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Memo on Dominican Republic-Central America Free Trade Agreement

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To: Interested Parties
From: Daniel Tarullo, Professor Law, Georgetown University and
Dan Restrepo, Director of Congressional Affairs

The Bush Administration’s Dominican Republic-Central America Free Trade Agreement (DR-CAFTA) is in trouble in Congress. Predictably, the Administration is now trying to deflect attention from the economic shortcomings of DR-CAFTA by arguing that its rejection would be a foreign policy setback for the United States. Yet, having ignored the needs of U.S. workers and failing to engage in bipartisan consultation on trade policies for four years, the Administration has no one but itself to blame for the possibility that a controversial trade agreement may be rejected by Congress.

Opposition to DR-CAFTA need not, and should not, signal opposition to trade agreements generally. Both the foreign policy and economic interests of the United States are well served by trade liberalization. It is particularly important for the United States to take a productive leadership role in bringing the Doha Round of multilateral negotiations to a successful conclusion. But debate regarding trade agreements often obscures, rather than illuminates, the issues:

  • First, neither DR-CAFTA nor any other U.S. trade agreement entails genuinely “free” trade. Substantial tariffs or quotas remain. The relevant question is who gets protected and who does not.
  • Second, like most recent trade agreements, DR-CAFTA affects much more than “trade” – it reaches far beyond import policies into domestic economic and social policy, by imposing, for example, obligations to provide certain forms of intellectual property protection. The choice of policies to include in an agreement reflects basic political decisions more than pursuit of comparative advantage or other economic justifications for liberal trade.
  • Third, the rhetoric of “free but fair” trade is no more helpful. “Fair” trade policies are usually in the eye of the beholder. Fairness is an important standard by which to evaluate a trade agreement, but fairness can be assessed only by looking at the impact on all affected groups and individuals.

Since both “free trade” and “fair trade” are more slogans than policies, it is important to refocus the debate on what constitutes a smart trade policy.

The basic principles of a smart trade policy arise from the reasons for seeking trade agreements in the first place. Trade agreements should provide significant gains for U.S. workers, consumers, and businesses. They should support development, democracy, and the rule of law in our trading partners. Because trade agreements inevitably create losers as well as winners, smart trade policy requires that steps be taken to ensure economic opportunity for all those who may be displaced by trade. Finally, a trade policy cannot be smart unless it can be sustained, both at home and abroad. At home, this means pursuing trade agreements in a bipartisan fashion. Abroad it means exercising U.S. leadership so as to bring the benefits of trade to all countries, including the poorest.

Judged against the standards of a smart trade policy, DR-CAFTA is badly flawed.

Contributing to U.S. Economic Growth: Trade agreements should spur creation of the good jobs associated with exports and result in the wider consumer choice associated with imports. The gains from trade, on either the export or import side, however, will be minimal in the case of DR-CAFTA, since the other countries in the agreement have very small economies and together account for barely 1% of U.S. trade. Although not every trade agreement need itself provide significant gains to be worthwhile, the Administration’s almost exclusive pursuit of trade agreements as rewards for countries that support its foreign policies has come at the expense of concentrating on larger markets for high-value U.S. exports.

Promoting Development & Respecting Democracy in our Trading Partners. The other six countries in DR-CAFTA will see some benefits in this agreement, likely in the form of an improved investment climate. For an agreement that is being advertised as important for development and democracy in the region, however, DR-CAFTA does relatively little to affect the region’s development challenges and to spread the gains from trade more broadly. Indeed, the rule of origin in the textile provisions is sufficiently restrictive that it may impede the ability of industries in the DR-CAFTA countries to remain competitive now that global textile quotas have been ended. The refusal of the Administration to include enforceable labor standards in the agreement, despite the well-documented absence of basic international labor protections in some of the DR-CAFTA countries, is a missed opportunity to spread the benefits of development to the average working person in these countries.

Respecting the environment and securing progress on development are essential to rebuilding public confidence and congressional support for trade agreements. Regrettably, the Administration is not dedicating the long-term resource and financial commitments necessary to realize the environmental goals of the agreement. The Administration’s insistence on a provision that forbids DR-CAFTA countries from using test data submitted by one pharmaceutical company to approve a similar drug of another pharmaceutical company could increase the cost of much-needed drugs in the region.

Trade agreements can, at most, provide one piece of a successful development strategy. Without needed infrastructure, education, and a reliable legal environment, even a trade agreement that offers substantial market access for competitive products from developing countries cannot markedly improve the lives of people in those countries. Yet, because it provides only limited opportunities for the region’s most competitive products, DR-CAFTA falls short of making the discrete contribution that trade could make to broad-based development and is unlikely to make a marked difference in the lives of every day Central Americans.

Ensuring Economic Well-Being for All. Like all sources of economic change, trade inflicts losses on some segments of society even when it benefits society as a whole. But trade policy does not exist in isolation from other economic policies. Whether U.S. workers affected by trade can find and keep good jobs depends on the effectiveness of macroeconomic policies and labor market programs. The sluggish job and wage growth of the last four years have created an unfavorable situation for displaced workers.

The Administration’s massive budget deficits risk increased problems in the future. Existing safety net programs such as extended unemployment insurance and trade adjustment assistance (TAA) already fall far short of needed support. Yet instead of trying to help more workers make the transition to new businesses or careers, so that they can play as productive a role in the economy as possible, the Administration has tightened the eligibility requirements for TAA, denying many workers even the modest resources available under that program. Although the number of workers likely to be directly affected by DR-CAFTA is small, the Administration again offers nothing to those who will be affected.

Restoring a Bipartisan Trade Policy. The fast-track, up-or-down voting procedures for trade agreements were designed to prevent delicately negotiated agreements from unraveling during the legislative process. But the inability to offer amendments places a premium on consultation and accommodation during the conception and negotiation of trade agreements. Most presidents since the end of World War II have tried to pursue a bipartisan trade policy. The current Administration has broken radically with this tradition. On DR-CAFTA, as on the bilateral trade agreements it previously concluded, the Administration has essentially excluded all Democrats from meaningful participation in the planning and negotiation stages. Only when the agreement is completed and it appears that some Republicans will defect does the Administration make overtures to Democrats. This highly partisan approach has produced a particularly ironic result in DR-CAFTA. Had the Administration involved a sizeable group of Democrats in fashioning negotiating positions on textiles, labor standards, and other issues, it could have gained a sizeable number of votes. Instead, it must now resort to either overtly protectionist promises or classic pork barrel politics to woo enough Republicans to win approval of DR-CAFTA.

On DR-CAFTA, as with each previous trade agreement, the Administration has failed to engage in bipartisan consultation. In its economic policies and fiscal choices, it has failed to offer a real safety net and improved educational opportunities to U.S. workers, present and future. If DR-CAFTA fails, it will be because of the cumulative effects of the Administration’s policies. Members of Congress who want to support trade expansion through smart policies have grown increasingly frustrated. Many voted for earlier agreements despite misgivings regarding the direction of Administration policies. Unable to offer amendments to either the trade agreement or its implementing legislation, and unable to elicit cooperation from the Administration, they may now feel their only recourse is to vote against DR-CAFTA – not because they oppose a trade agreement with those countries, but because this trade agreement, and the policies surrounding it, fall so far short of a much-needed smart trade policy.

Daniel Tarullo is a law professor at Georgetown University. Dan Restrepo is director of congressional affairs at the Center for American Progress.

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