International Trade

Washington Post business columnist Steven Pearlstein was online to discuss his latest column , in which he says the Central American Free Trade Agreement is the wrong trade agreement at the wrong time. A transcript follows.

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Crofton, MD: Under CBI legislation, the U.S. government can withhold trade benefits for a number of reasons, including a country's performance on labor rights or counternarcotics measures. Won't CAFTA take away that leverage? If we take trade actions for foreign policy reasons, won't a country be able to retaliate with trade actions against us?

Steven Pearlstein: Yes, this is the big hoopla issue that Democrats and labor unions are using to say this treaty is a step backward. Technically, its correct. In my opinion, it doesn't amount to a hill of beans.

First, it is just wrong that all of these countries have no labor unions, no labor rights, are just sweatshops to which multinational firms will move work from the U.S., costing U.S. job and further impoverishing the poor folks of Latin America. This is rather curious news, since we also read that Costa Rica, the largest of the Latin American countries, is threatening to put off ratification of the agreement because of the opposition of its strong public employee unions. And it is curious that, of all the signatories of this treaty, the only one that has not ratified or signed on to the International Labor Organization standards is .... the United States of America.

Look, the history of this is that trade creates economic momentum, growth and a middle class in the developing country which gradually strengthens the hand of labor against the entrenched, economic oligarchies in these countries. The arrival of international firms has the effect of strengthening the rule of law, which is really the bedrock for any workers right regime. And international firms tend to pay the highest wages and offer the best working condition in the country, if only to protect their image in the home/consuming countries.

The best protection for workers in Latin America from explotation is the arrival of international companies and the focus it puts on workers rights, where the market is the disciplining factor, not some sort of complex, legal mechanisms under a trade treaty that are very cumbersome to enforce.

By the way, other countries don't like it very much when we use trade treaties to dictate what their labor laws are going to be, as we wouldn't like it if it went in the other direction. These countries have to go through the same process we did, difficult as it is, to establish the kind of working environment we now take for granted. They can probably do that on an accelerated basis. But it is folly to think that it can be imposed from outside and take root. It has to evolve naturally. To think otherwise is to take a very ahistorical view of things.

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Annapolis, MD: Does the Congress have to vote up or down on all CAFTA countries as a package? Could it choose to exclude Guatemala or Dominican Republic, for example, since the President has designated them major illicit drug-transit countries, or to exclude Nicaragua because of unresolved U.S. citizen claims?

Steven Pearlstein: No. Its up or down, although the US has this annoying habit of demanding to renegotiate terms of a treaty as a condition of ratification. As you can imagine, other countries don't cotton to that much.

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Germantown, MD: Please comment on the following statement. U.S. government is trying to force Chinese to raise the value of its currency. Personally I think that's a bad idea. It's purely politically motivated and short-sighted. A lot of currencies and goods in the world are more or less tied to dollars. Chinese import a lot of raw materials from abroad. For the last a few years, they have been importing a lot of oil from abroad (that partially explains the high gas price, as our president says.). The rise in value of Yuan will make their imports cheaper. With cheaper raw materials they can lower the price of their export. If Chinese start to import a lot more oil, that would drive oil price to the roof. All those fuss about currency rate issue is based on a completely wrong assumption and calculation, which is the price of their export will remain the same. This is completely wrong. With cheaper import, those Chinese factories will have more room to lower their price and we might end up getting hurt on both ends.

Steven Pearlstein: The US government, along with the G-7 countries and the IMF, is trying to get China to move to a regime in which investment can flow freely in and out of the country, the yuan is fully convertible, and its value is set on world currency markets, like most other currencies, without intervention of China's central bank. If it goes up, so be it. If it goes down, so be it. Now, as an interim step, many people, including me, think it would be best to gradually raise the "pegged" price for a while toward, under the assumption that the market value would be higher, not lower. But that is only a transition.

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Washington, DC: Good morning:

In economics courses, it is taught that nations don't trade with each other, individuals do. The "US" doesn't buy oranges from, say, "Nicaragua". A company or an individual from the US buys from a company or an individual in Nicaragua. Or I might incur a "trade deficit" each time I purchase an item from a supermarket, but it hasn't made me worse off.

Economic courses also teach that trade deficits shouldn't matter because it only accounts for the current account and not the capital account. An increasing trade deficit might reflect the nation's healthy economy, as its citizens are able to purchase more products from abroad.

Do you agree?

What is the big fuss about CAFTA? Is it a genuine free market agreement? How could it not be beneficial towards the people it's intended to benefit?

Thanks for taking my questions.

Steven Pearlstein: Lots of questions there.

Obviously, companies trade, not countries or individuals. The sum of all these transactions adds up to the trade deficit. Add a few more things in there, and you get the current account deficit. In theory, whatever deficit (or surplus) there is in the current account is offset by a surplus (or deficit) in the capital account. That is, if we run a trade deficit, we have to borrow a corresponding amount from the rest of the world, meaning a surplus or inflow in the capital account.

It is perfectly logical that a developing country for many years could run a trade deficit as it imports capital to build infrastructure, some of which it buys from industrial countries. But more unusual is when you have a developed country running large and persistent trade deficits, like the U.S. In that case, you would expect the currency to depreciate to the point that the trade gets into balance, by making imports more expensive, exports more competitive. But in the case of the U.S. that hasn't been happening, in part because other countries are artificially keeping the price of the dollar high (China, Japan, other Asian countries) and in part because so many global investors want to invest their money in U.S. stocks, bonds and real estate. So the normal corrective mechanisms have not been working.

Cafta is a genuine free market agreement. There is no big deal being made of it, actually, reflecting its small impact on the U.S. economy (they make a much bigger deal of it in Central America and the Dominican Republic, however). It will be beneficial to most Americans, but not to a few, who are fighting it hard, like some textile interests. They are quite rational in fighting it, particularly considering the piss poor job we do in this country in helping the people hurt by trade. But it is perfectly rational for the rest of us to favor it.

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University Park, Maryland: A very basic question: Exactly how do farm subsidies work for US Farmers?

Steven Pearlstein: You got a week, because that's how long it would take to explain it, if I could, which I can't. Sugar benefits mostly from quotas, above which there is a prohibitive tarrif, combined with a government "loan" program which, in effect, guarantees growers a minimum price for their beets and cane and, if the market price goes below that, requires the government to take the crop in lieu of repayment of that loan. There are also programs for the government to pay growers not to grow if there is a supply glut.

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St. Louis, MO: Do you think the effect of trade agreements on the poorest citizens of other countries should be taken into account? The real scandal of CAFTA is the non-sugar (e.g. rice) U.S. "agri-millionaires" who would benefit from dumping their subsidy-induced excess crops on Central America, devastating the rural economy there and literally pushing millions toward starvation. It is unacceptable that this has not even entered the discourse in Congress and was even denied mention in your supposedly moralizing column.

Steven Pearlstein: Sorrrrrryyyy. Farm subsidies are bad. We should get rid of them. They do distort world prices and, if safeguards are not written in, they do allow sometimes U.S. farmers to put developing country farmers out of business. That's why the developing world is insisting that unless ag subsidies are dealt with, they are uninterested in signing any more trade treaties.

There. Now have I said it clearly enough.

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New York, NY: Why should Americans support CAFTA which obviously benefits big business, not ordinary Americans or ordinary Central Americans, and which is being strongly opposed by Central America's independent labor unions and left-of-center political parties? Corporations do not operate in the interests of the United States, the American people, the corporations' workers, or the towns where they are based. They are not supposed to. Legally, they have a fiduciary responsibility to their owners, not anyone else. It's pretty lame to talk about "the wrong side of history," as if globalization were something new: it's been around for 500 years (the worldwide slave trade, the opium wars, the Kulture system of exploitation in Java, the boom-bust worldwide sugar business which destroyed and impoverished northeast Brazil, Java and many other areas). If there were any serious protections for workers, here or abroad, it would be a different story. Unfortunately, under the current international regime, there are none. By the way, thank you for your nice, and nicely argued, point about the United States being the banana republic. Why would anyone, including us, want to make a treaty with such a bunch?

Steven Pearlstein: Obviously, you think consumers and workers are pawns in the hands of the all-powerful global corporations. In which case, what we should do is simply outlaw them because they are BAD, BAD, BAD and force every worker to join a union so he or she can use collective action to protect his job and the environment, too. That would bring us to nirvana -- you are absolutely right. While we're at it, why don't we nationalize most companies as well.

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Metarie, LA : It's amazing to me that the sugar industry has this much power. For years they have been blamed for ruining the everglades and making us fat- now they are single-handedly blocking a free trade agreement? How can they still have so much congressional support? And why hasn't there been more written about the folks in congress that are "brought to you by big sugar?" This is outrageous. I read another story recently that the sugar industry is now suing their competitors to make up for the fact that people are buying less sugar. Is there anything that can be done to stop them?

Steven Pearlstein: You might consider throwing out the Louisiana delegation to Congress, for starters. Or organize a sugar boycott. On second thought, don't organize a sugar boycott because it will only wind up costing taxpayers more money for subsidies. You see, the sugar farmers are on a guaranteed income program, aka welfare, which explains why so many more people are getting into the sugar farming business in recent years.

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Washington, DC: Great timing! I just finished a paper on this for school. Here is my question: In the wake of NAFTA, many original supporters of it now claim that the benefits might not have outweighed the costs. The reason is that Latin American governments don't have the strong institutions to capture the benefits of liberalized trade. From the point of view of Central Americans, should CAFTA be passed? In theory, just like NAFTA its great, but in practice the governments are not ready for it, even Costa Rica. Will CAFTA increase or decrease stability in CA?

Gracias - James Georgetown University

Steven Pearlstein: James, I think one of the big benefits from NAFTA is how it has opened up Mexico's power structure and made things more transparent and according to the rule of law. I don't think it coincidence that one-party rule has been ended during a period when there has been such a big growth in trade and external investment. So, as a general matter, it should contribute to stability in Central America, I would think.

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Washington, D.C.: Steve -

Good piece. Its one of harder charging editorials I have ever seen on the front page of the WP business section; it's also painfully true. I'm a trade attorney that follows these issues quite closely. The U.S. is simply running out of credibility on this front. Its becoming a bit of a joke.

There is hope, however. You may have noticed that the WTO Appellate Body recently found U.S. cotton subisidies to be illegal export subsidies (it seems the U.S. can't even play within the ground rules it set for itself in the Uruguay Round). The case was brought by Brazil. In my opinion other U.S. Ag programs are also beyond the limits and vulnerable to challenge. Its only a matter of time before Developing countries will take notice of the Cotton case and explore other issues. The EC is also under the gun, recently losing a case on its own Sugar Program to Brazil, Thailand and Australia.

There is an emerging base of western-trained attorneys willing to take on the WTO work as essentially a public interest project for countries in Africa, Asia, Cental America and elseswhere who need open ag markets to help climb up the economic ladder. Hopefully this will create some leverage at Doha.

Regards,

Matt M.

Steven Pearlstein: Ihope you're right, Matt. Thanks for that background.

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Washington, D.C.: You mention our "dangerously high" trade deficit. But I understand that our International Trade Commission estimates CAFTA will increase our trade deficit. Why pass yet another trade deal that will contribute to a problem that's growing worse every month?

Steven Pearlstein: This is really a bogus argument for opposing CAFTA. Its just small potatoes, whatever way it impacts the deficit. And the "causes" for the trade deficit have more to do with macroeconomic imbalances than with trade treaties, although I disagree with economists who say there is NO impact. Explaining why this is so is very hard and complicated, making it difficult to do it here. But as a general matter, there is little no "opening" of the U.S. market in Cafta that central american countries don't already have, while there is a modest opening of their markets for our agricultural and industrial goods and services, so I'm not sure I understand why it would be a negative for us.

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Washington, D.C.: It would be a major setback for US trade policy and our ability to negotiate other beneficial free trade agreements if CAFTA is defeated because of sugar, or a deal is made to exclude sugar from other trade agreements. These FTAs are essential for achieving or maintaining a competitive advantage for US exporters in these markets. The WTO is important for other reasons. It cannot give the US a competitive advantage but it can get at some of the foreign government subsidy practices which damage our US agriculture exports. We will not be in a position to get the best deal in the WTO unless US sugar is fully on the table. That means NO "sensitive product" status for US sugar in the negotiations.

Steven Pearlstein: Obviously, you are quite knowledgeable about this, because you deal with some of the details of trade negotiation, and the "sensitive product" status. You are absolutely correct in your last two sentences, that unless sugar is on the table, and sugar protections phased out, there will be NO new trade round.

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Arlington, VA: Congress has not rejected a trade agreement in the last 20 years, once it has been signed, sealed and delivered by the President. Don't you think the Administration should just stand on principle, call the bluff of "Big Sugar" and get on with a vote?

Steven Pearlstein: The reason presidents always win is that they play the national security trump card and then make side deals that get a one vote majority. The problem here is with the side deals Bush would have to make: if he agrees not to put sugar on the table in any future agreements, it would have the same negative effect on the WTO and FTAA negotiations as if the treaty were rejected. Either way, everyone would know sugar was off the table, so to speak, and if sugar is off the table, then there will be no further negotiations with Brazil and other developing countries.

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Washington, D.C.: I can't believe you would say the CAFTA countries have strong labor laws. The State Department says there are 5,000 kids under the age of 14 who work in sugarcane fields in El Salvador instead of going to school. Right now we can pressure El Salvador to fix that; under CAFTA, we can't.

Oh, and if it's true that "other countries don't like it very much when we use trade treaties to dictate what their labor laws are going to be," then they wouldn't be trading with us under the CBI, like they are now.

Steven Pearlstein: Gee, you just said ther are 5,000 kids under the age of 14 working the fields. You also said the Carribean basin rules are so effective we shouldn't be so cavalier in setting them aside with this overriding Cafta treaty. Seems to me you've just contradicted yourself, exposing the CBI sanctions as being relatively toothless.

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Alexandria, Va.: Big Sugar doesn't deserve all the blame for messing up the global free trade agenda. I hope you'll devote more columns to this topic and point the finger at the other corporate interests using campaign contributions to influence how the U.S. negotiates on trade issues.

Steven Pearlstein: All industries use campaign contributions to influence trade negotiations. No news there. But sugar has undue influence, creating the worst subsidy/tariff/quota regime of ANY commodity and creating the biggest problem in getting developing countries to negotiate another round of global trade liberalization. The fact that other lobbies try to corrupt the political process doesn't excuse Sugar from being the king of corruptors.

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Hong Kong, China: In your article, you state that hundreds of thousands of high-tech and service jobs will be sacrificed for the sake of 10,000 farmers if CAFTA fails. That sounds massive. Can you actually provide figures to back that up?

Steven Pearlstein: No, I can't. But if you look historically at the growth in these sectors from exports, its not hard to get to such numbers. Our future is in those industries, and right now many are shut out of foreign markets because of protectionist rules or tariffs. Energy. Telecom. Financial Services. Professional services. This is where we excel, where they are weak, and where our greatest chance is for competitive advantage.

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Arlington, Va.: I'm not trying to defend the sugar barons, but don't you think our government should be doing more to ease the workforce transition here in the states? As more and more jobs head overseas for all the right reasons, we need to deal with the economic dislocation here at home. Was any of that discussed in terms of the CAFTA debate?

Steven Pearlstein: Absolutely, the government should be doing more. Retraining. Wage insurance. Extended health insurance. More money for community colleges. And it is a moral travesty that we haven't done this for all sorts of displaced workers, starting with industrial workers. That's why I suggested last week that Democrats make a deal with Bush: offer to push Cafta through in exchange for some of this, along with an increase in the minimum wage.

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Washington, DC: You claim that NAFTA, and hence CAFTA, brought democratic reform to Mexico, but then claimed that labor and environmental reforms could not be "imposed" from abroad. How can political reforms and not economic reforms come through economic agreements? If the only real positive benefit to NAFTA was political, why not just have a international political agreement?

Steven Pearlstein: These benefits come indirectly, through propserity and the natural interaction of economic actors engaged in commerce and investment across borders. They didn't come because we dictated new laws to the Mexican people. Why do you think Lula, a former labor leader and now head of the Brazilian government, says absolutely he won't accept the labor provisions U.S. Democrats want to write into a free trade agreement? Its not because he's anti labor. Its because he's pro-Brazlian sovereignty.

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St. Louis, MO: I appreciate you acknowledging that subsidies are bad, but the fact is that we have them for now.

Given the fact of U.S. agricultural subsidies, don't you think it is unfair to poor Central American farmers who depend upon selling corn, rice, beans and dairy products for their livelihood to abruptly remove tariffs protecting them from subsidized competitors? As long as U.S. subsidies persist, wouldn't it be more fair to allow poor countries to protect themselves from them?

Steven Pearlstein: That's why these things have to be dealt with as part of global trade talks, not between a handful of countries and the U.S.

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Steven Pearlstein: Sorry, folks, but I have to take a somewhat early slide. Thanks for writing in. See you next week. I'll publish some of your other comments now.

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Washington, D.C.: "Seems to me you've just contradicted yourself, exposing the CBI sanctions as being relatively toothless."

The State Department and the ILO say that every major improvement in labor laws in the CAFTA countries in the past 15 years are the result of the U.S. threatening, from time to time, to remove trade benefits under the CBI. I would rather have the ability to do that with these 'relatively toothless' sanctions than say--as you do-- that the best thing for workers would be the arrival of more corporations which will certainly have their workers' best interests at heart.

Steven Pearlstein: Thanks.

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St. Louis, MO: If CAFTA would really be good for workers all around, why do you think labor unions oppose it? Do they just have bad economic advisors, or is it because CAFTA is a strategic step in the broader context of the trade debate in which workers' rights are affected, or some other reason?

Thank you.

Steven Pearlstein: Thanks.

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Great in theory: Like most trade stuff, it sounds great in theory...unfortunately, it blows in practice.

For example, in nice shiny theory, you open trade and the US should have more high paying jobs, while the other country should see their lower skill jobs gain in wages. The windfall profit to capital is taxed to provide retraining and a cushion to harmed US labor.

In the real world, wage gains in other countries, while real, are very modest. Most of the deadwood gain is shifted to profitability to multinationals. Said companies and ever increasing income executives lobby for tax cuts, and the gutting of training, education, and programs to smooth labor transition.

In a nutshell, we create throwaway people who's remaining employable years are before the fabled "long run" of economics. Or as Maynard Keynes eloquently said, "in the long run we shall all be dead".

Also, the massive concentration of wealth in the hands of the few is used to bribe LCD govts. to repress employee organizing. Why not, when its a pittance of the deadwood gain going to profitability?

Unfortunately, though a trained economist, I had the unfortunate inability to forget those nice abstracts are really people. I really love trade theory. It's just wonderful. Too bad it doesn't work in practice for anyone other than those who are already at the top of the heap.

Steven Pearlstein: Thanks.

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Washington, DC: Sure, if CAFTA is passed, a little more sugar will be sold to the U.S., a market access which will benefit a few families at best in Central America.

But what about CAFTA's intellectual property rights provisions, which will impede access to low cost, essential medicines, and criminalize legitimate uses of copyrighted materials? It seems to me that it is corporations like Pfizer and Microsoft that are the real protectionists. When Snickers bars use Central American sugar, the cost is at best a few percentage points cheaper. When Pfizer and Microsoft get extended patent protection, the price skyrockets over what it would be in patent-free, free market.

Steven Pearlstein: Thanks.

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Bethesda, MD: Describing the U.S. as a banana republic, citing one-party rule, politicization of the military and judiciary, and landed oligarchy, is accurate, but incomplete. Other characteristics of the Bush regime include intimidation, if not total control, of the media, and issuance of major non-bid contracts. As for CAFTA, how can this agreement be approved given that both parties are captives of sugar and farm interests?

Steven Pearlstein: Thanks.

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Washington, D.C.: Subsidies to US farmers arrive to them through a variety of mechanisms, but the effect of them is to promote production by keeping farms running, creating excess supply.

When these excess supplies hit the world markets, then world prices fall and that means producers in other countries can't break even on their crops. They either go out of business or they must receive subsidies and special arrangements too.

Over all, the USA subsidies at $18 billion aren't the worst. The EU spends in the neighborhood of five times more in a comparatively smaller market. The Japanese are crazy about rice subsidies, but they otherwise import more calories than any other nation on earth. Japan also spends more for development assistance than anyone else. The EU provides very good market access and profits to sugar growers in its old colonies, which is a big distortion on the world market for sugar. Some EU countries see agriculture as an integral part of their tourism economies -- who wants to tour through countrysides of empty shacks and abandoned fields? Might as well drive through Alabama.

Steven Pearlstein: Thanks.

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Washington, D.C.: Just want to note that April's trade deficit was lowest in 6 months.

Steven Pearlstein: Thanks.

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Baltimore: Here's my solution to the sugar problem -- wait for Castro to die. Then when Cuba opens back up to U.S. businesses, all the sugar barons can head home to claim their ancestral lands and we can finally be rid of them and their silly subsidies.

Steven Pearlstein: Thanks.

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Columbia, MD: Aren't the textile and sugar interests, beside costing us billions in subsidies, also undermining our national foreign policy interests? Particularly I'm thinking of Haiti and West Africa. Both areas would benefit from increased trade here and we would have less military/peacekeeping needs and the expense that comes with them.

Steven Pearlstein: Thanks.

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