Free traders have had plenty to chew on the past 18 months, as U.S. rhetoric and actions have fostered fears of a new round of trade protectionism. Yet, the U.S. administration has been steadily pursuing its goal of a Free Trade Area of the Americas (FTAA) at the same time.
Part of this broader strategy is the negotiation of a free-trade deal with the smaller economies of Central America, called CAFTA. An aggressive, nine-round negotiation schedule between the U.S. and Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua is expected to be completed by year-end. The recent bilateral deal with Chile may be seen in the same light.
How important is U.S. trade with Central America? Last year, U.S. exports to the region amounted to about $11 billion, or about 1.4 per cent of total exports, while imports were just over $13 billion. If this seems small, consider that Canada’s trade with the same countries is only $200 million in exports, and between $400-500 million in imports.
So, why the special effort? For one thing, the potential benefits might be much larger than suggested by the current trading relationship.
Canada’s bilateral free-trade agreement with Costa Rica, signed in April 2002, appears to have prompted a surge in two-way trade between the two countries. Indeed, it is a basic premise in economic theory that the benefits from international trade are greater the more different the two economies are, since they complement each other instead of competing. Even if most of the initial trade benefits fall to the smaller or poorer economies, the longer-term result is bound to be a stronger market for high-value U.S. and Canadian goods and services down the road.
But the main motivation behind the CAFTA process seems to be the hope that it will raise the odds of making a much bigger trade deal under FTAA. Such international negotiations inevitably get bogged down because of the sheer number of participants.
Establishing free-trade principles with a subset of members, particularly in cases where there may be fewer roadblocks, could add considerable momentum to the broader FTAA negotiation process.
On a political level, Canada is highly committed to FTAA, so any strategy that contributes to its success will also benefit Canada, eventually. In the meantime, there appears to be little or no scope for diversion of trade away from Canada as it loses its competitive advantage in the U.S. market to these Central American economies.
The bottom line? The world economy has benefited a great deal from trade liberalization, mostly undertaken during the 1980s.
Since then, multilateral free-trade negotiations have been difficult, and are likely to remain so. Therefore, it is sensible to pursue smaller, easier deals at the same time, especially if they will add momentum to the broader trade liberalization agenda.
(Stephen Poloz is vice-president and chief economist for Export Development Canada. He can be reached at spoloz@edc.ca)
