Yesterday, the president of the Dominican Republic Leonel Fernández announced that the DR-CAFTA free trade agreement between the DR and the U.S. will now take effect as of March 1st, 2007 (see RDnoticias.com). Is this a good thing for the DR and the U.S.? A recent Wall Street Journal article (“One Year After CAFTA“) claimed that the Central American Free Trade Agreement (or Tratado de Libre Comercio – TLC) has been an unqualified success. I do believe that free trade agreements are good for all countries involved, but also realize that—like any political decision—there are both winners and losers. While I am not a trade economist, below is some more of my opinions regarding CAFTA and a critique of the WSJ article.
The WSJ article claims that the Central American economies have been booming in recent years. This does not prove that CAFTA is causing the increased growth because correlation does not imply causation. U.S. economic growth or other structural factors may be driving Central American economic growth, not due to CAFTA.
The WSJ article also rails against the import-substitution strategy. While there are certainly import substitution success stories (see South Korea), this strategy relies on the government selecting industries in which the country has a competitive advantage; I am skeptical that national governments can be effective economic planners.
One issue that I worry about in regards to those who claim that CAFTA is an unqualified success is that of measurement error. CAFTA likely favors large-scale businesses, whose output figures are certainly included in national GDP figures. Small-scale farmers or small businesses may be hurt by CAFTA, but since it is less likely that these businesses are included in national GDP or trade reports, the damage to their business may not be included in national figures.
Like all free trade agreements, I believe that free trade is good for everyone in the long run, but free trade is not a magic bullet. There are likely to be short-run winners and losers from any free trade agreement, but in the long-run nations experience faster economic growth under free trade.