What CAFTA Really Means...

There has been a lot of gnashing of teeth over the CAFTA [Central American Free Trade Agreement] from both Democrats and Republicans in the United States. This fight is more about a test of wills than one of economics, in my humble opinion. Its about politics, party power and not really about our neighbors in Central America.

Despite the politics, this type of legislation also fits in nicely with the recent popular Live8 demands not to just only forgive indebtedness of poor countries, but also to unencumbered their exports to the developed world, called trade justice by Bob Geldof. Live8 was about Africa, but it can also apply to other poor and developing counties, including our neighbors in Central America who also need trade justice.

The agreement with Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and the Dominican Republic largely provides for tariff reductions. However, you rarely hear the following information found in the often quoted non-partisan Congressional Budget Office [CBO]report found here in the mainstream press......

According to the U.S. International Trade Commission (USITC), the United States collected $518 million in customs duties in 2004 on $17.7 billion of imports from those six countries. Those imports consist mostly of various types of apparel articles and produce. Nearly 80 percent of all imports from the region entered the United States duty-free because the United States has normal trading relations with those six countries or because the goods are imported under one of several U.S. trade programs. However those programs are scheduled to expire in the next three years. The Generalized System of Preferences will expire on September 30, 2006, and the Caribbean Basin Initiative will expire on September 30, 2008.

Of course what you hear in the popular press is that these tariff reductions will cost the US taxpayer $4.4 billion dollars for the period 2006-2015 as reported by the CBO in reduced tax collections. The statement saying that this will cost taxpayers, is largely rubbish as I will explain.

As I highlighted in bold in the earlier quote, most goods, 80%, are already imported to the US duty free. However, as I understand, the legislation has sunset provisions scheduled to expire over the next several years that would effectively reintroduce tariffs on some goods that currently do not have them. In fact, as the OMB abstract illustrates, most of the lost Treasury revenues are in 2009 and beyond. Given that much of the revenue given up by the Treasury comes after the scheduled sunset of the current tariff reduction, it may be that much of the supposed "costs" bandied about in the popular press these days are simply the extensions of these current tariff reductions. If not much then some of this is, but it is difficult to tell with he information available to me.

It is important to point out that if there was a reintroduction of these tariffs that the costs are ultimately borne by the consumer through higher prices and/or less competition and less consumer choice, anyway. So, despite the aforementioned $4.4 billion in Treasury revenue forgone through the tariff reductions, these taxes are ultimately paid by US consumers. So, the "subsidy" of tariff reductions is really a benefit to American consumers who see their costs of goods get cheaper. And reintroducing tariffs on imports from these countries benefits the businesses, albeit inefficient and uncompetitive, that produce these goods stateside while increasing costs to consumers above what they can be under the lower tariff regime.

So, therefore, I argue that reductions of tariffs are a tax cut for consumers, many of them poor and middle class while benefiting our neighbors by increasing demand for their goods. Furthermore, US businesses are forced to become more competitive and deploy assets into areas in the which the US has competitive advantages.

As far as the Democrat's argument and the theory of raising tariffs saves US jobs centers around the following thought; increase tariffs to a level to where US producers can compete with foreigners on price. Therefore, theorectically, employment can be maintained in the US. This obviously can be very expensive to consumers who have to bear the brunt of the price increases. Also, how does the state determine which industries are worthy of support? Rarely do these actions work very well, since tariffs would have to be raised not only against, for example, the CAFTA producers but against many producers in a complicated and difficult to maintain regime of ever changing tariffs creating winners and losers due to government fiat and not due to market forces. It will just be a gigantic mess and hardly worth the effort. Let US businesses compete on price and deploy assets where they make the most sense. This will create the best long=term benefit for US workers and consumers.

What hasn't been talked about much in the agenda laden press, are the bizarre and Byzantine import restrictions and subsidies affecting domestic sugar producers and exporters. Prices of sugar have been kept above world market prices in order to subsidize domestic US sugar producers. I really don't see why this is necessary since sugar isn't really an important commodity such as those that garner attention for national security reasons, such as oil. Largely, import restrictions on sugar imports are being lifted, but US producers will still be shielded to some extent from lower prices from outside. One day, these subsidies will have to end but they won't for now.

Now, if you understand what I am talking about, I congratulate you!