reforms in such areas as education, health, courts and physical infrastructure in order to remain competitive.

With Central America slipping, a trade pact could give the nations a big boost, but Cafta offers much less than Nafta did. The deal mostly cements temporary trade preferences Central American countries already have. Regional negotiators lacked the leverage to pry concessions from the U.S., so they won only limited gains in two areas where the region is strongest economically -- the sugar and garment industries.

Cafta leaves in place a system of price supports for U.S. sugar producers, and allows Central Americans to export only a meager amount to the U.S. -- equivalent to about 1% of annual U.S. production. The Bush administration has offered even more protection to the sugar industry to win votes needed to pass the accord.

Nevertheless, the administration and its Central American allies say the accord will boost investment in the region. They also warn that a failure of the U.S. Congress to approve Cafta could undermine leaders who have helped forge free-market democracies and who bet their political futures on tying the region closer to the U.S. As for providing additional help, Honduras and Nicaragua qualify for development assistance under the administration's Millennium Challenge Account -- although the other Central American nations don't yet qualify.

But Cafta's immediate economic benefits are so "nebulous" says the economist Carl Ross, a Bear Stearns analyst, that he says he can't incorporate them into his forecasts for the region.

When it comes to promoting regional security through economic growth, the Europeans, looking for deeper economic integration, have adopted another model. The European Union offers its poorest entrants free trade coupled with development assistance, free movement of labor and other measures designed to lift nations out of poverty.

When such poor nations as Ireland and Spain were admitted to the EU, they received funding aimed at boosting competitiveness and their workers were able to work elsewhere in wealthy Europe. Today, Ireland has one of the world's fastest growing economies and is competing on solid footing in high technology. The disposable income of Spanish families has risen by nearly 40% since 1998, estimates by Spain's La Caixa bank show.

Cafta's limited trade openings are unlikely to produce such dramatic gains.