US Senate To Debate CAFTA

by Mike Godfrey, for LawAndTax-News.com, New York

16 May 2005

With the Senate preparing to debate the future of the Central American Free Trade Agreement (CAFTA), a senior director of the National Taxpayers' Union has spoken out in favour of the agreement.

Dr. Richard Vedder, Distinguished Professor of Economics at Ohio University says that CAFTA will lead to lower prices for American consumers, greater business for American exporters, and a higher standard of living both in the US and Central America.

There is heavy opposition to the Central American Free Trade Agreement from US labor unions and farmers, not to mention from groups concerned about America's soaring trade deficits.

CAFTA, which was signed in Washington in June, 2004, will eliminate tariffs and duties on around 80% of manufactured goods and 50% of agricultural products exported from the United States to Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua. Tariffs on all other goods, with the exception of American sugar and a few Central American agricultural goods, will be phased out over a longer period.

Says Dr Vedder:

"CAFTA --- the Central American Free Trade Agreement -- is the latest in a series of customs unions going back hundreds of years. History often repeats itself, and a little historical lesson can help us evaluate the probable success of CAFTA. Let us begin in 19th century Europe. The zollverein, an agreement between more than 30 small- and medium-size German states that was signed in 1834, completely eliminated tariffs between them. In the generation following this trade agreement, Germany had a huge increase in economic growth, entering what Walt Rostow has termed Germany's "take-off" into economic growth. Moreover, the trade agreement spawned greater cooperation between the states, leading in just 37 years to German unification, forming one of the most powerful and prosperous nations in Europe.

"Another more recent example was the European common market, formed from the Treaty of Rome in 1957. Six nations -- France, Germany, Italy, Netherlands, Belgium, and Luxembourg -- formed a customs union that eliminated tariffs between those nations in a decade. In that decade Common Market economic growth exceeded five percent a year and unemployment rates fell below one percent in some of the nations. The agreement was so successful that it has subsequently spread to 19 other nations and is today's European Union (EU). While much of the EU today is stagnating, that is because of high taxes and government welfare state spending, not free trade. The unleashing of the spirit of enterprise by the removal of trade barriers created prosperity and had the added benefit of reducing tensions between former enemy nations.

"Lastly, of course, is the North American Free Trade Agreement (NAFTA), the customs union between the U.S., Canada, and Mexico. A little over a decade ago, when it is was ratified, detractors like Ross Perot predicted a massive loss of American jobs (a "giant sucking sound"), and depression in the Mexican economy. Instead, it fostered a big growth in trade, contributing to the prosperity of the era. Today, about 18 million more people are working in America than at the time of NAFTA's passage, and the unemployment rate has fallen from 6.1 percent in 1994 to 5.2 percent presently. Meanwhile, the fears of economic devastation in Mexico have been likewise proven groundless.

"CAFTA will lead to lower prices for American consumers, greater business for American exporters, and a higher standard of living both in the U.S. and Central America. The only question of importance is: how soon can CAFTA be expanded and integrated with NAFTA to form a true customs union encompassing all of the Americas? CAFTA is a great idea whose ratification is long overdue."

The NTU, a 350,000-member citizen group working for lower taxes and smaller government, recently released an open letter to Congress from a coalition of 24 federal, state, and local citizen groups and think tanks in support of CAFTA.

Leaders of Central American signatories of the Central American Free Trade Agreement (CAFTA) agreement arrived in Washington last week yesterday in an attempt to lobby the Bush administration and members of Congress on the merits of getting the United States on board the free trade agreement.

According to US Trade Representative Rob Portman, the six leaders, representing Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and the Dominican Republic had been invited to Washington so that US lawmakers can hear first hand the economic benefits the CAFTA deal will bring to the Central American economies.

However, support for the CAFTA in Central America is not universal, especially in Costa Rica, where President Abel Pacheco has recently called for the establishment of a "council of notables" who will reassess the merits of the free trade deal for the Costa Rican economy.

Costa Rica has also witnessed public demonstrations against the CAFTA, with unions protesting about the commitment it will place on the government to break up state-run monopolies and open up the utilities and telecommunications sectors to competition from foreign firms. The President has also angered supporters of the free trade pact by insisting that his long-delayed tax reform bill - still languishing in the Congress - is approved first.

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