A Central America Free Trade Agreement agreement may be the ticket President Obama needs to convince legislators and critics that he’s ready to kick start his administration’s export plan.
Last March, when the president announced the U.S. would undertake an ambitious new National Export Initiative, he pledged to double U.S. exports over the next five years, “working to remove trade barriers abroad” and “helping firms — especially small businesses — overcome the hurdles to entering new export markets.”
Nine months later, free traders from both the Democratic and Republican parties are complaining the Obama administration has made no effort to bring three Bush-era free trade agreements — with Colombia, South Korea and Panama — to Congress for approval. The reason, they say, is that Obama doesn’t want to alienate steel and auto unions that argue trade pacts kill U.S. jobs.
According to a report by the National Association of Manufacturers, 57 percent of all U.S. exports of goods and services are manufactured goods, and free trade agreements that reduce barriers to U.S. exports have had proven benefits for manufacturers and their exports.
Although U.S. public opinion often assumes the U.S. runs a trade deficit with its trade-pact partners, the opposite is true, said John Engler, president of the NAM. “Over the past two years, manufacturers in the U.S. sold nearly $50 billion more in manufactured goods to our free trade partners than we bought from them,” he said. The huge manufacturing trade deficits racked up by the U.S. during that period came with countries, such as China, that are not U.S. free trade pact partners.
The advantages of free trade agreements for the U.S. cannot be measured simply by comparing trade volume, said David Spooner, a former negotiator in the U.S. Trade Representative’s office for free trade agreements with Central America, Singapore, Australia, Chile, Panama and other countries. CAFTA, struck in 2005, provides one of the best such examples, said Spooner, an attorney at Squire Sanders & Dempsey in Washington, D.C.
From January through September 2010, the U.S. ran a modest $52.8 million trade surplus with the CAFTA nations, following a $995.1 million surplus over the same period in 2009. Although “the Central American region has struggled to compete with China and the rest of Asia” after CAFTA went into effect, he said, “it would be a mistake to blame CAFTA” for that struggle.
“The free trade agreement has largely kept Central America afloat in the face of that competition,” he said, by making it cost-effective for U.S. apparel firms to keep sourcing some of their products from the region.
On the political front, the region has faced numerous uncertainties since CAFTA went into effect, including a coup and constitutional crisis in Honduras in 2009 that paralyzed trade with that country for weeks, and the return of former Marxist rebel Daniel Ortega as president of Nicaragua in 2007. “This has hindered business confidence in the region,” Spooner said. “But things would be far, far worse without CAFTA,” which has bolstered confidence in the stability of the region.
More recently, Central America seems to be bouncing back strongly from the recession. “The economy in Central America has no doubt improved compared with last year,” said John Abisch, president of Econocaribe Consolidators, one of the largest non-vessel-operating common carriers in the ocean freight transportation industry.
“Things are more economically and politically stable,” he added, noting Nicaragua, El Salvador and Honduras all went through periods of instability. Even in Nicaragua, “we haven’t felt clients becoming apprehensive to do business.”
From January through September 2010, U.S. exports to the CAFTA countries (including the Dominican Republic) totaled $17.79 billion, compared with $10.61 billion for the same period a year earlier. U.S. imports rose to $17.74 billion over the same nine-month period, compared with $10.96 billion in the same period of 2009.
“We have seen an upswing in CAFTA trade during the last 10 months” (through September 2010), said an optimistic Gail Strickler, assistant USTR, Office of the U.S. Trade Representative.
“CAFTA has helped,” Abisch said. “It has certainly been positive for trade. It has been very good for Central America.”
Despite progress, the two largest suppliers of apparel to the U.S. from the region — Honduras and El Salvador — have continued to lose market share in the U.S. because of the enormous volumes of apparel coming out of China and China’s huge work force.
China’s population of 1.3 billion is nearly 28 times as large as the combined populations of the six members of CAFTA (including the Dominican Republic); that is, a mere 48.2 million people. From 2008 to 2009, China’s share of the U.S. apparel import market rose from 36 percent to 40 percent, measured in TEUs, while Honduras’ share dropped from 3 percent to only 2 percent; and El Salvador’s fell from 2 percent to 1 percent.
In value terms, China’s share of the U.S. market rose from 33 percent in 2008 to 38 percent in 2009, while Honduras’ share dropped from 4 percent to just 3 percent. Both El Salvador and Guatemala have leveled off at 2 percent of the U.S. market.
With the rise of low-cost suppliers from Vietnam, Indonesia, Bangladesh and India, Honduras is no longer the third-largest supplier of textiles and apparel to the U.S. after China and Mexico. In 2009, Honduras ranked eighth, according to U.S. Customs.
There are other benefits of CAFTA that cannot be measured simply by comparing export volume. According to Spooner, the well-being of U.S.-based yarn and fabric mills that belong to the National Council of Textile Organizations depends on exporting their products to CAFTA countries.
It works this way: The U.S. mills export their yarn and fabric to the region, where Central American companies cut and sew it into apparel, which is then shipped back to NCTO members in the U.S.
This complex supply chain only makes sense because, under CAFTA, apparel made in Central America enters the U.S. duty-free. Otherwise, U.S. tariffs on apparel are high. However, “CAFTA requires that yarn and fabric in apparel must originate in the U.S.” to qualify for the duty exemptions.
In the absence of CAFTA, some U.S.-based yarn and fabric mills might have gone out of business. But, given the high cost of U.S. labor, it would cost the U.S. mills too much to cut and sew those garments in the U.S.; exporting their yarn and fabric to Central America for sewing and cutting there wouldn’t make sense either if they had to pay high duties when those fabrics were re-imported to the U.S.
Because of CAFTA, “Central America did not lose this business (in the U.S.) to China, and U.S. exports of yarn and fabric (to Central America) have maintained at the same level (as before CAFTA),” Spooner said.
The average piece of clothing imported to the U.S. from Central America now contains 70 percent U.S.-made yarn and fabric. In contrast, clothing imported from China to the U.S. contains on average less than 1 percent U.S. yarn and fabric, Spooner said.
Despite the recent growth in trade volume with CAFTA countries, trade ministers of the CAFTA countries met recently to make a few technical fixes in the agreement that could boost trade, Strickler said. The most important fix was in the “short supply” provision concerning trade in elastomers; polymers such as spandex and Lycra.
The original CAFTA text specified elastomers had to be brought into the region from countries outside Central America to gain preferential treatment in the U.S.
Other fixes made recently include provisions regarding trade in sewing threads. “Some types of threads were left out of the original CAFTA text but will be put back in,” Strickler said. “We can create legislative language and send it up to the Hill. We are pretty excited about that.”
The lessons from CAFTA’s success seem to have had no impact on the fate of the three stalled U.S. free trade treaties, including those with Panama and Colombia. “It is extremely disappointing that we don’t have a free trade agreement with Colombia,” Abisch said. “I cannot understand any reason why not.”
Abisch said he has participated in a few of President Obama’s National Export Initiative roundtables, where CEOs of manufacturers, think tanks, transportation providers and others discuss various ways to achieve the president’s lofty targets for export growth.
“A lot of people have good intentions,” he said of the current administration. But when push comes to shove, “there are a lot of politics involved.”
Spooner, a Republican, agreed. “The votes are there (in Congress) to pass the South Korea free trade agreement if it would go to Congress. But it will never happen if the president waits for a thumbs-up from the steelworkers union,” he said. “And there is no evidence that they will infuriate the steel workers.”
Contact Alan M. Field at email@example.com.