South-Westerns' Economic News Summaries
CAFTA Becomes Reality
Subject Central American Free Trade Agreement
Topic International Trade
Key Words

Trade Agreements, Trade Barriers, and Free Trade

News Story

Following months of political maneuvering, the Central American Free Trade Agreement has become a reality. CAFTA has been one of the hardest-fought legislative battles of the year, with opposition rising from both sides of the aisle. The final vote was only 217 to 215, with almost all Democrats voting against the measure.

Trade barriers can take the form of protective tariffs, revenue tariffs, quotas, nontariff barriers, and voluntary export restrictions. Protective tariffs aim to shield domestic producers from foreign competition. Revenue tariffs, on the other hand, apply to products not produced domestically to provide revenue to the government. Products like tin, coffee, or bananas would be examples.

The free trade movement argues that trade barriers create greater losses to consumers than the gains that producers glean from the trade measures. Thus, trade barriers create a net loss to society. President Bush, who lobbied hard for the bill, praised the House vote in a statement that came only minutes after the trade victory. "By lowering trade barriers to American goods in Central American markets to a level now enjoyed by their goods in the U.S, this agreement will level the playing field and help American workers, farmers and small businesses," Mr. Bush said. The new agreement will eliminate most barriers to trade and investment between the United States, the Dominican Republic and the Central American nations of Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua. "Tonight, we have the opportunity to be the progressive, aggressive good-neighbor party," said Representative Bill Thomas, Republican of California and chairman of the House Ways and Means Committee. "We will not be the ones who say for 40 years that we want to help and then heel to the protectionist movement." President Bush has championed the deal as a model of free trade, while Democratic opponents argue that it would encourage American manufacturers to shift jobs out of the U.S. while doing little to improve the working standards of Central Americans.

Rob Portman, the United States Trade Representative, attempted to sooth opponents' concerns. He congratulated Congress on passing the agreement and pledged, "…to do all I can to continue our efforts to listen and address members' concerns on trade." The immediate economic impact is likely to be small, especially for the U.S., because the combined economies of all six countries included in the agreement are only about the size of the economy of Tampa, Florida, including the surrounding suburbs. In percentage terms, this is only about 1 percent of the United States gross domestic product.

Questions
1.

Distinguish between a revenue tariff and a protective tariff. Give examples of products that might qualify for each kind of tariff in the U.S.

2. Discuss what Representative Thomas means by "the protectionist movement."
3. Explain why President Bush claimed this agreement will "level the playing field."
Source Edmund Andrews, "House Approves Free Trade Pact With Central American Nations," The New York Times Online, July 28, 2005.

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