Trade Agreements should be signed for the right reasons

First Published: 2005-06-22

"I would say then to every nation on earth, by treaty, your people shall trade freely with us, & ours with you, paying no more than the most favored nation." Thomas Jefferson, in a letter to James Monroe, 1785

"The most extensive public benevolence which can commonly be exerted with any considerable effect, is that of the statesmen, who project and form alliances among neighbouring or not very distant nations, for the preservation either of, what is called, the balance of power, or of the general peace and tranquility of the states within the circle of their negotiations." Adam Smith, in The Theory of Moral Sentiments

Alejandro A. Chafuen, President and CEO, Atlas Economic Research Foundation addressing The Rotary Club of East Nassau on Friday, June 17, 2005.

The United States is the most successful single market economy experiment in the world. The great champions of liberty have always promoted free trade. Then why are market-champions from the Nassau Institute based in the most prosperous and freer economy of the Caribbean, opposing the current plans for the formation of a Caribbean Single Market Economy?

As in any association, it is a key that one joins for the proper reasons, which includes honouring the commitments required by membership. Listening to the arguments of some CSME promoters, and reading some of the provisions, it is easy to understand the prudence and stance of the Nassau Institute. Proper timing is also essential for free trade agreements, particularly for so ambitious a project as CSME. The United States failed in its first effort to create a similar, but less daring economic association, and I am not speaking here of FTAA. In May 1888 the Congress of the United States authorized the President to invite Latin-American governments to a conference in Washington to consider measures for preserving peace and security, forming a customs union, establishing better communications, adopting a common currency (based on silver), a uniform system of weights, measures, patent-rights, copyrights and trade-marks, while protecting for health risks due to this potential increase in trade. Sound familiar?

All the governments, except Santo Domingo, accepted the invitation to this conference, commonly known as the first Pan-American Conference. It met on the 2nd of October 1889, was presided over by James G. Blaine, the American secretary of state, who had been instrumental in having the conference called, and continued its sessions until the 19th of April 1890.

The majority of its members voted for most measures, from customs regulations to a monetary union, to common weights and measures, patents and trademarks, and creating an international American bank, and the building of an intercontinental railway. The more ambitious idea of the customs union was rejected and, as usual, the only agreement was the creation of a new bureaucracy: "The Commercial Bureau of American Republics" under the supervision of the State Department. Bureaucrats succeeded in getting their interests protected, but there was no progress on free trade. Just the opposite was the case. Soon after the meeting, also in 1890, the US Congress passed the McKinley Tariff Act which was, in the words of historian Clarence B. Carson, "the most thoroughgoing protective measure ever passed up to that time. The average duty rose to 49 per cent."Most countries at the time had very diverse institutional strength, and most relied on tariffs to pay for government expenses, which together with protectionist interests, helped to stall the process.

Free-Trade agreements always had strong enemies. Father Antonio Rosmini-Serbati (1797-1855), the great Catholic priest of the nineteenth century, noted that it is first the predominant families, who control major economic groups who oppose free-trade, only to be followed by "national selfishness." Some historians describe how these families forge friendships and alliances that can have a negative effect on the economy. James Bryce noted that "Private friendship or family relationship have a great effect on his conduct, and often an undue effect, for one is everywhere told that the difficulty of securing justice in these republics lies not so much in the corruptibility of judges, as in their tendency to be influenced by personal partiality. Things go by favour."

Protectionist clans will try to use all their pull to block any free-trade agreement that might affect their interests.

But our concern is not only for the enemies within. During the failed experience of 1888-9, the English were not so keen to see some of their great business allies, like Argentina, give preferential treatment to the USA. That surely played a role in slowing down the paths of continental integration. Today, other trade partners of Latin America and the Caribbean also feel threatened. "European companies lost almost half of their presence in the Mexican market after the integration to NAFTA" reported Jos? Mar?a Zufiaur, writing for Cinco Dias, on April 24, 2001. This critic of President Bush started his piece by stating "The Third Summit of the Americas has confirmed the expressed will of George Bush to place the Latin American and Caribbean relationship as the prime objective of US foreign policy." This was before September 11, 2001.

A key reason for creating trade associations and alliances is to; using the words of Adam Smith, increase "the peace and tranquility among nations." Is that what CSME will bring to Bahamas or will it be the opposite?

Friends of the free society are keeping an eye on Hugo Chavez, the ruler of Venezuela, a South American Caribbean nation. Although the price of Venezuelan oil has jumped from $10 to $50 during Chavez's tenure, they still manage to have a budget deficit, and some reports are showing that approximately $10 billion dollars are unaccounted from their state oil company. The potential use of this money for mischief or for gaining political control of small countries is a matter of concern.

CSME promoters speak about the need to "humanize" economic integration with a social and redistributive policy biased toward those who are less prepared for increased competition because they begin from a lower level of economic development. One should show concern for those who can't compete because they cannot escape the inefficiencies of state activity. But the solution here is to open educational opportunities rather than to create new machineries of state regulation and redistribution.

Some of these champions of CSME are explicit in saying that instead of expecting the benefits arising from the removal of barriers, they expect most of the benefits to come from a "process of cooperative development." If the coordination and harmonization of an increased amount of pooled resources is left to legitimate market players, small, medium or large, then we should not be alarmed. Yet over and over again, CSME champions flag the example of the European Union as a positive example. Is the goal to build more bureaucracies or to expand freedom in the Caribbean? The growing pains of the EU result from the effort to build an artificial bureaucratic and political unity rather than a unity that grows from the bottom up by the removal of barriers to the free movement of goods, capital, and labor. If the EU is the model, The Nassau Institute's concern is legitimate.

In order to support the creation of the CSME's Regional Development Fund, and the implementation of "affirmative action" policies to help the poorest countries, some mention the case of Ireland and Spain as an example. They point to Economic success of these countries as proof for the need for redistribution.

But if Ireland and Spain greatly progressed on their road to prosperity it was because they opened and liberalized their economies. Greece and other net beneficiaries of EU subsidies have not achieved better economic results because for long periods they failed to conduct necessary internal reforms.

Recalling the use of the Marshall Plan grants, Germany, the loser of WW II greatly expanded its economy because it led a market reform and liberalization movement. Whereas, Great Britain squandered resources with policies of nationalization and expansion of the welfare state.

Other provisions, such as the creation of a Caribbean Court of Justice, or giving constitutional standing to assure "decent wages" also deserve scrutiny.

One should also consider, that the countries that have advanced the most in free trade, such as Chile or Singapore, opened their economies before signing a bilateral trade agreement with the US. Small nations can lead the way, even when not joining politically led economic blocs.

The best way to analyze and debate these and other CSME issues is not behind the closed doors of bureaucrat offices but in the open and transparent market place of ideas such as is nurtured by the Rotary Club, the local media, the churches, and other organizations of civil society.

Institutions such as the Nassau Institute, contribute with its opinion and programs to bring freedom and prosperity to the Bahamian and Caribbean community.

Alejandro Antonio Chafuen has been president and CEO of Atlas Economic Research Foundation since 1991 and is president and founder of the Hispanic American Center of Economic Research. Chafuen serves as trustee and on the advisory boards of several European and Latin American institutes.

He is a frequent commentator on economics, security, and strategic threats in Latin America, as well as on the relationship between economics and ethics, such as corporate social responsibility and corruption. He is the author of Faith and Liberty (Lexington Books, 2003) (Econom?a y ?tica, RIALP), which has been published in different editions in Spain, Poland and Italy.

Chafuen serves on the board of the Chase Foundation of the Commonwealth of Virginia, on the board of the Acton Institute for the Study of Religion and Liberty, Grand Rapids, Michigan. He is also member of the advisory board of the Social Affairs Unit (U.K.) and since 1980, member of the Mont Pelerin Society. Chafuen is a Graduate of the Argentina Catholic University. He was Associate Professor at the Argentine Catholic University, the University of Buenos Aires, and The Hispanic American University, CA.

The views expressed are those of the author, and not necessarily those of the Nassau Institute (which has no corporate view), or its Advisers or Directors.

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