Latin America Wants Free Trade

By Mary Anastasia O’Grady
Monday, September 8, 2008

Of the two U.S. presidential candidates, one promises to expand international trading opportunities for American producers and consumers. The other pledges to raise the barriers that Americans already face in global commerce.

For Latin America, this is the single most important policy issue in the campaign. If Republican candidate John McCain wins, he says he will lead the Western Hemisphere toward freer trade. Conversely, Democratic candidate Barack Obama has promised that he will craft a U.S. trade policy of greater protectionism against our Latin neighbors. The former agenda will advance regional economic integration, the latter will further Latin American isolation.

Anyone who has read 20th-century history knows the seriousness of this policy divide. The last time Washington adopted a protectionist stance toward our southern neighbors was in 1930, when Congress passed the Smoot-Hawley tariffs. It took more than 50 years to even begin to climb out of that hole.

Many economists blame Smoot-Hawley for the depths of the U.S. depression. But Latin Americans have suffered even more over a longer period. Their leaders chose to retaliate at the time with their own protectionist tariffs, but the damage didn't end there.
In his 1995 book "Crisis and Reform in Latin America," UCLA professor Sebastian Edwards writes that though there was a brief period of liberalization in Argentina, Brazil and Chile in the late 1930s, it didn't last long. Adverse conditions brought about by World War II prompted the region's policy makers to restore tariffs, in the hope that protectionism would stimulate economic development.

"By the late 1940s and early 1950s," writes Mr. Edwards, "protectionist policies based on import substitution were well entrenched and constituted, by far, the dominant perspective." The U.N.'s Economic Commission on Latin American and the Caribbean, he adds, provided the "intellectual underpinning for the protectionist position."

Protectionism made a mess out of the region, and not only because spiraling tariffs and nontariff barriers blocked imports and destroyed the export sector. They also provoked an intellectual isolation as the information and new ideas that flow with trade dried up, along with consumer choice and competition. This had a deleterious effect on politics too, as closed economies spawned powerful interests which seized not only economic but political control and grew entrenched.

According to Mr. Edwards, it was only in the late 1980s and early 1990s that U.S. and Latin leadership (not counting Chile, which liberalized earlier) began to recognize the twin unintended consequences of this model -- poverty and instability -- and decided to act. "Tariffs were drastically slashed, many countries completely eliminated import licenses and prohibitions and several countries began negotiating free trade agreements with the United States."

Mexico and Canada signed the North American Free Trade Agreement with the U.S. in 1993, but the regional opening process continued well into this decade. A U.S.-Chile bilateral agreement kicked off in 2004. Five Central American countries and the Dominican Republic signed their own FTA (Cafta) with the U.S. in 2006. Peru's FTA with the U.S. was finalized in 2007. Colombia and Panama have signed agreements with the U.S. that are awaiting ratification by the U.S. Congress.

It is true that unilateral opening would have been a superior path. Yet for a variety of reasons -- not the least the political attraction of reciprocity -- FTAs have become fashionable. And there is no doubt that the agreements, warts and all, have aided in the process of dismantling trade barriers, strengthening the rule of law, and moving the region in the direction of democratic capitalism.

Mr. McCain wants the U.S. to continue its leadership role in opening markets in the region. He favors ratification of the Colombia and Panama FTAs, which the Democratic-controlled Congress is blocking. He also wants to lift the U.S.'s 54-cent tariff on Brazilian ethanol, and he wants to preserve Nafta.

Mr. Obama would reverse regional trade progress. He supports House Speaker Nancy Pelosi's opposition to the Colombia FTA, even though it will open new markets for U.S. exporters. He promises to "stand firm" against pacts like Cafta and proposes to force a renegotiation of Nafta, which is likely to disrupt North American supply chains and damage the U.S. economy. By heaping new labor and environmental regulations on our trading partners, his "fair trade" proposal will raise costs for our trading partners and reduce their competitiveness.

Perhaps worst of all, his antitrade bias will signal the region that protectionism is back in style in the U.S., and encourage new trade wars. No good can come from that, for the U.S. or for Latin America.