Today in 2005: U.S. House narrowly approves CAFTA

July 27, 2012

Today in Legal HistoryEarlier this month, the presidential candidates from the two major parties, President Barack Obama and Mitt Romney, exchanged jabs over which of the two is or would be the bigger “outsourcer-in-chief.”

Outsourcing here, of course, refers to implementing or embracing policies that send formerly American jobs overseas (i.e. closing a factory or call center located in the U.S. and relocating it in, say, China).

At a time of high national unemployment, espousing policies that encourage job outsourcing is political poison.

Although there will be many who disagree in this charged political environment, it’s highly unlikely that either of these candidates have taken any actions that would have as much of an “outsourcing” impact as the Dominican Republic – Central America Free Trade Agreement.

While its official acronym is “CAFTA-DR,” the agreement is more popularly known by CAFTA, which it was known as when it was first introduced (before the Dominican Republic joined the negotiations).

On July 27, 2005, CAFTA was approved by the U.S. House of Representatives by a narrow vote of 217-215.

The agreement became U.S. law when President George W. Bush signed the “CAFTA-DR Implementation Act” on August 6.

How did CAFTA encourage outsourcing of American jobs?

Characteristic of nearly all free trade agreements, CAFTA effectively swept away all tariffs, quotas, and other measures that protect domestic products.

Though there are other parts of CAFTA that may have encouraged outsourcing, this aspect of the trade agreement unquestionably has the biggest impact.

Specifically, Article 9.2 forbids each signatory nation (the U.S., Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and the Dominican Republic) from treating other signatory nations’ goods and services any differently than their own.

This section has a wide range of impacts.

First, it bans all laws that encourage supporting domestic products or services over foreign ones (i.e. “Buy American” laws).

Moreover, it also forbids signatory nations from treating “a locally established supplier less favorably than another…on the basis of degree of foreign affiliation or ownership…or on the basis that the goods or services offered by that supplier…are goods or services of another [signatory nation].”

Translation: the U.S. government can’t punish those who outsource to any of the signatory countries, nor reward the ones who don’t.

Thus, any proposed taxes on corporations that outsource cannot apply to corporations that outsource to countries with which the U.S. has a free trade agreement such as CAFTA.

So far, it seems that this provision just prevents government deterrence of outsourcing, but it certainly does a lot to encourage the practice, too.

On a very basic level, the elimination of tariffs serves to directly encourage outsourcing.

A tariff is a tax on imports or exports in and out of a country.

Consequently, they serve to promote domestic industries on both the supply and demand side.

On the supply side, tariffs make it cheaper to use domestic labor, products, and services by offsetting the cheaper costs of production in less developed nations with increased taxes.

In other words, the tariff would erase the savings that a corporation would otherwise gain by relocating its manufacturing operations abroad.

Tariffs also increase demand for domestic products and services by decreasing consumer prices on such products (by discouraging their exportation, thus increasing their market saturation).

Neoclassical economists are quick to criticize tariffs as a distortion of the free market system, and even quicker to tout the economic benefits of free trade agreements like CAFTA.

However, studies have been inconclusive as to the impact of CAFTA on the economy – with the exception of domestic unemployment.

Though it’s difficult to precisely discern the impact of CAFTA on this element because of other factors such as the Great Recession, it seems clear that CAFTA has contributed to a distinct rise in U.S. unemployment in the seven years since its enactment.

And although CAFTA may have caused quite a bit of outsourcing, its ongoing impact is its preventing either presidential candidate from taking definitive action to reverse it.