Free Trade Policy Needs Consistency

This week the Senate is expected to take up CAFTA, the Central American Free Trade Agreement.  The White House is putting heavy pressure on Congress to support this agreement, which it should.  But one cannot help feeling that its own missteps on trade are what have gotten this administration to the point where it must pull out all the stops to gain passage of a very modest trade agreement that probably won’t have much impact one way or another.  In previous administrations, this sort of agreement would have been a routine matter, not requiring extraordinary effort to get passed.

The problem for many free traders like myself is that the Bush Administration has played politics with trade since day one, which has done serious damage to the fragile alliance that still supports free trade.  It imposed utterly unjustified tariffs on steel, torpedoed the Doha Round of multilateral trade talks by supporting a huge increase in agriculture subsidies, and has never missed an opportunity to demagogue China for all our trade woes.

Having destroyed the prospects for a multilateral trade agreement, which was supposed to be primarily about eliminating agriculture subsidies, the Bush Administration has tried to salvage some semblance of a free trade agenda by pursuing bilateral trade agreements.  Such agreements have been concluded with Australia, Chile, Jordan and Singapore.  Talks are underway with Bahrain, Morocco, Panama and groups of countries in Africa and South America.

While the amount of activity is impressive, the results are not very great in terms of opening trade.  Moreover, the heavy reliance on bilateral trade agreements may create future problems.  Economist Anne Krueger, now the number two official at the International Monetary Fund, summarized the case against preferential trade agreements in 1999 article in the Journal of Economic Perspectives:

            –  Once countries are inside a trading bloc such as NAFTA or the European Union, they have an incentive to support protection against countries outside the bloc.

            –  Protectionists will use bilateral trade agreements to avoid multilateral agreements, which all economists believe are far preferable.  Those who benefit from bilateral agreements will henceforth tend to oppose new multilateral deals.  Once a trader has gained access to the market he is most interested in, he will not want to share those benefits with those in other countries.

            –  Finally, the resources of organizations like the U.S. Trade Representative’s Office are limited.  If they are busy with bilateral agreements, they have no time or political capital left to pursue multilateral agreements.

Jagdish Bhagwati, America’s leading trade economist, has gone so far as to call free trade agreements “a sham” that are actually undermining the world trading system.  He argues that the proliferation of such agreements by the U.S. is part of a long-term effort to pursue a unilateral trade policy.  “Thanks to the myopic and self serving policies of the world’s only superpower, bilateral free trade agreements are damaging the global trading system,” Bhagwati says.

A 2003 study by the Congressional Budget Office found that the economic potential of bilateral agreements is very limited.  It noted that NAFTA, one of the largest such agreements, had virtually no effect on the U.S. trade balance with Mexico even after eight years.  However, the study also noted that there might be important noneconomic reasons to support free trade agreements.  For example, they could support U.S. foreign policy objectives and aid democratic forces in those countries with which we have such agreements.

Indeed, it would appear that foreign policy is the best reason to support CAFTA.  It is clearly in this country’s interest to encourage economic growth and reform in Central America even if the economic benefit for us is minimal.  It also keeps alive the principle of free trade, which this administration has done so much to undermine.

Still, much more could have been accomplished with CAFTA if the White House had made more of an effort.  For example, it could have used this as an opportunity start dismantling the absurd U.S. sugar policy, which keeps domestic prices far above world levels just to enrich a few producers.  Although CAFTA opens the sugar market a little, much more could have been done without making the sugar lobby any more opposed to the agreement than it is anyway.

Free traders have no choice but to support CAFTA.  Its failure would be seen as a victory for protectionism and would crush the hopes of economic reformers throughout Latin America.  I agree with economist Tyler Cowen: “This is probably a treaty we should pass, but it is not a treaty we should be proud of.”

The effort shouldn’t have been this difficult.  If President Bush had been more consistent in his support for free trade over the last five years, he would now be in a stronger position to get CAFTA approved.