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The National Association of Manufacturers' Phony Case for CAFTA
Alan Tonelson
Friday, June 17, 2005

Let’s give the National Association of Manufacturers some credit. Usually, its analysis of a new trade deal consists of little more than dismissing its opponents as “protectionists� and predicting that the pending trade agreement is needed to prevent a new global economic Dark Age. By contrast, the organization’s recent study of the Central America Free Trade Agreement actually presents the semblance of an argument.

Unfortunately, it’s an argument devoid of rigorous or even coherent thought – at least when it comes to how global trade and business really work. In fact, properly read, NAM’s data and reasoning wind up showing why CAFTA is a lose-lose proposition for the United States and the Central American countries, not a win-win.

“CAFTA-DR: A Winner for U.S. Manufacturing� parrots all the standard outsourcers’ talking points about the agreement. It dutifully touts the impoverished Central American and Dominican micro-markets in question as major customers for American businesses and workers. And it emphasizes that, when it comes to market access, CAFTA will simply bring most Central American tariffs down to the U.S. levels of zero.

At the analytical heart of the NAM study, however, is the claim that CAFTA will help save regional garment manufacturing and its exports from the onslaught of China and other big Asian rivals, which was greatly intensified by the abolition of global textile and apparel quotas last Jan. 1.

“CAFTA-DR� does project that the elimination of Central American and Dominican tariffs on U.S. goods will boost U.S. manufactured exports to the region (excluding textile and apparel products) by just over $1 billion – by the time all these barriers are eliminated. As NAM sees it, the tariffs’ removal would give U.S. goods a significant advantage over other goods in Central American markets, and therefore enable American producers to seize market share from foreign competitors. Local Central American producers, however, would not be harmed because so few of them compete with most manufactured imports.

The report insists, however, “By far the largest effect on U.S. exports would be the preservation of some or all of existing U.S. exports to the CAFTA-DR countries that otherwise would be lost if Asian countries displaced current CAFTA-DR country apparel exports to the United States.� In fact, if CAFTA lives up to its promise of making the Central American garment industries fully competitive with their Asian – mainly Chinese – rivals, NAM projects that the agreement could save up to another $4 billion in U.S. exports to the region.

This is an export effect fully four times larger than the one NAM claims will result from the elimination of Central American tariffs. The smaller this anti-China effect, the fewer U.S. exports would be saved. After all, as NAM correctly notes, garment exports are by far the main source of the foreign exchange needed by the Central Americans to purchase U.S. products or any other imports.

Unfortunately for the U.S. textile industry and other American manufacturers, numerous holes can be punched in NAM’s reasoning. For example, the CAFTA textile and apparel provisions are full of loopholes likely to permit transshipment of large quantities of Chinese and other Asian textile and apparel products through the CAFTA countries into the U.S. market. In addition, nothing about CAFTA will have any effect on the current host of predatory trade practices used by the Chinese and other Asians to hold or expand market share – no matter what the economic fundamentals say.

With $660 billion in foreign exchange reserves, the Chinese could easily subsidize and dump into oblivion many U.S.-Central American production-sharing arrangements. And the Chinese show as few signs of halting their currency manipulation – which artificially reduces the price of their products, and makes them more competitive in markets all around the world – as the Bush administration has shown in dealing with the problem.

It’s also difficult to imagine Central America’s other trading partners taking the new tariff changes lying down. Japan is a veteran currency manipulator and subsidizer. The European Union practically exists to subsidize its manufacturers. CAFTA’s approval is just as likely to jolt these countries into acting to preserve their exports as it is to produce greater long-term U.S. market share. Indeed, the Europeans and Japanese both responded to NAFTA by signing their own free trade agreements with Mexico for exactly this reason.

Yet from the standpoint of domestic manufacturers outside the textile and apparel complex, the NAM scenario suffers a more fundamental problem. Not only does NAM predict that a combination of Central American tariff elimination and earnings from garment exports will support up to $5 billion of U.S. exports (including the $1 billion in new exports), but it also suggests that the garment industry will be the only possible source of Central American wealth – and import financing – enlarged by CAFTA. Even stranger, at another point in the study, NAM accepts the U.S. International Trade Commission projections showing that net Central American textile and apparel exports to the United States will barely rise at all.

As NAM keeps reminding us, because “outside the textiles and apparel industries, 95 percent of CAFTA-DR exports already enter the U.S. market duty-free,� the CAFTA-DR countries “will obtain little new market access� and CAFTA “is unlikely to generate significant new imports to the United States.� Moreover, NAM repeats, “The key benefits to the region lies [sic] in the greater ability to withstand Chinese and other Asian competition in the apparel area� and in the access to the U.S. markets locked in for these countries by CAFTA.

Even better, according to NAM, “fears that a flood of U.S. investment will pour into the CAFTA-DR region...are unfounded� because U.S. firms are already free to invest in these countries. (Yet, if this statement is true, one wonders why U.S. financial, insurance, and telecommunications firms appear to be lining up to pursue more aggressive investment, acquisition, and sales strategies, and why the Costa Ricans, to name one example, seemed to be concerned for their domestic industries in these areas.)

The NAM study, of course, is touting these features of the agreement as the masterstrokes that truly make it a win-win – and render opponents’ fears of increased CAFTA exports to the U.S. Market irrelevant and irrational. But if NAM is correct, these features of CAFTA will actually doom the Central Americans to a future of indefinite poverty, and prevent them from ever becoming wealthy enough to import more from the United States – no matter how many of their tariffs are eliminated.

At best, NAM seems to believe that these low-income countries – now specializing in the production for export of relatively low-value, labor-intensive products and basically unable to move up the value-added and technology ladder – will somehow become robust importers of those higher-value, technology-intensive products still made by the United States. Yet NAM never specifies how the Central Americans will earn the money needed to pay for these imports. Remember that NAM accepts the International Trade Commission projections indicating that Central American textile and apparel export earnings will scarcely budge. So NAM never “shows us the money� that allows CAFTA’s increased purchases from U.S. manufacturers.

Can the CAFTA countries make it up on volume in current industries? It’s possible of course that the ITC projections completely wrong. Many, in fact almost all, of the pro-NAFTA projections proved to be sharply in error. Indeed, it’s possible that America’s appetite for imported golf shirts, capri pants, and tunic tops will expand as fast as possible forever. But it’s more likely that the U.S. market will start to behave like other markets strapped with huge amounts of rapidly rising debt and be forced to curb imports.

In theory, the CAFTA countries’ garment industries also could become so globally competitive that they make major inroads in European and Japanese markets as well. But theory clashes with reality here again. The CAFTA countries lack the proximity to these regions that is so crucial to their prospects in the United States. And Europe and Japan have shown little interest in expanding imports of anything from the developing world.

Just as important, NAM’s reasoning ignores one of the biggest dynamics driving apparel trade – and the rest of manufactures trade – nowadays: The enormous pricing power wielded by China. In particular, the abolition of global textile and apparel quotas earlier this year (a policy NAM endorsed) works against these countries. In fact, the quota abolition places any country that relies heavily on exporting apparel in the no-win position of competing in industries increasingly dominated by China and other Asian mercantilists.

Even if CAFTA did preserve or perhaps expand Central America’s share of the U.S. apparel market, the systematic, massive overproduction from Asia would continue exerting powerful downward pressure on prices all around the world. As a result, both the Central Americans’ hopes for economic progress, and with them, U.S. exporters’ hopes for a vibrant new market, are likely to be sharply limited.

As is known all too well by NAM’s smaller domestic members (and the rest of the domestic manufacturing community), the “China price� has sharply depressed margins for U.S. producers. Consequently, even in highly sophisticated, capital-intensive industries that China has only started to enter, many thousands of NAM’s members are struggling to survive. Often the price of the finished Chinese product in the United States is less than their cost of materials. Does NAM or anyone else really expect different results in labor-intensive products like apparel, where the Chinese heavily rationalized their formerly inefficient state-owned companies in anticipation of the lifting of quotas, and now have a significant lead? Can any U.S. manufacturer or policymaker seriously believe that we have somehow stolen a march on the Chinese with CAFTA and that they will simply surrender in the face of our CAFTA cleverness?

In other words, the NAM study conveniently ignores the bedrock economic concept of the terms of trade – the relative prices of exports and imports and why they matter. Central to any country’s hopes for either achieving economic development or maintaining its level of development is improving and preserving its terms of trade – making sure that, on balance, it exports goods and services that are priced higher and worth more than the goods it imports. A country with deteriorating terms of trade is a country becoming less competitive and soon poorer.

NAM’s analysis can escape this dilemma, but only by assuming that the Central Americans will learn to make and export to the United States other, increasingly sophisticated, more profitable goods. Clearly, the multinational companies that dominate NAM are especially good at transferring this know-how to low-income countries. Perhaps the NAM leadership knows full well that this hidden assumption, properly understood, adds a level of realism otherwise missing from its study.

But assuming such economic development in Central America would force NAM to concede that CAFTA could indeed boost U.S. net imports in a growing number of industries, worsen the U.S. trade deficit, increase America’s international debts, and accelerate the off-shoring of industrial supply chains. This picture is, of course, one that NAM is loathe to paint, as it would have the opposite effect from the one NAM desires to achieve. That is to say, it would certainly increase Congressional and public opposition to CAFTA and disrupt the plans of the outsourcers running NAM.

Ironically, not only will CAFTA not stop the Chinese juggernaut, it actually helps it to gather steam. While Congress, the multinationals, domestic producers, and the public are tied up fighting over CAFTA, they are too preoccupied to formulate truly effective policies to deal with China – which continues its quest to grab as much of the world’s share of manufacturing as it can. And this bleak situation is all the more disturbing thanks not only to NAM’s insistence on passage of CAFTA, but also thanks to its continued opposition to measures that would directly stem the tide of Chinese exports to the United States – an export tide to which Central American products would actually be added if the hidden assumption in NAM’s study proves true.

In sum, NAM can legitimately portray CAFTA as a boon to Central America only by admitting that CAFTA is likely to be as bad for domestic U.S. manufacturers as the other free trade agreements it has so strongly supported. But CAFTA can be a boon to textiles or any other part of the U.S. economy only if the United States drops the trade policies that NAM has spearheaded for so long – which open the U.S. market to all comers without insisting on any meaningful, enforceable reciprocity; which refuse to set trade policy priorities; and which actively encourage companies to go offshore to supply our home market.

Such critically needed changes to U.S. trade policy are impossible for NAM even to consider -- as long as its outsourcing multinational members call its tune. In fact, the organization continues to support strongly all the other new, outsourcing-focused trade agreements that President Bush has teed up and is preparing to submit to Congress once the road is cleared by CAFTA.

Does NAM realize that its CAFTA study is fatally flawed? Has it simply overlooked the report’s massive and pervasive internal contradictions? Or does it realize that the CAFTA countries are likely to move up the industrial food chain – just like Mexico did under NAFTA –because its outsourcing multinational members will provide the wherewithal to do so? No one outside the NAM leadership can know for sure. But either way, “CAFTA-DR� simply adds to the mountain of evidence that NAM is no longer fit to speak for domestic industry on trade or economic policy.