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
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
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
MYTH: DR-CAFTA will
result in U.S. job losses.
FACT: DR-CAFTA will
encourage stronger growth and new, higher-quality jobs in the
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
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.
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
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
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
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.
FACT: A growing trade
deficit is an indication of strong inflows of foreign investment
and domestic economic growth, resulting in rising living standards
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
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
DR-CAFTA countries have
adopted the core labor standards of the International Labor
effective enforcement of labor regulations. Failure to comply would
lead to monetary fines and/or the loss of preferential trade
Programs have been
designed to assist these countries in strengthening their
institutional capacity to administer labor regulations
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
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
MYTH: DR-CAFTA will
encourage greater immigration from Central America to the United
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
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
Markheim is a Senior Policy Analyst in the Center
for International Trade and Economics at The Heritage