Features > May 26, 2005

Three-Dimensional Economics

CAFTA won’t help U.S. workers, and blocking it may help the rest of the world

By David Moberg

Last year thousands of Costa Ricans took to the streets to demonstrate against the Central America Free Trade Agreement (CAFTA).

If you believe the Bush administration, its free trade agreement with five Central American countries and the Dominican Republic will open “BIG” (its emphasis) markets to American products, forge an alliance to save domestic textile jobs, “protect labor and environment,” and, of course, “strengthen freedom and democracy.”

Judging from their protests, many workers and peasants in those countries disagree. And judging from Bush’s reluctance over the past year to bring the Central American Free Trade Agreement (CAFTA) to a vote, a majority of even this Republican Congress don’t believe him. But the push for a vote is now on: The region’s leaders are visiting the United States and trade officials are striking special interest deals for support—such as the $500,000 federal grant that tilted The Humane Society to support CAFTA after years of criticizing similar trade pacts.

There are good reasons to doubt the administration claims. Even if they’re wide open to American exports, the signatories are small, poor countries—including Guatemala, El Salvador, Costa Rica, Nicaragua and Honduras. The largest, the Dominican Republic, is a market about the size of Bakersfield, California. Even optimistically exaggerated trade with them isn’t going to make a dent in the record U.S. trade deficit, which reached $617 billion, or 5.3 percent of the U.S. economy, last year.

CAFTA isn’t likely to expand markets by reducing Central American poverty much either. Flooding their markets with subsidized U.S. corn will hurt many of the rural poor. The North American Free Trade Agreement (NAFTA), the model for CAFTA, offers scant inspiration. Over NAFTA’s first eight years, Mexico lost 1.3 million jobs and suffered declining real wages, according to the Carnegie Endowment for Internal Peace, and the United States lost 880,000 jobs, according to the Economic Policy Institute.

No boon to workers

Hemispheric cooperation is not likely to save either Central American garment workers or the remaining U.S. apparel and textile workforce. The global quotas on export of apparel and textile products to Europe and the United States established under the longstanding Multifiber Agreement had dispersed the industry to dozens of poor countries. But when it ended on December 31, Chinese garment exports to the United States shot up in January by 75 percent, with 20 times more cotton knit shirts coming in than a year earlier. Apparel factories in both Central America and the United States have been shutting down. Not even China’s upwards reevaluation of its currency, which is needed to reflect economic reality and to redress a rapidly growing trade imbalance with the United States, is likely to stop the Chinese from capturing a projected 70 percent of the U.S. market in a few years, much of it at the expense of small, poor, garment-exporting countries.

On labor rights, CAFTA is no improvement over NAFTA’s deeply flawed labor side agreement, and it retreats from the labor rights standard that unions praised in the free trade agreement with Jordan signed in 2000. It simply requires the countries to enforce their own laws and “strive” to protect labor rights, with no meaningful penalties if they fail. Under current preferential trade agreements, unions and human rights groups have been able to petition the U.S. government for trade sanctions—and win some improvements—when Central American governments have violated international labor standards.

Central American laws and enforcement of the rights of workers to organize and strike fall far short of international standards, according to studies by the State Department, the International Labor Organization, Human Rights Watch and labor organizations, including the AFL-CIO. And the International Labor Rights Fund, whose study of Central America the Bush administration refused to release officially, reports that even during CAFTA negotiations several governments “were taking steps to downgrade their labor laws.”

The weak protections for labor rights are not the only way in which CAFTA is a blow against democracy. More than a deal to lower tariffs, CAFTA is an agreement to protect corporate rights (including intellectual property) and to restrict government controls over investment, public procurement and provision of public services that breaks new ground, according to Lori Wallach, director of Public Citizen’s Global Trade Watch. “The procurement rules are horrific, even broader than NAFTA, way broader than WTO,” she says. In many ways, CAFTA grants investors and corporations far more rights than NAFTA or the proposed inclusion of public services under World Trade Organization rules. It even incorporates some of the very broad and controversial language of the failed Multilateral Agreement on Investment.

CAFTA, following the NAFTA precedent, allows foreign investors to sue governments under international trade tribunals to protect against loss of property, not only from nationalization but even from regulatory measures that might constrain corporations and are thus deemed “indirectly … equivalent to expropriation.” Despite a congress-ional requirement in the 2002 “fast track” legislation to restrict such investor protection, CAFTA opens the door to expanded action by foreign corporations in the United States and other CAFTA countries to fight “regulatory takings,” or losses of potential profits because of public interest legislation. For example, if CAFTA had been in place, Harken Energy—an oil company in which Bush was once an investor and director—could have more easily pursued its claims for $12 million in damages against Costa Rica for a government moratorium on oil drilling. Those claims are now filed in that country’s courts.

CAFTA’s larger context

CAFTA is more important politically than economically. It’s a stalking horse for the broader Free Trade Agreement of the Americas and a step toward stronger protection of corporate interests in future trade agreements. It faces unusually unified Democratic opposition, much of it focused on labor rights, and right-wing Republican hostility, focused more generally on globalism. But some Republicans also have regional concerns about increased imports of textiles and sugar, since CAFTA threatens a price support system that relies on supply control, not on taxpayer subsidies.

The debate over CAFTA highlights some of the weaknesses in the cheerleader view of globalization, exemplified in New York Times columnist Thomas Friedman’s latest effusive book, The World Is Flat. The world has been flattened, he argues, by a combination of software and communications technology, the opening of China, India and other markets, and changing corporate strategies, such as outsourcing and offshoring. Everybody competes and collaborates on this giant, open, level playing field now, offering great opportunities to rich and poor countries alike.

While this “flattening”—or opening—of a more global market in labor, goods and services is undoubtedly underway, Friedman ignores the vertical dimension of the new world economy. First, there’s the issue of power. Deals like CAFTA underscore how much the rules of the world economy are shaped by the United States, acting on behalf of the interests of multinational capital (and secondarily in the interests of U.S. corporations). In his previous book, Friedman said that governments had no choice but to accept the “golden straightjacket” of the Washington Consensus policies of austerity and privatization. When Bush advocates the spread of freedom and democracy, he is not calling for power to the people. He wants governments that will accept these external policy constraints and deal with the consequences, through the appearance of democracy and elections, but will not deviate from or challenge the corporate global agenda. The “flat world” has room for only a very flattened notion of democracy.

There is also the issue of inequality. The number and proportion of extreme poor, living on $1 a day or less, has declined worldwide over the past two decades, as the numbers of moderately poor have increased, but the progress has been uneven, with many countries regressing, especially in Africa. While there’s a heated debate among academics about how to measure global inequality overall and whether it has risen or fallen in recent decades, even the most optimistic pictures show rising global inequality if the dramatic changes in China are excluded. Indisputably, inequality within most countries, whether rich or developing, including China, is increasing.

Submission to free markets and the dictates of the Washington Consensus do not guarantee economic success, and as economist Jeffrey Sachs argues in The End of Poverty, the market is no magic answer to global poverty. Indeed, several studies, including a recent analysis from the International Labor Organization, have found that protection of labor rights, democracy and greater equality are associated with higher economic growth, stronger export performance and other signs of economic success.

China, on the other hand, proves an exception to the arguments of both neoliberals and social democrats. China has succeeded partly because it hasn’t submitted to the flat world: Its currency controls, which now pose severe problems for the United States, helped to stabilize China during the 1997 Asian financial crisis and helped it grow (often at the expense of jobs in both rich and poor countries). But CAFTA would prohibit such controls, which permit governments to slow down sudden flights of capital, and many of the other means by which China harnessed foreign investment for domestic growth.

If opponents succeed in blocking CAFTA, the victory will be important mainly as a signal that the onwards march of corporate-friendly economic agreements has at least temporarily halted. It will open political space to the demand that governments go back to the drawing board and devise new relationships and institutions that respond to the realities of both the “flat” world of global integration and the “vertical” world of power and inequality.

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• Reader Comments

  ooh! I wish there was a clear and easy answer to this huge and complex issue. The depth of knowledge required to follow the implications and consequences of such broad and far reaching policies is intimidating.

  How do we achieve wage growth, corporate growth equality, fair trade and a positive outcome for rich and poor countries alike?

  There’s the multi-trillion question with a priceless, elusive answer. It seems the more one learns, the more confused one gets.

  Posted by john on May 26, 2005 at 12:26 PM

  Dave Moberg’s analysis and criticism of CAFTA is quite astute and needs to be taken seriously.  He aptly points out that the agreement will neither protect labor rights anywhere nor increase markets for such products as finished garments or primary agricultural products.  Many influential (mostly Republican) politicians represent states and/or districts with powerful agribusiness lobbies in Washington whose price supports and federal subsidies would violate the terms of CAFTA while US dumping of cheap export crops like corn, rice, and other essential grains would increase poverty in the Central American counntires thus further constraining local markets already far to narrow to absorb any quantity of US finished goods exports. Garment industry investment in Central America is liable to create more sweatshops producing goods that, since the collapse of the Multi-fibre Agreement late last year, will be unable to successfully compete with cheap, higher quality finished garments from China whose surge in the world export markets over the past half year has been astounding!  What is likely to result from CAFTA is lost jobs in both the US and Central America.  Downward pressure on the export prices of finished garments from China’s privelaged position in the world market can only lower labor standards in countries like those in Central America where the light industrial labor market will be flooded by farmers displaced, or proletarianized, by US dumping of subsidized grains on the local market. What CAFTA is promoting is less “fair trade” than further sweatshop investment by wealthy countries like the US in countries that are increasingly powerless and impoverished by a new, more concentrated division of labor which will integrate these countries into the global market on a more unequal and exploititive basis. It will also further Central American dependency on foreign food imports, loans, aid, and markets!  Globalization has always been less about “trade”, one third of which is intra-firm, than about corporate restructuring of the global economy in a way that increasingly “flattens” or obliterates local economies while increasingly skewing the global distributiion of wealth in favor of the rich!  In a world where globalization is flattening the world in order to vertically maldistribute wealth and power in its wake, workers and the poor in both the US and Central America can expect little from agreements like CAFTA.

  Posted by steve on May 26, 2005 at 1:17 PM

  I’d like to take issue with Steve’s analysis of globalization, which, well-written and argued though it was, shares many problems with typical left-wing criticisms of globalization.

  For one thing, China only has a “privileged position” in the world market relative to much poorer countries like those of Central America or sub-Saharan Africa.  The United States actually still has the most privileged position in the world economy, since the dollar is still (for the time being) the world reserve currency.  That means simply that international debts, including our own, are denominated in dollars, and thus, in the event of a financial crisis, we could devalue the dollar could to pay off our debt.  (It’s a neat trick, but it only works once.) Foreign investors know this, and thus are willing to lend us money on terms more generous than any other nation is likely to receive. 

  It is this fact, combined with the American consumer credit binge of the past ten years, which accounts for America’s burgeoning trade deficit with China, much more than the Chinese government’s aggressive mercantilist strategies.  As Robert Reich explained in a recent article in the “American Prospect,” China’s policies are simply smart for a developing nation.  The Chinese invite in hard capital investment while strictly regulating speculation, and use America’s spending power as the engine of their own development.  While the Chinese will eventually, for political and economic reasons, have to appreciate the yuan, the United States needs to bear the brunt of the adjustment by constraining its spending.  How to do this without sending the economy into a tailspin is anybody’s guess.

  I did appreciate Steve’s point about increased competition leading to a downward pressure on wages and prices.  One of the most negative effects of globalization is the deflationary pressures it has wrought.  I would rather he followed through with this point than to talk about the exaggerated phenomenon of the export of capital by multinational corporations to low-wage production centers in developing nations.  Most foreign direct investment, over 80%, occurs among developed nations, and most of that winds up in the United States. 

  Again, the United States actually has much lower labor costs than developing regions like Central America, due to the higher productivity of American labor.  This owes to better education, health care, and social services, and a higher overall level of technological development.  In fact, low wages are the only advantage that developing nations have in the world market.

  The idea that there is a simple cause of society’s economic ills implies that there is a simple solution, and this, alas, is not so.  What, then, might be a solution?  I would like to hear more written about capital controls and bilateral trade arrangements.  David Moberg mentioned China’s practice of currency controls in passing toward the end of his article.  Currency controls have helped stabilize and smooth China’s economic development; perhaps they could similarly smooth adjustments to trade-related dislocation and unemployment in developed nations.

  Posted by Matthew K. on May 28, 2005 at 6:44 AM

  China is taking our dollars and buying US notes, in effect, holding an ever greater percentages of our accumulated debt.  Additionally, China is investing heavily in the Americas.  Many of the maquiadoras established under the NAFTA agreement have been taken over and are now owned by Chinese investors.  The Chinese now control much of the garment manufacturing sector in Central America.  They are heavily invested in Panama.  They have established separate trade agreements with Brazil and Argentina.  Their investment doesn’t stop south of the border.  Several brands in the United States have been purchased out-right by Chinese investment groups.  Notable among these is Murray, manufacturer of garden machinery.  Other US brands are discovering that they can not compete internationally.  Consider IBM’s withdrawal from the personal computer market that took effect with their yielding of the PC division to Lenovo this year.  Soon this is going to be true with agriculture as well. Increasingly, many items found in your grocery store are now of Chinese origin--read the labels!
  We are placing ourselves in a highly vulnerable position for the future.  The effect of dependency on foreign oil is already recognized.  Consider now the impact of an ever increasing dependency on not only manufactured goods, but also, our supply of food.  Compound this with the relinquishing control of our national debt in the form T-Bills held by foreign investors and the case for our trade policies of the last two decades begins to disintegrate.

  Posted by troubled in the Heartland on May 29, 2005 at 3:38 AM

  Heartland:

  China still controls only a tiny fraction of the world economy, far smaller than the United States.  I’m sure they do export a lot of goods and capital.  So do we.  What’s your point?  The United States has far more commercial presence in the world than China does.  If you wish to speak of neocolonial influence in Latin America, I suggest you research the history of the United Fruit Company, and the other large American and European concerns which have dominated the region’s economic life.  Not to mention the sordid legacy of American foreign policy in the region stretching back to the 19th century.  If China is guilty of anything, it’s cutting in on our action, again still a disproportionately small slice considering its population and resources.

  I can’t really understand your point about “relinquishing control of our national debt” at all.  How are we relinquishing control of anything by simply borrowing money from China?  Again, if anything, the United States is using its privileged position as world reserve currency to borrow beyond its means, something no other country can do.  Of course, we can’t do that forever, but that’s as much a result of our own policies as China’s.  Also, has it occurred to you that the Chinese economy is as dependent on the American export market as the United States is on China’s loans?

  I simply can’t understand what you have against China.  It is true that in 30-50 years time, it will be a commercial and military superpower to rival the United States.  So what?  Happens all the time in world history.  We will have to adjust our foreign policy to meet the new reality, that’s all.  Chinese protectionist policies are simply what every rising power after England has used to counter the trade advantage of established rivals.  The United States did the same thing in the 19th century.  There’s really nothing we can do about it short of tit-for-tat negotiation.  Retaliatory tariffs would simply spark a trade war that would harm both ourselves and the Chinese, and create substantial political and geopolitical tensions to boot.  There are no simple solutions to complex problems.

  Posted by Matthew K. on May 29, 2005 at 10:12 AM

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