January 23, 2005
Trade pact proposal has U.S. upside
By Nancy Cole
A proposal to liberalize U.S. trade with six Central American and Caribbean nations has received broad support from U.S. agricultural groups. But the fate of the U.S.-Central America-Dominican Republic Free Trade Agreement remains uncertain.
Negotiations for the regional pact began in January 2003, shortly after Congress granted trade promotion, or "fast track," authority to President Bush. On May 28, the Office of the U.S. Trade Representative signed an agreement with five Central American countries - Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua. The Dominican Republic, on the island of Hispaniola, subsequently signed the accord on Aug. 5.
Although El Salvador’s legislature has ratified DR-CAFTA, the pact awaits approval and implementing legislation in the six other countries. Under "fast track," Congress cannot amend DR-CAFTA.
The Bush administration is expected to formally submit DR-CAFTA to Congress during the first half of this year. Members of Arkansas’ congressional delegation are, by and large, taking a wait-and-see attitude. "International trade should be a two-way street that benefits both parties fairly," said Sen. Blanche Lincoln.
And Sen. Mark Pryor said he supports trade agreements "that open new markets to our products as long as the playing field is level." But he also mentioned several specific concerns that he has about DR-CAFTA. "CAFTA could have meaningful benefits for Arkansas.... However, I am concerned about the environmental and labor provisions and the impact of the concessions in the textile/apparel and sugar sectors will be damaging to U.S. industries," Pryor said.
Mickey Paggi, director of the Center for Agricultural Business at California State University in Fresno, said U.S. agriculture faces few downsides with DR-CAFTA. "The first thing that strikes you about that particular agreement is that 99 percent of the agricultural products coming from those countries already enter the United States duty-free," said Paggi, citing existing programs like the Caribbean Basin Initiative. "We’ve got an agreement that, if it’s enacted, creates market-access opportunities for U.S. agricultural products."
Ron Heck, chairman of the American Soybean Association, said, "It’s a very good deal for soybeans."
DR-CAFTA would immediately eliminate tariffs on U.S. soybeans, soybean meal and soybean flour, and tariffs on U.S. soybean oil would be phased out over a 12- to 15-year period. The pact also liberalizes quotas and tariffs on U.S. exports of pork and pork products. Increased U.S. production of pork would have an added impact because hogs account for more than 20 percent of U.S. soybean-meal consumption.
Since 2001, the United States has exported an average of more than $238 million worth of soybean products annually to the DR-CAFTA nations. "It’s a market that’s naturally ours because of the proximity," Heck said.
Soybeans are Arkansas’ No. 1 crop. In 2004 the state ranked ninth in U.S. soybean production, growing almost 4 percent of the nation’s crop.
The prospect of U.S. rice exports to the region under the agreement also is positive, but not quite as simple as that for soybeans.
Rice is considered a "sensitive" product in Central America and the Caribbean because it’s a dietary staple throughout the region. As a result, DR-CAFTA’s tariff reductions for rice are "backloaded," said Eric Wailes, an agricultural economist at the University of Arkansas. Backloading means that the DR-CAFTA countries are compelled to reduce their tariffs only after 18 to 20 years.
Rice tariffs in the region also are subject to "tariff escalation," said Wailes, "where basically you have higher tariffs on the value-added products, like milled rice, compared to rough rice." Over time, DR-CAFTA will "harmonize" tariff rates for rough and milled rice, he said.
Bob Cummings, vice president for international policy at USA Rice Federation, said his group is "strongly supportive" of DR-CAFTA. "We are going to get some small immediate access for milled rice, we’re going to preserve the very large rough rice market that we have, and then we’re going to have prospects down the road for the market to decide what kind of rice is going to get shipped there," Cummings said.
Since 2001, the United States has averaged more than $84 million annually in rice exports to the DR-CAFTA region. Arkansas, the leading rice state, produced 46.5 percent of the nation’s 2004 crop.
The U.S. poultry industry also "is solidly behind CAFTA," said Toby Moore, vice president of the USA Poultry and Egg Export Council.
Central American countries had feared an influx of chicken leg quarters, which account for about 55 percent of U.S. poultry exports to the region, so the United States agreed to longer tariff-phase-out schedules for leg quarters, Moore said. "In return, the Centrals agreed to allow further processed products immediate access to zero tariff," he said.
The DR-CAFTA countries also committed to recognizing the U.S. poultry inspection system, thus eliminating an important non-tariff trade barrier.
Since 2001, U.S. poultry exports to the DR-CAFTA region have averaged $61 million annually. Arkansas is the nation’s No. 2 poultry-producing state.
The U.S. cotton and textile industries have been less enthusiastic about DR-CAFTA, "because it includes some opportunities for third-country participation," said Gaylon Booker, a consultant and former president of the National Cotton Council. "In other words, allowances are made for something called ‘tariff preference levels,’ which would allow a country like China to ship fabric into Central America, have it used in garments, and enter the United States duty-free," Booker said. "Timely implementation of safeguards on China textile exports into the U.S. market could possibly have some impact on whether the U.S. cotton industry would be willing to reconsider its opposition to this current CAFTA."
Assurance of such quid pro quo legislation, however, "is sort of hard to come by," he added.
U.S. cotton exports to the DR-CAFTA countries have averaged more than $55 million annually since 2000. In 2004, Arkansas ranked fourth in U.S. cotton production, growing almost 9.1 percent of the nation’s crop.
One sector within U.S. agriculture has been outspoken in its opposition to DR-CAFTA.
U.S. sugar cane and sugar beet producers say the pact would destroy their industry by permitting an influx of sugar imports.
Sugar cane is grown in four states - principally Florida and Louisiana - and sugar beets are grown in 12 states - the most important being Minnesota, Idaho, North Dakota and Michigan. Arkansas produces neither crop.
Since the War of 1812, the United States government has treated sugar as a "sensitive product," guaranteeing U.S. producers a minimum price that is above world prices and placing a ceiling on sugar imports.
U.S. trade negotiators defend DR-CAFTA’s sugar provisions, saying their concessions on import quotas equate to less than 2 percent of annual U.S. sugar consumption.
Rob Paarlberg, a political scientist at Wellesley College in Massachusetts, said negotiators learned their lesson after completing the 1994 North American Free Trade Agreement with Mexico and Canada. "They underestimated Mexico’s ability to become a net exporter of sugar," said Paarlberg, "and the NAFTA agreement is going to give Mexico duty-free access to the U.S. market after 2008."
In August, the U.S. International Trade Commission released its official analysis of the potential effects of DR-CAFTA, concluding the agreement "would provide benefits to the U.S. economy worth $166 million each year" once fully implemented. The report noted that "some sectors of the U.S. economy are likely to experience increased import competition...while other sectors are likely to experience increased export opportunities." The study concluded that any impact would be "minimal" given "the small economy and market size" of the DR-CAFTA region. According to the commission, 2003 exports to DR-CAFTA countries amounted to $14.4 billion, about 2 percent of total U.S. exports, while imports totaled $16.9 billion, a little less than 1.3 percent of total imports. Although the DR-CAFTA market ranked just 12th in terms of U.S. exports and 15th in terms of U.S. imports in 2003, it did represent the second largest U.S. export market in Latin America, exceeded only by Mexico.
Paarlberg said the potential impact of trade agreements on the United States is less a function of tariff reductions and more a function of the economic growth and development that the agreements might generate. "If CAFTA stimulates income growth in Central America, and it stimulates growth across a broad base of the urban middle class, that’s going to be very good for U.S. exports - with or without trade reductions at the border," he said.
Parr Rosson, an agricultural economist at Texas A&M University, expects DR-CAFTA to initially benefit U.S. agricultural exporters of such high-end products as processed foods and highquality beef. "Once everything is fully phased in, you’re probably looking at about $2 billion a year in additional ag exports," said Rosson. But the DR-CAFTA region needs other development assistance, he said, "if we expect to see those markets become like a Mexico, for example."
The National Farmers Union opposes DR-CAFTA, saying the potential benefits for American agriculture are exaggerated. "We think it just continues some of the failed trade policies of the past, which obviously aren’t working," said Tom Buis, vice president of government relations for the union. "You know, we’re going to be a net importer of agriculture products this year for the first time in 40 some years."
Buis was critical of U.S. trade negotiators, saying "they’re negotiating on market access, domestic subsidies and export subsidies, as opposed to some of the big factors of trade that aren’t being negotiated, like labor standards, environmental and health standards, and currency differences. All three are hugely important to America’s farmers and ranchers because it makes these other countries lower-cost producers of many of the commodities."
The international development and relief agency Oxfam also "actively opposes" DR-CAFTA, said Stephanie Weinberg, a trade-policy adviser with Oxfam America. "What we believe it will do, primarily, is displace large numbers of small and vulnerable farmers across the region," Weinberg said. Such farmers won’t be able to compete against such heavily subsidized U.S. crops as rice, she said. "We’re concerned there is gong to be more displacement of jobs than there is possible creation of jobs."
"What we would like to see is the U.S. really put all its efforts into completing a successful round at the World Trade Organization Doha Development Round," she said, where agricultural subsidy issues are scheduled for negotiation.
A loose-knit group of social justice and solidarity organizations, called the "Stop CAFTA Coalition," in October wrote all 535 members of Congress, asking them to vote no on DR-CAFTA for many of the same reasons as Oxfam.
Opposition to the agreement also is coming from the U.S. Business and Industry Council, which represents small- and medium-sized manufacturers. Senior Fellow William Hawkins said the group opposes DR-CAFTA because past trade agreements, like NAFTA, have created U.S. trade deficits rather than surpluses.
"We’re still the larger market and, when we have these mutually market-opening agreements, naturally the larger market is the target, which is us, and these smaller markets don’t add up to very much for us," Hawkins said.
"When NAFTA was put in, we had a small trade surplus with Mexico. And the object of NAFTA was to increase that surplus by giving us preferential access to Mexico and also to cheaper Mexican labor as an export platform for us to other parts of the world," he said. "The problem, of course, is that we now have a huge trade deficit with Mexico, and Mexico has become an export platform into the United States."
In addition to DR-CAFTA, U.S. trade negotiators recently concluded similar free trade agreements with Singapore, Chile, Australia and Morocco, and they’re working on the Free Trade Area of the Americas, which would encompass 34 economies.
One final aspect of trade agreements - namely, security interests - shouldn’t be forgotten, said agricultural economist Paggi.
"Where you have countries integrated into a global trading system, either internationally or bilaterally, you tend to find a more stable environment. When people are engaged in mutual commerce, the tendency for conflict is decreased."