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Latin America Needs Free Trade

Friday, February 6, 2009

Is the United States retreating from globalization? If so, that is bad news for countries south of the border.

While there is never a “good time” to start a trade war, the current moment is especially inconvenient. Yet Congress seems intent to push through an economic stimulus package containing nakedly protectionist measures that make a mockery of the U.S. commitment to free trade. The House-approved stimulus plan says that all public works projects funded by the legislation must use U.S.-made iron and steel. The Senate bill has its own “Buy American” plank, which is even broader than the House provision and would cover all manufactured goods used in stimulus-funded public works projects.

On Wednesday, the Senate voted to water down the “Buy American” clause by demanding that it be “applied in a manner consistent with U.S. obligations under international agreements.” This was meant to assuage concerns raised by the Europeans and Canadians, not to mention those voiced by President Barack Obama, who on Tuesday told Fox News that “we can’t send a protectionist message” and also told ABC News that “we need to make sure that any provisions that are in [the stimulus plan] are not going to trigger a trade war.” Unfortunately, even in its revised form, the “Buy American” stipulation may still provoke retaliatory actions from U.S. trading partners. “I would bet everything I have on a trade war breaking out within WTO-consistent rules,” Columbia economist Jagdish Bhagwati told a reporter on Thursday.

At a time of economic crisis at home and abroad, a trade war could have disastrous consequences.

The “Buy American” language makes no economic sense. As Gary Clyde Hufbauer and Jeffrey J. Schott of the Peterson Institute for International Economics have pointed out, it would do very little to promote U.S. job creation. But if other countries responded with protectionist moves of their own, that could have a highly negative impact on U.S. jobs. “The negative job impact of foreign retaliation against Buy American provisions could easily outweigh the positive effect of the measures on jobs in the U.S. iron and steel sector and other industries,” write Hufbauer and Schott. “The difference is that jobs lost would be spread across the entire manufacturing sector, while jobs gained would be concentrated in iron and steel and a few other industries.”

However the “Buy American” debate turns out, one hopes that it does not signal a U.S. retreat from free trade and globalization. At a time of economic crisis at home and abroad, a trade war could have disastrous consequences. That’s what happened during the 1930s, when America’s Smoot-Hawley Tariff Act—passed by Congress and signed by President Herbert Hoover in 1930—unleashed a flurry of protectionism around the globe and exacerbated the Great Depression.

The Democratic Congress has close ties with organized labor and is heavily protectionist in its attitudes. Indeed, one of President Obama’s biggest challenges will be to uphold U.S. support for free trade despite resistance from his own party. Of course, that assumes Obama himself is a free trader. During the campaign, he opposed bilateral free trade agreements (FTAs) with Colombia and Panama and called for renegotiating NAFTA. In his first meeting with Mexican President Felipe Calderón, shortly before Inauguration Day, Obama expressed his desire to “upgrade” NAFTA.

The world is now waiting to see whether, as president, Obama will be more skeptical of trade liberalization than Republican George W. Bush or Democrat Bill Clinton, the latter of whom championed NAFTA in the face of intense opposition from his fellow Democrats in Congress. If Obama wishes to maintain U.S. credibility and bolster America’s trade partnerships, he cannot govern as a protectionist. His remarks on the stimulus package have been encouraging. But when push comes to shove, will he risk angering Democratic lawmakers—and powerful Democratic constituencies—in order to defend free trade?

The Europeans and Canadians are eager to know. So are political and business leaders in Latin America. Free trade is especially important to Latin America. In countries throughout the region, U.S.-led trade liberalization has improved economic opportunities, fortified market-oriented democracy, and strengthened the rule of law. At a time of major economic turmoil, U.S. leadership on free trade is critical. Obama must provide it.

He faces at least three big tests on hemispheric trade: whether he will revisit NAFTA; whether he will endorse (and urge Congress to approve) the Colombia and Panama FTAs; and whether he will pursue new FTAs with countries such as Brazil and Uruguay. The U.S.-Mexico relationship is fundamentally sound, so hopefully any disagreements over NAFTA can be ironed out without upsetting the basic framework of bilateral trade. The Colombia and Panama deals were both signed in late 2006; their approval by Congress is long overdue. Colombia is a key U.S. ally in South America whose government deserves credit for reducing violence and working with the United States to curb drug production.

In countries throughout the region, U.S.-led trade liberalization has improved economic opportunities, fortified market-oriented democracy, and strengthened the rule of law.

Brazil and Uruguay are both members of Mercosur, the South American trade bloc, which would complicate U.S. efforts to negotiate bilateral FTAs but not necessarily stymie them. In 2006, U.S. and Brazilian officials launched a new U.S.-Brazil Commercial Dialogue designed to enhance their bilateral trade relationship. Obama should build on this dialogue and push for a formal FTA. (Admittedly, this would require both the United States and Brazil to make some tough decisions on agriculture policy.) As for Uruguay, in 2007 U.S. and Uruguayan officials signed a Trade and Investment Framework Agreement, which created a U.S.-Uruguay Council on Trade and Investment. Obama should use this as a launching pad to pursue FTA talks with Montevideo.

Whether or not the United States seeks to expand its trade relationships in the Western Hemisphere, China will seek to expand its own. Beijing is moving rapidly to boost its economic links with Latin America. Meanwhile, Venezuelan strongman Hugo Chávez is trying to enlarge his anti-U.S. trade bloc, known as the Bolivarian Alternative for the Americas. If Washington does not make hemispheric trade expansion a priority, it risks losing influence in the region. That would be bad for the United States, and bad for Latin America.

Jaime Daremblum is director of the Center for Latin American Studies at the Hudson Institute.

Image Credit: Darren Wamboldt/The Bergman Group.

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