by Andrés Carranza Betancourt
President Trump’s Executive Order that officially withdraws the United States from the Trans Pacific Partnership (TPP) was welcomed in Central America. The region is home to the Dominican Republic–Central America Free Trade Agreement (CAFTA-DR), a free trade deal between the United States and Guatemala, El Salvador, Honduras, Nicaragua, Costa Rica and the Dominican Republic. CAFTA-DR countries showed signs of relief, as the TPP would have increased competition from Asia and challenged its main industries.
The Central American economy is heavily dependent on both U.S. exports and imports due to its geographic proximity and reliance on American foreign direct investment from multinationals. These companies have been mainly attracted by the region’s cheap labor and the reduction of tariffs as a result of CAFTA-DR. Consequently job creation, net exports and economic growth are dependent on the actions of these multinationals and on the accessibility to export to the United States.
The TPP’s tariff reduction scheme, which planned to eliminate an estimated 18,000 tariffs amongst the dozen participant countries, would have opened the door to countries in Southeast Asia to compete with Central America.
It is no secret that countries like Vietnam, who enjoy cheaper labor and better technology, would end up attracting multinational corporations currently established in Central America, damaging the local economies. In 2012, Vietnam exported almost $7bn US Dollars worth of apparel to the United States, accounting for 34% of US apparel imports. The TPP would have allowed Vietnam to export apparel to the US at a 0% tariff rate, making her exports even more competitive. This could have resulted in a 50% increase in apparel and footwear exports in 10 years. The situation however, on the other side of the Pacific, would have been grim.
So would have been the case of El Salvador and its strongest industry: textiles. According to the nation’s Central Bank, Vietnamese competition would have led to a fall in clothing exports between $106.7 and $380 million US Dollars. The country, heavily dependent on its so-called sweatshops would have experienced a fall of 0.7% in GDP. According to the President of the Salvadoran Association of Industrialists (ASI), the country would have lost at least 50,000 direct jobs and the region up to 300,000, due to the cheaper costs of production in countries like Vietnam, who according to the President of ASI, even enjoy government subsidies in their processes. The situation is similar in neighboring Honduras. Members of the private sector urged their government to join the TPP, in an effort to try and maintain their competitiveness against Vietnam. 26.4% of Honduras’ total exports come from the textile sector. Given that their attempt never materialized, the scrapping of the TPP is a relief.
Given President Trump’s stances on free trade and his willingness to re-negotiate the North American Free Trade Agreement (NAFTA), the fate of Central American economies remain in limbo.
The Salvadoran Ministry of Economy believes that the United States will not depart from CAFTA-DR, as it seems that Trump’s priority is NAFTA. During the Presidential Campaign, Trump repeatedly mentioned that the United States had a humongous trade deficit with Mexico, as a result of a badly negotiated NAFTA. This was his argument for re-negotiating the latter. Such argument is based on the premise that trade deficits cause job loss and hinder production and growth; common claims from anti-trade individuals. However, whether or not trade deficits are detrimental for US interests is a matter of debate amongst economists. The United States might import more than it exports. Nonetheless, according to Mark J. Perry, from the American Enterprise Institute, this is offset by a “corresponding investment surplus”, caused by foreigners eagerly investing hundreds of billions of dollars in America every year.
The extra income acquired by countries running a trade surplus might cause the country’s currency to rise. This would make her exports more expensive and less competitive. Hence it must let money flow back to its trading partners in the form of investment. The United States benefits from such flow back. Moreover, the United States’ trade deficits might also be caused by the fact that the Dollar is a global reserve currency. Transactions not involving the United States occur around the world in US Dollars. This creates pressure on the American currency, making it stronger and making American exports more expensive and less competitive. This is called the Triffin Dilemma, which claims that “the provider of the global reserve currency would need to run perpetual trade deficits to keep the world financial system from freezing, with those trade deficits potentially fueling domestic booms and busts.”
However, unlike NAFTA, the United States enjoyed a trade surplus of $5 billion US dollars with the CAFTA-DR nations in 2015. Likewise, according to the Department of Commerce, U.S. goods exports to CAFTA-DR supported an estimated 134 thousand American jobs in 2014. Only 0.56% of American imports come from Central America, even though for countries like El Salvador, exports to the United States comprise 47% of total exports. However, in the case of El Salvador, total exports to the United States summed up to $2.56 million US dollars and imports from the United States summed up to $4.09 million US dollars; a $1.53 million US dollars deficit.
Hence, following Trump’s belief that trade deficits are not beneficial for the United States, CAFTA-DR should be a pretty good deal for him.
Whether the Trump administration renegotiates or withdraws from CAFTA-DR will ultimately determine its stance on free trade in practice. Even though Trump is unhappy with NAFTA, he will attempt to re-negotiate and not scrap it. This indicates that he finds some value on free trade between nations. Given that CAFTA-DR already provides most of the benefits of trade surplus and job creation that Trump is looking for when re-negotiating NAFTA, it would be reasonable to maintain it the way it currently is. Nonetheless if the Administration decides to follow the simple rule of “buying and hiring American”, it is possible that CAFTA-DR has its days numbered. Although Central America does not have a strong manufacturing sector like Mexico, it does have a very solid textile one, due in part, to American companies moving abroad. That being said, Trump could attempt the same carrot-and-stick-like policies that he currently has towards the manufacturing sector – from border tax to de-regulation and tax cuts – with the textile sector, hoping to save or generate more American jobs. If the latter do not work, he could terminate CAFTA-DR once and for all.
It is evident that the United States would hold the high ground in every single scenario involving CAFTA-DR.
The dependency on the free-trade agreement is such, that the Central American countries would have to comply to Trump’s demands in case of a re-negotiation. President Trump also has the power to cripple the Central American economy with a mere signature. Nonetheless, unlike other free trade agreements, CAFTA-DR seems a win-win for both parties involved. The United States holds a trade surplus with the region and following Trump’s logic, this means a good deal. For the CAFTA-DR countries, even though they have a trade deficit with the United States, the free trade agreement has been a source of jobs, opened markets for the export of Central American goods and hence an important part of the region’s GDP. The economic future of Central America is uncertain. What is certain though, is that the fate of CAFTA-DR will show the world what a good trade deal looks like in Trump’s America.
Andrés Carranza Betancourt is a passionate learner in an exuberant world. He was born and raised in El Salvador and attends Bates College where he Double Majors in Politics and Economics and is part of the institution’s debate team. He has written various political articles in his home country for nationally-acclaimed newspapers and is an avid football fan (and refuses to call the sport soccer). Andrés enjoys a good time with family and friends and is committed to his country’s progress.
The views expressed in this article are those of the writer. The Contemporary takes no position on matters of policy or opinion.
The picture above was taken by the government of Chile of the leaders of the TPP, can be found here, and is under a CC BY-SA 2.0 license.