CAFTA Passes Despite the Fear

Back in 1993, when Vice-President Al Gore represented the Conservative end of the then more Conservative Democratic Party, he debated millionaire and former presidential aspirant, Ross Perot on Larry King Live about the virtues and disadvantages of the North American Free Trade Agreement (NAFTA). The pact eliminated most trade barriers between the United States, Canada, and Mexico. NAFTA passed with the strong support of President Bill Clinton and Republicans in the House of Representatives. If only Democratic votes had counted, NAFTA would have failed in Congress. The vote marked the beginning of the end of the post World War II bi-partisan consensus in support of free trade.

In 1993, Perot cleverly used the metaphor of a “great sucking sound” to represent what he predicted would be the effect of NAFTA on US employment. Instead, the great sucking sound was the precipitous deflation of Perot’s pumped-up argument. When the Perot-Gore debate was held in October 1993, the unemployment rate was 6.8%, having decreased from a high of over 7%. During the subsequent years, the unemployment rate plummeted to a nearly all-time low of 4% and now is an historically low 5%. During a most recent recession, the unemployment rate peaked at only 6.3%. If someone had predicted such numbers for the unemployment rate for the years following 1993, they would have been labeled as unrealistically optimistic.

Now, it is at least plausible that without NAFTA the employment numbers would have been even rosier, but that was certainly not the implication of Perot’s rhetoric. Perot’s clever metaphor would have not had the same saliency if he argued that employment will decrease rapidly, but less rapidly with NAFTA. Twelve years later, it is fair to conclude that Perot was radically wrong. Free trade with Mexico and Canada is consistent with a vibrant and growing United States.

In addition, the reduction of unemployment in the US did not come at the cost of a reduction in wages. From 1993 to the present there has been an increase in real per capita income and median household income. These increases came in the face of downward wage pressure caused by high levels of illegal immigration.

NAFTA has not proven to be as advantageous for Mexico as first anticipated. Much of the growth in US imports has not come from Mexico, but rather from China. Mexican low wages were not sufficient to guarantee its success. Mexico, like China, must be willing to free up entrepreneurial forces from excessively regulatory and corrupt bureaucracy.

This week, Congress by the narrowest of margins and aided by creative time stretching, passed the Central American Free Trade Agreement (CAFTA). Similar to NAFTA, the agreement eliminates or reduces trade barriers between the US, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and the Dominican Republic. Classically free trade in net benefits all trading partners, increasing economic efficiency and living standards.

However, even if the economic benefits for the US are marginal, it is hard to imagine opponents of CAFTA could believe that there could be much negative economic impact in trade with countries whose total gross national product (GDP) is less than 2% of the US GDP. The experience of NAFTA certainly does not support such apprehension. Moreover, the effect of trade will have the important foreign policy benefit of improving the economies of our neighbors and thus enhance their political stability. Whatever minor effects, positive or negative, there will be on the United States, free trade with the US will undoubtedly improve political and economic prospects for Central America.

Ironically, it is Democrats and the Left who claim concern for the poor of the world. Yet, there is no faster way for the developing countries to grow than by international trade. In latter half of the twentieth century, Japan, Europe, Taiwan, and South Korea recovered in a world of free trade. China and India are now growing rapidly fueled mostly through trade. Pouring aid into undeveloped countries made help in an acute disaster, but in the long run can have a debilitating influence. This is particularly true if aid enriches corrupt dictators rather than providing relief or assisting development. Trade, in general, and CAFTA in particular are the best ways to spread and share prosperity with Central America.

The disappointing aftermath of the CAFTA vote is the realization that most Democrats and many Republicans apparently see a fearful and apprehensive America, trembling at the economic might of Costa Rica. This is not the attitude that created an America that generates 25% of the world’s GDP. Rather, it is a vision that says more about the Congressmen and Senators who oppose CAFTA than it does about the United States. It is a vision that panders to fears, rather than appeals to hope.

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