July 28, 2005

CAFTA–A Close Call

Filed under: Economy,Taxes & Government — Tom @ 5:52 pm

The Central American Free Trade Agreement (CAFTA) passed last night in the House by the barest of margins. From a political perspective, it’s both a major victory and a narrow avoidance of what could have been a bigtime embarrassment for George W. Bush.

To me, it was also a close call on whether to support it. On balance, I am more relieved than anything else that it passed, and still have some reservations. I’m not happy with the “side deals” that “protected” the sugar and textile industries and will continue to make products containing them cost more than they should (though, in my opinion, the Reuters article I linked to exaggerates their impact on negotiations with the rest of the world).

The economic justification for free trade, even when other countries can produce everything more cheaply than your country, is solid and more than just theoretical, as Torrens and Ricardo showed so many years ago when they explained comparative advantage.

So what are the problems? Simply that as with sugar and textiles, entrenched industries, workers, governments often resist the resource allocations, capital flows, and admittedly often-difficult dislocations involved in making free trade work.

It’s messy, it’s disruptive, and it’s easy to point the finger at free trade as the problem when it’s really something else. For example, it’s easy to blame depressed wages, to the extent they exist, on free trade, when the problems are really lack of control over borders and lax employment law enforcement. It’s easy to blame loss of national sovreignty on free trade, when it’s usually the lack of will to exert it that’s the issue. It’s easy to look at another country that is prospering while yours is struggling and blame free trade, when it’s probably your government’s tax and economic policies that are making a mess of things.

There are other complaints. It’s very contentious, and very understandable that it is. So it may be useful to look at what happens when trade barriers go up.

It’s almost always not good. The best example is this one: The consensus among historians and economists is that the Hawley-Smoot tariffs of 1930, rather than mitigating the effects of The Great Depression that began in 1929, only made its effects much worse, as retaliatory tariffs went up around the world. One could argue that Hawley-Smoot inadvertently set the stage for the near-total turnover of the US Government in 1932 from Republican to Democrat control of Congress that went virtually unbroken for 60-plus years.

Here’s a less-understood example that is more recent. The informal quotas imposed on Japanese car imports in the 1980s, while they bought The Old Big Three in Detroit some time to get their act together (though GM never really did, which is the subject of this previous post), caused Honda, Toyota, and then others to decide to build plants here. Twenty years later, the Japanese car companies are as strong and competitive as they have ever been, and have transformed themselves from mere exporters into true multinationals, side effects that were totally unanticipated at the time the informal quotas were imposed.

Which is I suppose why it’s ironic that the vast majority of opposition to CAFTA came from Democrats who initially benefitted politically from ill-advised tariffs way back when, and who more recently, despite the help of the government, saw hundreds of thousands of mostly Democrat-supporting UAW jobs disappear in the 1980s and 1990s.

But I digress: If free trade and the comparative advantage principles behind it work out in the long run, countries that have never been able to emerge from basket-case status and grinding poverty may actually do so. Though it’s a bit chicken-and-egg, economically more prosperous countries tend to have representative rather than dictatiorial governments; economically backward ones tend to be dictatorships. Emerging economies tend to become more representative in their governments as they grow.

That isn’t to say there aren’t a lot of messy details to work through and constantly monitor. But on balance, a prosperous world whose various national governments represent the collective wills of their people is at least possible with free trade, and is virtually impossible without it.

UPDATE: American Thinker and Polipundit point to an Investors Business Daily editorial (no longer available without a subscription) that boldly (and hopefully correctly) predicts some pretty impressive long-term improvements as a result of CAFTA, including reverse migration of illegal immigrants back to their economically improved homelands. Seems a bit overdone, but IBD’s editorialists have a pretty good track record.

UPDATE 2, July 29: The Wall Street Journal (link requires subscription) notes the party divide, and provides this graphic to show how isolationism, once the reserve of the GOP, is now firmly entrenched in Donkeyland (graphic copied to ensure availability for education and discussion purposes):


UPDATE 3, August 1: Wow–It may be hot outside, but it’s chilly in the halls of the out of power. The Democrat leadership, particularly Nancy Pelosi, is on a recriminations jihad against the 15 Democrats who voted for CAFTA. A Wall Street Journal editorial (link requires subsdcription) reports today that:

The San Francisco Democrat called a caucus gripe session in the wake of last Wednesday’s vote, and an article in the Capitol Hill newspaper Roll Call suggested that Democrats who voted yes may lose their favorite committee assignments. Our John Fund reports on OpinionJournal.com that Democratic leaders are especially mad at two Black Caucus Members from New York, Edolphus Towns and Gregory Meeks, for voting aye. Apparently if you’re from the financial capital of the world, you’re not supposed to favor free trade.

Facing Some Flak: Hackett (Guest Cartoon)

Filed under: OH-02 US House — Ken Knotdrau @ 3:54 am

Background behind Mr. Knotdrau’s efforts:
Re Hackett’s TV Ad

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