CAFTA - Winners and Losers Analysis (April 2005)
I. Introduction -
Any Free Trade Agreement (FTA) results in winners and losers. In contrast to popular notion, the line between the winners and losers does not converge with national borders. Rather, the division is a sectarian one - winners and losers exist in all states that are members to the agreement. This memo identifies the main winners and losers from the potential ratification of the Central American Free Trade Agreement (CAFTA) on both the American side and in the Central American Countries (CAC). The memo uses the computational results of a simulation model conducted by the US International Trade Commission (a complete review of the results and its analysis can be found on-line at: http://www.fordschool.umich.edu/rsie/workingpapers/Papers501-525/r507.pdf)
II. Winners :
1. Consumers -
The main winners of tariffs elimination and trade barriers reductions are consumers in all member states. Simply put, decline in protectionism means cheaper goods. Whether consumers are rich or poor, American or Salvadorian, goods will be cheaper for them. This includes agricultural products as well as manufactured goods. For instance, the current tariff in CAC is 164% on chicken and 60% on dairy products. The elimination of these tariffs will lead to significantly lower prices and benefit for consumers in countries on both sides of the agreement.
2. American Farmers -
Elimination of tariffs on American agricultural goods in the CAC will provide access to a large number of consumers in potential growth markets. Tariffs on agricultural goods in CAC currently range between 15% and 164%. The elimination of these tariffs will allow penetration of American agricultural goods into the CAC markets. In addition, since the American markets have been open for CAC agricultural goods for quite a while, the CAFTA will not significantly expose American farmers to more import competition.
3. CAC Manufacturing -
There is a sizeable percentage increase in CAC output in textile, wearing apparel, and leather products & footwear, which will benefit CAC manufacturers. According to the computational results, employment will increase by 53,000 workers in textile, 230,000 workers in wearing apparel and 9,500 workers in leather products & footwear. This increase in employment is equal to 28%, 42% and 15% respectively. This makes sense as those are the sectors in which CAC can be presumed to have comparative advantage. In addition, it is important to notice that without the ratification of CAFTA these sectors will hurt tremendously as China is expected to become the supplier of choice for most US textile and apparel importers after the expiration of quotas in 2005 under the Uruguay Round Agreement on Textiles and Clothing.
Other manufacturing sectors will benefit tremendously by a more positive investment environment in CAC, backed by the United States Government. This will lead to foreign direct investment, increase in job supply, backward linkages, economies of scale, rising wages and better labor practices. The Mexican experience in NAFTA serves as a positive example for the benefits to the manufacturing sectors.
III. Losers :
1. CAC Farmers -
The elimination of the high tariffs on imported American agricultural goods will take many CAC farmers out of business. This is especially troubling as Central American farmers constitute a significant portion of the poor population. These farmers will not be able to compete for two reasons. First, heavy subsidies of American agricultural goods create a phenomenon of over-production that results in dumping of goods in foreign markets. These goods are being sold at a price lower than the cost of production. Second, the agricultural sector in CAC cannot support the farmers as their population increases and the sector is in need of modernization.
2. American Textile and Apparel -
Gross output in the American textiles and wearing apparel is expected to decline. The computational results indicate a loss of 5,100 workers in textiles, and 14,000 workers in apparel. These job-losses correlate with -0.55% and -1.77% respectively.
IV. Conclusion:
The CAFTA agreement will result in winners and losers in all member countries. It is obvious from the data, as well as simple logic, that the effects and costs of CAFTA are much less significant to the United States than they are to the Central American Countries.
The CAFTA will benefit consumers in all sectors significantly by lowering prices of all goods. In addition, not ratifying the CAFTA will lead to severe losses in the textile and wearing apparel sectors in CAC as Chinese products will have an advantage. These should be significant factors in calculating the overall value of the agreement.
The analysis of the CAFTA losers in CAC and the attempt to address these losses lead to two main conclusions:
1. The CAC farmers are directly hurt by the heavy American subsidies on agricultural goods. It is not CAFTA that poses the damage but rather American policy. Since agricultural subsidies are a U.S.-EU dispute, it is important to concentrate efforts to fight them through the right channels, such as the multilateral Doha Round. The U.S. will not change its agricultural policies for CAFTA.
2. There is a need to focus on policies that will help connecting the loss of income in the agricultural sector to the gains made in manufacturing goods. These policies include vocational training grants, micro-financing opportunities and education aimed at the hurting population. These policies could be backed and funded by the United States Government and should be added to the CAFTA as supplemental.