If Cafta Doesn’t Pass, Latinos Will Look to Europe, South America

If the Central American Free Trade Agreement does not pass, countries heavily invested in the textile apparel industry may look to European or South American markets for trade agreements, said C. Monica Capra, assistant professor of economics at Emory University.

After both the House Ways and Means Committee and the Senate Finance Committee held introductory hearings on CAFTA in mid-April, followers of the agreement wait for legislation to be proposed in Congress, and GlobalAtlanta has invited Georgia academics to offer their opinions on the proposed trade agreement.

Dr. Capra, who is in favor of the agreement, said that the short-run costs of CAFTA like the displacement of rural workers in Guatemala or the increase in telecommunication prices as the industry privatizes in Costa Rica, could be out-weighed by the long-term political reforms and economic development the agreement would bring to the region.

“The legal reforms that the Latin American countries will adopt as a result of CAFTA will provide a framework for establishing the rule of law, reducing corruption and human rights violations,” she said. “These will later translate into a more stable economic development for the region.”

The reduction of apparel and textile tariffs that CAFTA proposes would also allow Central American textile products to be more competitive with Chinese imports in the U.S. market, she said. Countries like Honduras that are heavily invested in the apparel industry, might consider free trade agreements with markets in Europe and South America if CAFTA does not pass.

Guatemala and the Dominican Republic, two countries that have experienced strong public opposition to CAFTA, should encourage civil society discussion about the agreement, so that it is not viewed as an arm of U.S. imperial imposition, she said, which could lead to violent protests and political instability.

Dr. Capra also noted that a protected sugar industry in the U.S. would likely keep foreign sugar imports from competing with domestic sugar prices.

Dr. Capra’s responses to DR-CAFTA questions follow. If you have a background in Latin American politics, economics, or the DR-CAFTA agreement and would like to contribute to GlobalAtlanta’s discussion, please email your thoughts to info@globalatlanta.com.

1- What are your greatest concerns with the proposed DR-CAFTA agreement?

You probably know that to many economists, any free trade agreement is good news, so my main concern is that CAFTA may not be ratified. Although I have to confess that the chances for that are pretty low. Another less obvious concern I have is that in some places such as the Dominican Republic and Guatemala there is a strong popular opposition to free trade and privatization. The main concern that I have is that people in those countries perceive the agreement as another US (imperialist) imposition with support from domestic elites rather than as a mutually beneficial agreement among trading partners. It is important that the countries that experience popular opposition to CAFTA encourage dialogue and education so that the civil society better appreciates how they can benefit from CAFTA and does not feel alienated. A feeling of alienation may lead to violent protests and political instability both, I believe, would undermine the agreement.

2- What do you think are some of the negative aspects of the agreement?

The agreement sounds better than it is. In fact, there are sensitive goods in both the US and Central America that are heavily protected and the protections are unlikely to change. For example, the US sugar industry is fighting to exclude sugar from the deal, which I believe will happen since that industry has a lot of influence in Congress. It is ironic that such an insignificant sector of the US economy (1 percent of US farm revenues) has such a heavy clout over politicians in the US.

Anyways, it is likely that the market distortion that may survive after negotiations is that tax payers in the US would have to pay sugar growers in Central America not to produce sugar so that US sugar growers could produce it at much higher cost. In Central America, rice may keep its protection and the countries may take too long in adopting better environmental and labor standards.

3-If this agreement is not approved by the U.S. Congress, what sort of reaction might that elicit from Latin American governments?

Not much, their economies are already highly dependent on the US. In addition 80 percent of all exports from Central America entered the US duty free; the same applies to the Dominican Republic through the Caribbean Basin Initiatives.

Still, these countries may be concerned about China’s predominance in the textile industry. CAFTA would reduce apparel and textile import taxes and therefore make Central American textile products more competitive in the US market. If CAFTA is not ratified and China’s products continue displacing other countries’ products, in the medium term, some Latin American countries that have bet heavily on the apparel industry such as Honduras may face serious problems. These countries may feel that they need to find other markets for their products, so I would not be surprised if they reallocate their efforts towards a EU-Central America or a Mercosur-Central America free trade agreement.

4- How important is DR-CAFTA to implementing a Free Trade Area of the Americas?

CAFTA can work as a testbed for further free trade agreements. Things that do not work could be improved upon or changed. There is also a positive psychological externality from liberalizing trade. People who are concerned and fearful about trade and globalization become more comfortable with the idea once they experience it. For example, before Nafta, the average Mexican did not trust trade, the US or Canada, now the average Mexican is supportive of further liberalization. In addition, the more Latin American countries join free trade agreements with the US, the more costly it is for those countries that are not included to remain excluded.

5-How might DR-CAFTA affect U.S. Trade with China or other parts of the world?

As in any trade agreement, there are loser sectors in the economy and winner sectors in both the US and Latin America. The agreement will not affect the US economy that much, as a whole, but some sectors will see immediate (short-run) benefits. These sectors are mainly in agriculture (farming and ranching). The US apparel industry may be concerned, but not as much as they are with Nafta or China.

Since the Latin American countries involved already enjoy duty free status, they will not see much of a short-run benefit. The short-run costs differ across countries and across sectors. For example, Costa Rica seems to be concerned about being forced to privatize its telecommunications monopoly because such a process may result in higher prices in the short-run. Guatemala is concerned with the effects of importing more US agricultural products on its rural and mainly indigenous population. In Guatemala about 50 percent of the population works in the land, those people will surely be displaced to the cities and I doubt whether in the short-run the non-farming sectors will be able to absorb the displaced.

However, the medium and long-run benefits may be big. To begin, they will be able to better compete against China’s apparel and textile exports in the US market. Secondly, the agreement will make legal reforms binding in Central America. These legal reforms, among other things, will make future US investments in the region less risky and therefore more attractive. I believe that the legal reforms that the Latin American signing countries will adopt as a result of CAFTA will provide a framework for establishing the rule of law, reducing corruption and human rights violations. All of these will later translate into a more stable economic development for the region. It is the growth of the region that in the long-run will benefit the US economy.