WASHINGTON, Nov. 17 (UPI) -- The collapse at Cancun of the Doha round of world trade talks was a major blow for world prosperity for the next decade. The likely collapse in Miami of the Free Trade Area of the Americas negotiations will be at worst a blip, at best a benefit -- FTAA, as an idea, was misguided from the word "Go".
This column is in two parts. In this first part I will outline the rationale for believing FTAA to be a mistake.
FTAA is pleasing to the George W. Bush White House because it appears to take seriously Latin America's economic capabilities, and thereby no doubt helps in Hispanic voting precincts. It is a natural logical extension of the North American Free Trade Agreement (NAFTA) that appears on the face of it to offer the best chance for the Latin American economies to upgrade their capabilities and standards of living. Add in Bush's need for support in the War on Terrorism, and it's easy to see why the administration has given this week's FTAA meeting a high priority.
However, the arguments originally advanced for NAFTA have not all been proved correct, and some of the arguments for NAFTA do not apply to FTAA.
Politically, the United States needs to avoid having an extremely impoverished nation on its southern border, which could inevitably be used as a recruiting ground for terrorism. Apart from the border with Canada, the U.S. border with Mexico is the country's most vulnerable point, and there is every reason to believe that improving the lot of the 105 million Mexicans will both lessen the pressure of illegal immigration and facilitate border control.
Economically, there is a very good logistical argument for manufacturing in Mexico goods for final sale in the United States. If the border controls can be made relatively speedy, then much of the Mexican industrial base is within a day's trucking of the southern United States. Hence goods manufactured in Mexico can be included in a U.S. company's production structure, without disrupting "just in time" inventory and logistical management systems.
While there may be a cost to low-skilled American workers from increased Mexican competition, that cost is finite. The population of Mexico is well under half that of the United States, and the increased wealth, whether in the form of lower consumer prices or higher business profits, deriving from U.S. companies utilizing low cost, readily available Mexican labor can provide opportunities for modestly skilled Americans in other sectors. Pat Buchanan was wrong; the "giant sucking sound" of jobs fleeing south of the Mexican border was only a moderate sucking sound, and the increased wealth from utilizing Mexico's labor cost comparative advantage makes up for it for the United States, and far more than makes up for it for Mexico.
Politically, NAFTA has been less successful. At the time it was implemented, it was believed that NAFTA would drag Mexico out of the Institutional Revolution Party(PRI)'s 70 years of autarkic socialism into capitalism, as well as ending the inferiority complex and suspicion with which Mexicans in general regarded the United States. This hasn't happened, and it doesn't look like it's going to happen. Vicente Fox, and the National Action Party (PAN), beat the PRI in 2000, but have made no progress on privatizing the oil company Pemex or the electric generation sector, both of which could have been rendered hugely successful and profitable by the market turmoil since 2000. PAN lost seats in the mid-term congressional elections this year, and now looks likely to lose the Presidency in 2006 to the Party of Democratic Action's mayor of Mexico City, Manuel Lopez Obrador, on a platform well to the left of the PRI's moderate presidents Carlos Salinas (1988-94) and Ernesto Zedillo (1994-2000.)
More alarmingly, Americans should not forget the bizarre outburst of anti-American feeling in Mexico after September 11, 2001, at a time when even France's leftist Le Monde was saying "We are all Americans now." NAFTA has made Mexico a business partner but not, it appears, a friend.
If NAFTA has been only a qualified success, the argument for FTAA looks weak indeed. The logistical and security arguments for NAFTA do not apply to FTAA. Land transportation from any part of Latin America other than Mexico is unreliable and slow, so no integration of production systems with those countries is possible, other than by sea or air, by which means the U.S. can easily be linked with any country in the world. The adverse effect on low skill Americans of opening up to competition with 550 million Latin Americans will be far greater than that of competition with 105 million Mexicans, because the U.S. population is dwarfed by comparison -- a weighted average of working class living standards throughout FTAA, towards which wage rates will converge given free trade, is far closer to the unpleasant Latin American level than to U.S. comfort. Conversely, the economic benefits to the U.S. of more efficient production are limited, as they are from subcontracting production to any distant low wage Third World country.
In reality, the U.S. economy and those of Latin America are not particularly well suited to close cooperation. Such cooperation cannot be a partnership of equals, like the European Union, because the wage rates and living standards of the U.S. are too far above those of Latin America for any "free movement of labor" equilibrium to be possible. On the other hand, the economies are not truly complementary. The United States is itself a substantial producer of the primary commodities in which Latin America has a comparative advantage, while in most areas where the U.S. could usefully subcontract labor costs, Latin America is nowhere near competitive with India or China. Thus neither the "partnership of equals" nor the "hub and spoke" model of economic cooperation work well, even without considering the political aspect.
Politically, FTAA also appears to be a bad idea, if only because U.S. economic and political dominance would make it very difficult to achieve any kind of balance within the alliance, so that Latin American resentment of its neighbor might well be intensified rather than relaxed by increased contact.
There is a sense in which the U.S. and Latin America bring out the worst in each other. On the U.S. side, it is notably not the free market capitalists of Silicon Valley who are pushing FTAA, but the crony capitalists of the Old Economy. They combine with the International Monetary Fund, the World Bank and USAID to ensure that policy discussions relating to Latin America are far more oriented towards poverty reduction, state solutions to problems, and to achieving an "understanding" of Latin American economic backwardness, than is the case with, for example, East Asia, even though many East Asian countries are equally poor.
On the Latin American side, resentment of the United States, and envy of its economic success appear to produce a truly poisonous political mix that makes propounding good economic policy more or less certain political suicide. It is notable, for example that even after Argentina's economic collapse the proponent of free market solutions, Ricardo Lopez Murphy, achieved only 16 percent of the vote, coming third and allowing the socialist and the kleptocrat to fight it out in the runoff. Latin America contains some of the most unequal societies in the world, yet its electorate is inordinately prey to voting for any egalitarian, anti-market nostrum that comes along. Even politicians who achieve a measure of economic success, such as (apparently) current Brazilian president Luis Ignacio (Lula) da Silva, do so only by reversing all the populist slogans by which they were elected. Meanwhile, at the top of Latin American society, the U.S. high-consumption, get-rich-quick culture is envied, and the rich seek not long term economic success but quick profits, and a lifestyle that would be the envy of Las Vegas.
There is another factor that makes FTAA a bad idea, and that is its effect on worldwide free trade. Ever since the EU began to draw closer together, in the late 1980s, political strategists have propounded the possibility of a world dominated by three giant trading blocks (alarmingly akin to George Orwell's Oceania, Eurasia and Eastasia, albeit with Britain a member of Eurasia not Oceania.) It is difficult to see why any reasonable person should find this vision attractive.
For those inclining to the left, such blocs would cut out most of the world's poorest countries, particularly in sub-Saharan Africa, condemning them to an eternity of handouts and economic failure. For those with an inclination towards the free market, it would be appallingly inefficient. "Eurasia" would have appallingly high costs of government, and an inexorable tendency towards economic rigidity. "Eastasia" would have very little access to most of the world's richest consumers, a huge labor surplus, and a tendency to drive wages down by Darwinian processes to sub-subsistence levels. "Oceania", or FTAA, would have little access to the world's most efficient manufacturing, and would be ridden by dissent between its stronger and weaker members.
Surely almost any other geopolitical line-up for the 21st century would be preferable.
In part 2 Tuesday I will outline the available alternatives to FTAA, for the U.S. and more particularly for Latin America.
(The Bear's Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that, in the long '90s boom, the proportion of "sell" recommendations put out by Wall Street houses declined from 9 percent of all research reports to 1 percent and has only modestly rebounded since. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)
