CAFTA under fire

July 13, 2005

Free Market Foundation

The Bush Administration has aggressively pursued bilateral trade, concluding agreements with Australia, Chile, Jordan and Singapore. Talks are underway with Bahrain, Morocco, Panama and groups of countries in Africa and South America. While the amount of activity is impressive, the results are not very great in terms of opening trade. Moreover, the heavy reliance on bilateral trade agreements may create future problems, says Bruce Bartlett, a senior fellow with the National Centre for Policy Analysis.

Economist Anne Krueger, now the number two official at the International Monetary Fund, summarised the case against preferential trade agreements in a 1999 article in the Journal of Economic Perspectives:

Once countries are inside a trading bloc such as NAFTA or the European Union, they have an incentive to support protection against countries outside the bloc.

Protectionists will use bilateral trade agreements to avoid multilateral agreements, which all economists believe are far preferable.

Those who benefit from bilateral agreements will henceforth tend to oppose new multilateral deals; once a trader has gained access to the market he is most interested in, he will not want to share those benefits with those in other countries.

Finally, the resources of organisations like the U.S. Trade Representatives Office are limited; if they are busy with bilateral agreements, they have no time or political capital left to pursue multilateral agreements.

Jagdish Bhagwati, America’s leading trade economist, has gone so far as to call free trade agreements a sham that are actually undermining the world trading system. He argues that the proliferation of such agreements by the United States is part of a long-term effort to pursue a unilateral trade policy. “Thanks to the myopic and self serving policies of the worlds only superpower, bilateral free trade agreements are damaging the global trading system,” says Bhagwati.

Source: Bruce Bartlett, CAFTA Under Fire, June 29, 2005; and Anne O. Krueger, Are Preferential Trading Arrangements Trade-Liberalizing or Protectionist? Journal of Economic Perspectives, Vol. 13, No. 4, Fall 1999.

For text:http://www.ncpa.org/edo/bb/2005/20050629bb.htm

For Krueger text:http://web.nps.navy.mil/~relooney/JEP_16.pdf

For more on Trade: Case Against Protectionism:http://www.ncpa.org/iss/tra/

FMF Policy Bulletin/ 5 July 2005