Latin American Free Trade

©1996 by Dale Franks

Two years ago, America was the leader of the free-trade movement in the Western Hemisphere.  The result of that leadership was the extension of the North American Free Trade Agreement to Mexico, and the ratification of the Uruguay Round of the General Agreement on Tariffs and Trade.  Additionally, prospects for ever more far-reaching free trade agreements with other Latin American nations, most notably Chile, appeared favorable as well.  Since then, American policy toward free trade with Latin America has been completely reversed.

While Latin American nations press forward to complete a series of both bilateral and regional free trade agreements, the United States has remained aloof.  Chile, losing faith any prospect for fast-track approval to join NAFTA, is negotiating bilateral agreements with Canada and Mexico.  The South American Mercosur trade and customs union is also busily instituting a freer trade regime among its members.  But in the United States, the issue of free trade has withered since the acrimonious debate over the ratification of GATT.

The main argument against free trade in the United States has been the supposed loss of jobs in America as they were exported to other, lower-wage countries.  Protectionist opponents of free trade have exploited the fear of what Ross Perot colorfully termed the "huge sucking sound" of jobs leaving the country.  But the experience of NAFTA so far is that the imagined flight of jobs to Mexico has remained just that: imagined.  In fact, a recent poll by Reforma, a leading Mexican newspaper, indicates that the general belief in Mexico is that jobs have transferred to the United States rather than the reverse.

It is also important to remember that even though a country may have lower wage rates than our own, it does not automatically follow that unit labor costs in that country are, in the main, any lower than those of the United States.  Lack of infrastructure, low productivity, excessive government regulation, and a poor level of education among the work force add to unit labor costs  over and above the cost of wages alone, and may be so high as to be uncompetitive with US industry.  The problems enumerated above are precisely the problems most Latin American countries face to one extent or another.  As a result, while some low-skill jobs may be transferred to Latin America, there will be no mass migration of production to those countries in the immediate future.

There may very well be some loss of jobs in the United States under a free trade regime, but experience has shown that these job losses will most likely come from less productive, less competitive industries.  While this will undoubtedly cause dislocation for some Americans, it will also free up a part of the labor force for training and employment in other new high-skilled, more value-added industries over the long term.

Implicit in the jobs argument is also the worry that low-priced imports will put pressure on domestic firms, causing further job losses.  For some firms, this may undoubtedly be true.  But for the vast majority of American consumers, goods of lower cost and equal or better quality will be more universally available.  Also, this argument discounts the competitive ability of American firms.  Japanese competition in the 1980s was certainly difficult for the US auto industry.  But that same competition immeasurably improved the quality of American-made automobiles, and has allowed the US auto makers to seek aggressive expansion in overseas markets.  Competition may be difficult, but its existence provides industry with much more robust health and flexibility.
By refusing to push for increased free trade in our own hemisphere we are also depriving ourselves of lucrative export markets.  As incomes rise and economic growth increases in Latin America, the demand for goods and services that cannot be produced in the Latin American economies rises commensurably.  By neglecting to aggressively push for lower levels of tariffs among the Latin American nations, we are closing off our ability to export goods and services to one of the world's fastest-growing regions.

Moreover, free trade is a good thing for the Latin American nations as well.  The economies of Latin America desperately need the impetus for reform that free trade would provide.  The 1996 edition of the Heritage Foundation's Index of Economic Freedom shows that, of the 26 Central and Latin American nations, 16 have economies that can be classified as "Mostly Unfree" or "Repressed".  The Latin American economic model of excessive regulation, wage and price controls, high levels of tariffs, and state ownership of industry has seriously crippled economic growth in the region.

In the United States, small business has become the main engine of economic growth.  But in many Latin American countries, regulation alone provides an almost insurmountable barrier to starting a new small business.  Predictably, small business activity in many regions is, for all practical purposes, non-existent.

An interesting indicator of how well the economy provides goods and services to the population is the level of black market activity.  There is a direct correlation between economic freedom and the level of black market activity in a given economy.  In those Latin American nations with less economic freedom, black market activity is rampant.

A free trade regime would force the Latin American Governments to divest themselves of notoriously inefficient state industries such as Brazil's Petrobras.  Regulation of private industry would have to be drastically reduced.  Barriers to foreign capital would have to be dropped.  In such an environment, opportunities would be opened for a host of entrepreneurs to start new  businesses.  Jobs lost in the public sector as state-owned industries are divested and streamlined would be absorbed by a rise of private sector employment.

A huge amount of fiscal pressure would also be taken off the various governments in the region as they divested themselves of the need to subsidize their more inefficient industries.  More stable fiscal and monetary policies would go a long way towards eliminating the perennial hyperinflation that has plagued the region.

An extension of free trade throughout the western hemisphere is a win-win situation for everyone.  The United states gains by the opening of new markets for its products and services.  The Latin American nations gain by freeing their economies and immensely expanding the opportunities available to their people.

It is past time for US policy makers to push for an extension of free trade to our neighbors to the south.

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