The Menace of CAFTA: Loopholes and Hidden Agendas
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CAFTA may appear to be a minor agreement with small countries of no economic importance. However, CAFTA was negotiated on the basis of very bad principles, which have a dismal track record and which pose major threats to the American economy should they be carried into larger agreements in the future. The only way to force a change in policy and strategic thinking in the USTR’s office, as new appointee Congressman Rob Portman (R-OH) comes into the job, is to defeat CAFTA and thoroughly discredit the process that produced it.
The Menace of CAFTA: Loopholes and Hidden Agendas
William R. Hawkins
Wednesday, March 23, 2005
There is a pattern in official statements put out to promote controversial trade agreements. Topic headings and first paragraphs will proclaim an agreement boldly supportive of American interests, but then the following paragraphs and fine print will back away from the proclaimed goals or even undermine them completely. The hope in official circles is that a “nation of headline readers� will be won over by the claims, and not examine the details. This tactic was in use long before the present Bush Administration and does much to explain the widespread distrust among the American public of new international agreements, especially given the record of past agreements not living up to their advanced billing.
The Central America Free Trade Agreement (CAFTA) is the most current example of how this tactic is used. CAFTA claims to benefit U.S.-based fabric manufactures by requiring the use of American-made fabrics (known in the industry by the term “yarn forward�) by foreign garment producers in order to get preferential access to the U.S. market. This is a very good use of the vast leverage available to American negotiators. However, CAFTA includes a number of loopholes that undermine the benefits of the yarn forward provision.
First, the U.S. rule of origin for fabric only applies to “essential� components, i.e. not all components of a garment would be given duty free import status. The rest of the fabric could come from Asia, most likely China. There is also an unlimited “single transformation� exception to the rules of origin that would allow the production of items such as bras, boxer shorts, and pajamas from non-American (read Chinese) fabric. Nicaragua gets to use non-American cotton and man-made fabrics for approximately half its current garment exports for five years (with lower amounts out to nine years), and a similar exception applies to wool garments from Costa Rica for two years.
Non-American denim, wool, cotton, and man-made fibers produced in Mexico can be sent to CAFTA for assembly into garments that can then shipped duty free into the United States. This disgraceful provision is an unjustified reward for textile firms that moved from the United States to Mexico under NAFTA, putting tens of thousands of Americans out of work. It is also another major loophole which China can (and has) exploited. Mexico has long been a hotspot for illegal textile transshipments from China.
While these disturbing loopholes are in the part of CAFTA agreement best known to the public, there is another massive problem in a part of CAFTA that most people have never heard discussed. According to the U.S. Trade Representative’s (USTR) official summary of the agreement, chapter nine of CAFTA establishes a basic rule of “national treatment� in government procurement. This means that each nation must treat goods, services, and suppliers from the other CAFTA parties in a manner that is “no less favorable� than domestic firms when awarding government contracts. The chapter also bars discrimination against locally established suppliers on the basis of foreign affiliation or ownership. This means governments cannot treat their own citizens better than foreigners, or use “buy domestic� policies to support their own economies with their own public funds.
Governments have long used procurement to support domestic industry, particularly public infrastructure, national defense, and other strategic sectors. It is both good politics and sound economics for money taken out of the economy through taxes or borrowing to be plowed back into the economy via procurement. Government spending is also a vital stabilizer during the business cycle. Fiscal policy has proven to be a much more effective tool for stimulating the economy than monetary policy. Easy money can support economic activity, but it cannot instigate it. Fiscal policy actually puts money to work, but its impact is lessened if the money goes to work overseas. This was the flaw in the policy of fighting the last recession with massive tax cuts: Consumers used too much of the bounty to buy imports.
The United States, with a Federal budget of over $2 trillion, is well positioned to make use of fiscal policies to promote economic growth, but instead its trade negotiators – operating as usual under the undue influence of transnational corporate lobbyists and academic sophistry, want to erode this capability both at home and abroad.
The U.S. push to improve the “transparency� of procurement in the ongoing Doha Round of global trade talks has, however, failed. A World Trade Organization (WTO) General Council Decision of August 1, 2004 dropped this issue from the Doha agenda. According to the USTR, “A number of WTO Members remained concerned that a transparency agreement could lead to market access commitments.� Article V of the existing WTO Government Procurement Agreement (GPA) takes into account “the development, financial and trade needs of developing countries� so that they can continue to restrict procurement to “promote the establishment or development of domestic industries....[and] support industrial units so long as they are wholly or substantially dependent on government procurement.� They are also free to negotiate “mutually acceptable exclusions from the rules on national treatment.� Even with these exemptions in the GPA rules, most developing countries have refused to sign the GPA because they do not want to open their budgets to foreign firms.
The superficial argument in favor of non-discrimination for procurement in CAFTA is that when trying to trade with small, poor countries, the only entity with any real money is the government. American firms want to bid on the development and infrastructure projects these countries need. But when this principle is expanded to the wider world, as the USTR wants, the United States could find itself on the short end once again.
There are already public rumblings about Federal, State and local governments outsourcing work overseas, including sending sensitive personal records to foreign data processing centers. There has also been an ominous trend at all levels of government of letting foreign firms bid against American firms for projects paid for with taxpayer dollars. With the United States already running a $618 billion current account deficit and the dollar falling on world currency markets, American officials should not be adding to the nation’s economic problems by sending public funds, and the jobs and productive capacity they support, out of the country.
The USTR who negotiated CAFTA was not concerned with such matters, not even when they involved sustaining the U.S. defense industrial base. When the House Armed Services Committee proposed reforms to bolster the domestic production of critical weapons technology for the American armed forces in the 2004 Defense Authorization Act, USTR Robert Zoellick objected. He hates any “buy America� language, even when national security was at stake. Yet, the WTO GPA allows “the protection of essential security interests relating to the procurement of arms, ammunition or war materials, or to procurement indispensable for national security or for national defense purposes.� It is an odd thing indeed when the WTO shows more concern for national interests than does the USTR.
CAFTA may appear to be a minor agreement with small countries of no economic importance. However, CAFTA was negotiated on the basis of very bad principles, which have a dismal track record and which pose major threats to the American economy should they be carried into larger agreements in the future. The only way to force a change in policy and strategic thinking in the USTR’s office, as new appointee Congressman Rob Portman (R-OH) comes into the job, is to defeat CAFTA and thoroughly discredit the process that produced it.
