CAFTA: Free Trade and Non-Tariff Market Distortions and the need for common policy on Labor and Environmental Standards

By Evan Simpson

 Common institutions as part of free trade

Free trade isn't just about lowering tariffs and promoting investment opportunities in foreign countries, though both are important. A true common market would have to do more than allow for the free movement of capital and goods. It needs common regulations, common institutions, and common economic standards to meet the conditions of a free market.

From subsidies to environmental regulations, there are a wide variety of non-tariff barriers to trade between nations, many of which are in place for very good reasons. The protections of a minimum wage would not normally be discussed in trade negotiations, but a floor for wages is as much a barrier to free trade as a tariff or a quota. Most FTAs attempt to eliminate one set of barriers to trade while leaving others in place. The oft-cited benefits to free trade; increased productivity, rising standards of living, and increased competition, are all predicated on a truly free market existing after an agreement is put into effect. A case study of the flawed approach to free trade can be made of the proposed Central American Free Trade Agreement, a free trade pact between the United States and five Central American nations.

Asymmetrical markets under free trade agreements

CAFTA is based largely on the approach to trade of its NAFTA and Chile-Singapore predecessors. Nations agree to lower tariff barriers and open up domestic good and capital markets to foreign competitors. But CAFTA misses a slew of trade asymmetries dealing with labor rights, environmental regulations, health and safety codes, etc. While protections against virtual slavery, or poisons in food are warranted, they still have a trade distorting effect when nations do not agree to exactly what falls under each of these areas.

The United States maintains a myriad of labor laws, including a $5.15 minimum wage, regulations for overtime pay and numerous protections for unionization. Few regulations up to the United States standards are found in Central America, and those that are on the books are rarely enforced. El Salvador has been criticized for its lack of enforced labor standards by numerous organizations, and the government seems unlikely to change its lackadaisical approach to enforcement even if CAFTA is adopted. [i] The trade pact wouldn't require any higher standards of labor protections from Central America, merely that nations enforce the laws they already have on the books. [ii] The United States admirably recognizes other nations right to define their own labor laws, but differences in labor regulations in El Salvador and the United States make the trade environment less than free. Ideally, investment goes to the locations that are most productive, all other things being equal, sparking competition and a rise in productivity for all.

An example of how environmental regulations distort the free market can be taken from NAFTA. A Canadian firm, Methanex, produced the gasoline additive MTBE, which has begun leaking into groundwater in California. Gray Davis issued a regulation banning the additive, and Methanex sued claiming California was unfairly targeting its product with restrictions. [iii] Many critics point to this instance as indicative of the problems with dispute resolution and corporate free trade suits in NAFTA. Precisely the same mechanisms of Investor-State dispute settlement have been written into CAFTA under Article 10 Section B.

The problem isn't as much with specific mechanisms, or the control of corporations over states' sovereign abilities to ban what products they choose. The problem is the patchwork of environmental, health, labor and safety standards among trading partners. If Canada and Mexico had also banned MTBE, Methanex could not have sued. Investor-state disputes would be far less common if regulations were universal, and could not be argued as a single state's unfair regulation. Until there is some consensus as to what regulations are acceptable, and those regulations are standardized between trading partners, free trade will do more harm than good by maintaining unequal market conditions.

Free trade of labor, environmental and wage regulations

Instead of focusing on free trade of goods and capital, the United States could focus on free trade of institutions and regulations. If MTBE is a known pollutant, an international conference to ban the additive should be convened. If labor standards are too low in Central America, the U.S. ought to negotiate a rise in the minimum wage concurrently with drops in tariffs. Obviously Central American states are not soon going to be able to pay all workers $5.15 an hour. But important steps might be for the NAFTA/CAFTA nations to adopt the dollar as a common currency, at least allowing wages to be accurately compared, and a commitment from each government to raise the minimum wage each year, much as tariffs have been negotiated to fall annually.

Most, if not all, of the criticisms leveled at CAFTA would be addressed if common environmental and labor regulations were negotiated concurrently with common investment and import regulations. Free trade can be done in a way that minimizes market distortions and truly does benefit all people only if the United States broadens its vision of what free trade entails to include all the institutions necessary for common market conditions.

[i] “Deliberate Indifference: El Salvador's Failure to Protect Workers' Rights.” Human Rights Watch . Vol. 15, No. 5 (B). December 2003.

[ii] CAFTA Article 16.2

[iii] Andrew Duffy. “Canadians challenge California pollution rules under NAFTA.” The Gazette (Montreal, Quebec). October 27, 1999. A19.