April 15, 2005 | Commentary on International Organizations

Give U.S. a Fair Shake -- Move Forward With DR-CAFTA

Oooh, for fear. Harold Meyerson, columnist for The Washington Post, recently wrote that the Dominican Republic-Central American Free Trade Agreement (DR-CAFTA) represents nothing but a way to boost American corporate profits at the expense of flimsy labor and environmental standards in the other signatory countries.

In other words, Meyerson claims, if the agreement passes Congress later this month and then is signed by the president, corporations will get richer, but regular citizens -- in the United States and in the Dominican Republic and the Central American nations of Honduras, Guatemala, Costa Rica, Nicaragua and El Salvador -- will suffer.

It's hard to make the case that Americans will suffer. Our $9.5 trillion gross domestic product (in constant 1995 dollars) is 130 times the size of the combined economies of the other six signatories. Moreover, nearly 80 percent of the consumer and industrial goods that enter the United States from those countries comes in duty-free now, even though American exporters face significant tariffs.

Under DR-CAFTA, American exporters will gain duty-free access for most American-made products -- 80 percent immediately, the rest over time -- to markets whose average weighted tariffs are nearly four times our average of 2.6 percent. Half of U.S. agricultural exports will become duty free immediately, with the remaining barriers eliminated over time.

But what about those other countries? Do they benefit from DR-CAFTA? The Index of Economic Freedom, published annually by The Heritage Foundation and The Wall Street Journal, argues convincingly that a clear link exists between economic freedom and prosperity.

And DR-CAFTA will encourage all the signatory governments to intervene where they should in the economy -- promoting the rule of law, protecting intellectual property rights -- and reduce interventions that curb economic growth, such as high regulation, bureaucratic red tape and barriers to trade.

DR-CAFTA would liberalize economic policies in the Dominican and Central American and lock in those policies, providing a degree of reliability that will spur investment. Moreover, the agreement will open large sectors of their economies to U.S. investment, such as energy, finance, insurance, telecommunications, transport and tourism.

Meyerson makes the argument that Mexico has not benefited from NAFTA, on which DR-CAFTA is modeled. He says real wages for Mexicans have declined, poverty has increased and illegal immigration has soared. He called NAFTA "a lose-lose proposition" for workers in the United States and Mexico.

Yet, World Bank and Organization for Economic Cooperation and Development statistics show that real per-capita income has increased 9 percent since 1994 and employment by 21 percent since 1995. Also, literacy and life expectancy have increased, and malnutrition has decreased since NAFTA came into being.

Even better, NAFTA has contributed to economic and political change in Mexico. While further change is necessary, Mexico's economy has opened, and an opposition party candidate, Vicente Fox, was elected president for the first time in 71 years in 2000.

Meyerson also claims, as do other critics of free trade, that such agreements contribute to environmental degradation and diminished labor protections. But numerous economic studies show that the single greatest contributor to environmental degradation and low labor standards is poverty. Once income levels rise, citizens begin to demand and receive greater labor protections and better treatment for their environments. And they certainly don't countenance the rollbacks that Meyerson predicts.

Encouraging significant foreign investment -- which DR-CAFTA almost unarguably would -- will contribute to economic growth, which will increase living standards and help reduce illegal immigration to the United States. We spend billions of dollars each year to contain illegal immigration, but it would be far more effective to create jobs in Central America and the Dominican Republic that reduced incentives for workers to come here.

DR-CAFTA is not a perfect trade agreement. It doesn't eliminate all tariff protections immediately -- some won't be phased out for a decade or more. And it continues to largely exempt the American sugar and textile industries from true competition, despite the staggering costs of these exemptions -- about $1 billion a year in economic damage for sugar, according to the Government Accountability Office, and $9 billion to $14 billion per year for textiles. Americans pay two to three times what the rest of the world pays for sugar.

But taken as a whole, the agreement is well worth finalizing. It stands to benefit American producers and consumers and bolster economic growth and political stability in America's backyard.

Brett D. Schaefer is the Jay Kingham fellow in international regulatory affairs in the Center for International Trade and Economics at The Heritage Foundation.

About the Author

Brett D. Schaefer Jay Kingham Senior Research Fellow in International Regulatory Affairs
The Margaret Thatcher Center for Freedom

Related Issues: International Organizations