June 16, 2005 | WebMemo on Trade, Economic Freedom

Just the Facts: Debunking Some Myths About DR-CAFTA

The debate on the potential costs and benefits of the proposed Dominican Republic-Central Ameri­can Free Trade Agreement (DR-CAFTA) has begun. Often contentious, it has played out between those that fear the effects of freeing trade on their own narrow interests and those that embrace the economic and strategic benefits that the agree­ment will bring.

This week, Congress will begin to evaluate the merits of DR-CAFTA in committee hearings. It is essential that lawmakers separate myth from fact. The following are some common misconceptions about freeing trade between the United States and the countries of Central America.

MYTH: DR-CAFTA, like NAFTA (the North American Free Trade Agreement with Canada and Mexico), will be a disaster for the American economy.

FACT: Since the implementation of NAFTA, the U.S. economy has grown rapidly, millions of new jobs have been created, and investment has expanded.

  • Between 1993 and 2003, the U.S. economy added almost 18 million new jobs, grew by 38 percent, and increased exports to Mexico and Canada from $134.3 billion to $250.6 billion. U.S. manufacturing output rose 41 percent. Today, the U.S. economy continues to exhibit strong growth and enjoys a historically low rate of unemployment. Clearly, NAFTA did not hurt the U.S. economy.
  • Freer trade stimulates growth, improves invest­ment and job opportunities, and leads to rising living stan­dards. Under DR-CAFTA, farmers, manufacturers, banks, and other service providers will become more competitive, have access to new markets, and benefit from stronger pro­tection of property rights.
  • DR-CAFTA will help the Central American countries to develop and modernize their econ­omies. This, in turn, will generate greater demand for U.S. goods and services. For exam­ple, Costa Rica will be seeking to renovate its telecommunications systems and financial ser­vices, creating opportunities for U.S. firms. Freeing trade generates benefits in America today by making U.S. goods more competitive and tomorrow as Central American countries develop into larger markets.

MYTH: DR-CAFTA will result in U.S. job losses.

FACT: DR-CAFTA will encourage stronger growth and new, higher-quality jobs in the United States.

  • As illustrated in the 2005 Index of Economic Freedom, countries adopting freer trade policies experienced higher average growth (2.8 per­cent) between 1995 and 2003 than countries that did nothing (2.4 percent) or that reduced their openness to trade (1.4 percent).
  • Since 1983, under the Caribbean Basin Initia­tive (CBI), the Dominican Republic and Central America have been receiving preferential trade access for most of their goods entering the U.S. Thus, any job loss associated with lowering tar­iffs on products from Central America has already occurred.
  • The agreement is actually a way to protect Amer­ican jobs. For example, apparel manufacturers in Central America are required under the CBI to use U.S. fabric and yarn in their products in order to qualify for duty-free access to the U.S. market. By strengthening the relationship between U.S. textile producers and Central American apparel firms, DR-CAFTA will make the region as a whole better able to compete with Asia, support­ing continued U.S. textile exports and jobs.
  • DR-CAFTA will open Central America and the Dominican Republic to U.S. goods and ser­vices. It is an opportunity to gain new markets for American products and services, to make investing in the U.S. more attractive, and to support better, higher-paying U.S. jobs.

MYTH: DR-CAFTA will be just another excuse for outsourcing by U.S. companies, resulting in further job losses.

FACT: The U.S. is not losing net jobs to other countries, and this trend should continue under DR-CAFTA.

  • According to the Organization for International Investment, the number of manufacturing jobs insourced to the U.S. grew by 82 percent over the past 15 years. During that same time period, the number of jobs lost as a result of outsourcing grew by only 23 percent.
  • The size of the U.S. market, a highly skilled workforce, and relatively low international trade barriers combine to serve as a beacon for attract­ing foreign investment into the American econ­omy and generating new, better-paying jobs.
  • Although South Carolina has lost some textile jobs as a result of technological advancement and trade adjustment, it has gained higher-paying jobs at the new factories of BMW, Daimler-Chrysler, and China's leading electronics manufacturer.
  • The biggest reason for outsourcing is not free trade, but the tax and regulatory burdens faced by companies operating within the United States. If these burdens are reduced, firms in the U.S. will be more competitive and less likely to move their business elsewhere.

MYTH: DR-CAFTA will make the trade defi­cit bigger, hurting the U.S. economy.

FACT: A growing trade deficit is an indication of strong inflows of foreign investment and domestic economic growth, resulting in rising living standards for Americans.

  • Between 1980 and 2004, in those years in which the current account deficit increased, the U.S. grew an average of 3.5 percent. The econ­omy grew only 1.9 percent in years in which the current account deficit shrank.
  • By definition, a trade deficit indicates an inflow of foreign capital. The U.S. trade deficit reflects too little domestic savings to satisfy all of the invest­ment opportunities in this country. This shortfall is remedied by a net inflow of foreign investment.
  • As investment and the economy grow, new jobs are created and the demand for all goods, includ­ing imports, rises. A growing trade deficit is gen­erally a sign of a healthy, expanding economy.

MYTH: DR-CAFTA leaves foreign workers unprotected.

FACT: DR-CAFTA will enable the Central American countries to enforce labor standards.

  • DR-CAFTA countries have adopted the core labor standards of the International Labor Organization.
  • DR-CAFTA requires effective enforcement of labor regulations. Failure to comply would lead to monetary fines and/or the loss of preferential trade benefits.
  • Programs have been designed to assist these countries in strengthening their institutional capacity to administer labor regulations effectively.
  • Data indicate that the more flexible a country's labor laws, the higher the level of a country's per capita GDP and the greater the benefit to each household. Thus, caution should be used when demanding that the Central American countries adopt additional regulations that may reduce the ability of their workforce to adjust to economic change.
  • Historically, as prosperity increases, the desire and ability to implement labor protections and expend resources on their enforcement become stronger. This natural evolution toward protect­ing workers has been demonstrated in the U.S., Britain, and other developed countries.

MYTH: DR-CAFTA will encourage greater immigration from Central America to the United States.

FACT: New economic opportunities and ris­ing living standards will work to stem the tide of immigration.

  • Recent studies show that areas in Mexico that benefited from NAFTA had higher wages and lower levels of emigration. Areas that did not experience increased economic activity as a result of NAFTA saw a decline in wages and remain the main source of immigration from Mexico into the U.S.
  • DR-CAFTA would help to generate the eco­nomic growth and stability that bring new opportunities, new jobs, and rising living stan­dards to the people of Central America. With the agreement in place, the decision to emmi­grate to the United States would become one driven by choice rather than necessity.

Although the myths about DR-CAFTA might make for interesting media fodder, it is the facts that should rule the debate within Congress. The facts are clear: DR-CAFTA will improve U.S. eco­nomic performance, support American jobs, improve regional competitiveness against China, and promote economic freedom and prosperity across the region.

Daniella Markheim is a Senior Policy Analyst in the Center for International Trade and Economics at The Heritage Foundation.

About the Author

Daniella Markheim Jay Van Andel Senior Analyst in Trade Policy
Center for Trade and Economics (CTE)