Saturday, May 09, 2009
THROW THE MODEL OUT!
The following was published today in the Puerto Rico Daily Sun [Year 1, No. 198: p. 13]
It is way past the time we in the Caribbean and Central America should have abandoned once and for all the export based economic model that was more or less thrust upon us by our principle trading partner to the North. Unfortunately, much of Central America and a dwindling number of insular Caribbean states continue their fruitless pursuit of assembly industries for export to the US market. The assembly process is known in the US as 'production sharing' and the topic has been, until recently, a fixture of sorts among researchers at the US International Trade Commission (USITC). They regularly published lengthy reports ostensibly for members of the US Congress intent on maintaining as much employment as possible from their quondam industrial base within the borders of the United States. I am familiar with these publications because I used them frequently in my own research.
Hence, I am very familiar with the volatile nature of production sharing in the Caribbean Basin from its inception in the late sixties and early seventies to its virtual institutionalization in the eighties via the Caribbean Basin Initiative (CBI) and its many incarnations or reincarnations thereafter up to and into the new millennium. Once the import substitution model of yore was abandoned and countries slowly began to buy into the new outward oriented export paradigm, opportunities arose for entry into the largest and most lucrative market in the hemisphere (that of the U. S.). I won't go into the geopolitical forces behind this new “paradigm” other that to draw people's attention to the fact that the CBI was enacted “for” our region under the Reagan Administration shortly after the US invasion of Grenada, a period in history which also saw the rise of the Sandinistas in Nicaragua and several other insurgencies throughout Central America.
Preferential access schemes such as Section 807 of the US Tariff Schedule (subsequently replaced by Section 9802.00.80 of the new Harmonized Tariff System) linked with the Caribbean Basin Economic Recovery Act, as the CBI was more formally called, stimulated the garment assembly industry, which has historically been the largest sector by far in export processing zones throughout our region. A recent World Bank study [PDF] notes the region has witnessed 30 years of unilateral preferential access to the United States for certain products under the CBI and subsequently through the Caribbean Basin Trade Partnership Act (CBTPA), enacted in 2000. It correctly asserts that these preferential agreements have shaped the Caribbean external trade structure.
For example the garment/textile sector I refer to above grew from less that 1% of Nicaragua's exports to the United States in 1990 to close to 63% by the year 2003, according to data from the Economic Commission for Latin America [CEPAL-Mexico, May, 2006: pp. 29 - 30; PDF]. Although not as dramatic, a similar trend occurred throughout much of the rest of the region with garment/textile exports from Guatemala, El Salvador, Honduras and the Dominican Republic going from 26%, 29%, 24% and 39% respectively of exports to the US in 1990 to 60%, 87%, 78% and 49% in 2003. It should be noted that the Caribbean Basin carries out the vast majority of its external trade precisely with the United States. By all measures, this data should be viewed as a success story from the point of view of proponents of the export paradigm. As a matter of fact, the recently enacted Central American, Dominican Republic Free Trade Area, CAFTA-DR was crafted to a large degree to solidify those gains and provide for further growth into the future.
The problem is that the crafters of this policy ignored a glaring but simple truth that a beginning student of international economics is capable of explaining to anyone with an ability to listen. The truth revolves around a concept known as “trade diversion”. Anyone even remotely familiar with the ins and outs of worldwide garment commerce would have been aware that there was a gradual process of trade liberalization going on that straddled the turn of the century and that would profoundly impact importers like the United Sates. Added to that was the fact that the garment/textile powerhouse of China would be joining the free trade club, so to speak, and would consequently overwhelm any other exporter within the US and other markets, if free trade were to prevail.
What is disheartening, not to say thoroughly outrageous, is that US authorities were well aware of it, judging by the voluminous output on the topic produced prior to the fact by researchers at the USITC, not to mention half a dozen or so other non-government think tanks. Yet, US authorities perpetuated the preferential access schemes that “shotgun married” the Caribbean Basin's garment assemblers to their own moribund textile mills via the CBTPA. William C. Gruben of the Dallas Federal Reserve Bank was succinct when he described several years ago the outcome of the identical phenomenon in the case of Mexican textile/garment exports to the US:
“By their very nature, regional accords lower tariffs and regulatory burdens for members, giving them an edge over nonmembers. Trade diversion occurs when these preferential trade agreements encourage higher-cost imports of member countries to replace the lower-cost imports of nonmembers. Where trade diversion exists, economic theory suggests that all good things must end—at least for those that have benefited from the trade preferences. ... When the importing countries extend preferential trade benefits to more nations, the boom from the original diversion may be followed by a bust as new trading patterns emerge and the world’s low-cost producer regains its advantage. This may not always occur, but it’s exactly what happened with Mexico’s textiles and apparel. With the erosion of Mexico’s NAFTA edge, China increased U.S. sales. Mexico lost market share—and as a result, employment fell in the textile and apparel maquiladoras.”
And this is the exact same thing that occurred with the Caribbean Basin's US based export model! We bought into the orthodoxy, acquiescing ever so eagerly to the US marketing ploy like a herd of oblivious lemmings plunging trans-like over the perennial cliff. As if to rub salt into the wounds, the World Bank now tells us, as we founder in the throes of the worst economic downturn since the Great Depression, that although preferential trading schemes were established as a development tool to stimulate and diversify our exports, the prevailing consensus is that“…trade preferences have not delivered expected results...they have not helped overall trade performance”.
We have now come full circle. Can anyone honestly blame the region if some member countries are seeking out alternatives to US policy prescriptions, no matter how wrongheaded or erroneous they might be perceived as being from the US side? Who is going to want to follow a US economic strategy for the region if we have obediently been following them for the last thirty odd years only to end in the situation so aptly described by the latest World Bank report? President Obama rose to the US presidency on a promise for change. He was also given a rousing reception at the recent Summit of the Americas from a region reeling from economic decline. Is this really a new beginning or will we be left to eat merely words?