Bush’s plan for a Western Hemispheric trade pact: Don’t bet the farm on it.

By Jock O’Connell

This article originally appeared in the Forum section of the Sacramento Bee on Sunday, February 3, 2002.

In a January 16 address at the Washington, D.C. headquarters of the Organization of American States (OAS), President George W. Bush revisited a topic he had originally broached during the 2000 presidential campaign -- infusing the historically troubled relations between the United States and Latin America with a new vitality and sense of purpose.

At the center of candidate Bush’s initiative was his call for the creation of a Free Trade Area of the Americas no later than 2005. FTAA would be NAFTA writ large. Encompassing all of the Western hemisphere’s democracies -- 34 at last count -- it would rival the steadily expanding European Union. It would also, the presidential aspirant argued, give an added spur to Latin America’s fitful progress toward democracy and economic liberalization.

The proposal was welcomed by U.S. business, which had long regarded Latin America as a region of huge but tragically unrealized economic potential. For California companies, the economies of Central and South America have never been major markets. We actually ship more goods to Thailand than to Brazil, more to Sweden than to Argentina and more to Finland than to Chile. Altogether, less than two percent of California’s export trade winds up in South America.

So a free trade zone incorporating much of the Western Hemisphere would seem to hold the promise of major new export opportunities for California firms.

We shouldn’t get our hopes up, though.

Foreign trade -- along with the whole question of globalization -- has emerged as an emotionally charged issue in American politics. Because trade agreements typically involve compromises that inevitably leave some parties aggrieved, they are bound to be controversial. That raises the question of whether the Bush administration, having barely coaxed a Trade Promotion Authority measure through the House of Representatives in early December, will be able to muster the political support needed for future trade pacts.

The specific proposal the president made at the OAS headquarters represented a considerable retreat from the bold vision he espoused prior to the 2000 election. Instead of calling for a full-blown FTAA, Bush announced his intention to first negotiate a free trade pact with five small Central American nations -- Costa Rica, Honduras, Guatemala, El Salvador and Nicaragua.

The president’s new game plan, the usual White House sources explained, aims to use this southern extension of NAFTA to entice the much larger economies of South America -- most notably, Argentina, Brazil, Colombia and Venezuela -- to join in a hemispheric trade pact later on. (A free trade agreement between the U.S. and Chile is being negotiated separately.)

While moving one step at a time seems eminently reasonable, the strategy was actually dictated by the administration’s realization that these are not especially propitious times for discussing FTAA in South America. Apart from the indifferent response that had greeted Bush’s original FTAA proposal in Brasilia and Caracas, the agonizing death spiral of Argentina’s economy and the Colombian government’s preoccupation with a left-wing insurrection, a right-wing counter-insurgency and the usual array of drug cartels make FTAA a tough sell at the moment.

The collapse of the Argentine peso in January following four years of recession has shaken that nation’s faith in free market economics. Eduardo Duhalde, the latest in a rapid succession of Argentine presidents, has pronounced the free-market model "broken" and has warned that his government will take whatever steps are necessary to protect Argentine industry and jobs.

Their economic plight has also soured Argentines on the U.S. Argentina was the only Latin American country to take part in the Persian Gulf war, and it has generally supported the U.S. on issues like human rights violations in Cuba. But Duhalde’s government has been gravely disappointed by the Bush administration's reluctance to do much to help its ally during the current crisis.

The beneficiary of this strain on Argentina’s relations the U.S. is apt to be Brazil, Latin America’s largest economy and a nation that has thus far shown little enthusiasm about FTAA. According to recent press reports, there are even signs Argentina may be considering the establishment of a common market and a common currency with Brazil. This move would not only establish an economic unit half-again as large as Mexico, it would provide Brazil with added clout in countering U.S. influence in South America and in demanding a better deal for other emerging economies in the upcoming round of multilateral trade talks under the World Trade Organization.

The White House’s decision to forego FTAA for the time being hardly means that its more modest proposal will be any easier to achieve. The problem lies not so much in getting the five Central American nations to agree to enlisting in an enlarged NAFTA but in gaining congressional approval for the accord.

A free-trade agreement with five small Central American economies would have a trivial impact on trade flows. After all, the combined economic output of these countries is roughly equivalent to that of the Sacramento region. Moreover, with per capita incomes averaging far less than in Mexico, these nations hardly present exciting new export opportunities for U.S. firms. Nor are indigenous industries within these nations apt to benefit much from the new proposal since, courtesy of trade legislation enacted by Congress last year, these countries already enjoy access to the U.S. market that is nearly as unfettered as Mexico has under NAFTA.

The only substantial effect of the new trade pact would be the establishment of firmer legal safeguards for foreign investment that would make these countries more attractive to multinational corporations seeking to build and operate factories. That fact alone will be sufficient to insure stiff opposition from organized labor, environmentalists, and worker rights activists in the U.S.

Campaigns to mobilize support for trade liberalization measures in the U.S. are traditionally waged on two fronts, with the overall goal of cobbling together enough votes in Congress to ratify the relevant trade agreement.

Along one front, free trade advocates engage in an eternal struggle -- perhaps most comparable to that of Sisyphus -- to persuade the American public of the considerable virtues of free trade. Opinion polls repeatedly demonstrate the public’s remarkably resilient antipathy toward foreign trade. This failure to win grass-roots support for free trade measures places an even greater burden on the campaign to forge a coalition of interest group to lobby trade measures past sometimes dubious lawmakers.

Historically, this effort has relied more on old-fashioned horse-trading than on the persuasiveness of trade economists. It is also an endeavor teeming with ironies and contradictions. (Winning the House vote giving the administration the authority to negotiate new trade agreements required the measure’s proponents to agree to maintain trade barriers protecting the textile industry in several southern states from imports from several poor nations, including Pakistan.)

Interest group coalitions hang together only so long as each party derives benefits from the association. Delivering those benefits is apt to prove much more difficult in an international trading system that lacks its old sense of harmony and order (i.e., a system in which the U.S. and its friends pretty much got to dictate the agenda to everyone else).

As became abundantly evident at the World Trade Organization’s last two summits (in Seattle in November 1999 and again at Doha two months ago), future rounds of trade negotiations will involve an unprecedentedly assertive bloc of developing nations, led by such formidable players as Brazil, India and the WTO’s newest member, China.

One of the issues they are asserting is one that is likely to be of considerable interest in the Central Valley -- the future of U.S. agricultural trade policy.

During a meeting of Western Hemispheric heads of state in Ottawa last fall, Brazil delivered a list of demands that the U.S. would have to address before it would consent to discuss an FTAA. Prominent among those demands -- all of which will spark considerable controversy in the United States -- was a call for the U.S. to sharply cut farm subsidies and lower its agricultural trade barriers.

Brazil is far from alone in voicing such complaints. "It is unconscionable for the United States, Japan, and the European Union spend hundreds of billions of dollars on maintaining marginal activities for the benefit of a few of their citizens, while devastating agricultural sectors that are central to peace and development in poor countries," International Monetary Fund (IMF) Managing Director Horst Köhler charged during a speech to the International Conference on Poverty Reduction Strategies in Washington on January 14.

Even if Brazil’s position on agriculture does not hinder prospects for FTAA negotiations, it is emblematic of a new age in international trade. As Louis Uchitelle, the economic affairs columnist for The New York Times recently observed: “Globalization is gradually slipping from the control of the United States and the other industrialized countries.”

Within an organization like the WTO, which operates by consensus, it is by no means certain that the preferred agenda of the West will continue to prevail, especially in such key areas of concern as the protection of intellectual property rights, the legitimacy of anti-dumping measures, or the ability to subsidize agricultural production.

If anything, the sweep of future trade talks is likely to go well beyond how best to foster efficient markets and the “frictionless” movement of goods and services. Questions of equity, the protection of the environment, the safeguarding of basic human rights will be raised in future rounds of trade negotiations.

That will it all the more difficult for U.S. trade negotiators to deliver the results expected by the domestic interest groups that normally champion free trade. The challenge of enacting future trade pacts may therefore require free trade advocates to refocus their energies on building popular support for further trade liberalization.

Copyright © 2002 By J. A. O’Connell

For other articles by Jock O'Connell, click on Essays