U.S. Has Everything to Gain From CAFTA

Suddenly, the Central America Free Trade Agreement is revived from certain defeat in Congress. That’s great news for poor neighboring countries and also for business and agriculture in the U.S. -- and Southern California.

It also serves as a warning to China in the three-dimensional chess game that is international trade and politics.

The agreement, which will have hearings in June and could pass Congress this summer, would open access for products, services and investment between the U.S. and the countries of Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and the Dominican Republic.

For its Latin American participants, CAFTA would provide an opportunity to modernize their economies, and for the U.S. it would provide a tactical countermeasure to China’s exporting excesses.

When limits on trade in textiles and apparel were lifted under World Trade Organization rules in the first quarter of this year, China flooded the U.S. with shirts, blouses, bluejeans and underwear -- increasing exports in some categories by more than 1,000%.

But that has produced a backlash from the Bush administration. In the last 10 days, the federal government has slowed the flow of apparel from China by imposing limits -- called “safeguards”-- on some items to allow several years for U.S. producers to adapt.

On Friday, China agreed to raise its tariffs on textile exports in an effort to avert a trade war with the U.S. and Europe, although some Western manufacturers said it was too little to have a major impact.

Meanwhile, the Bush administration has garnered support for CAFTA from U.S. textile companies that had previously opposed the agreement. The idea is to reward neighboring countries by granting them access to the U.S. market, while introducing some competition for China’s export juggernaut.

One factor attracting textile industry support is that under CAFTA rules, apparel made in Central America would have to use U.S. fabric which is not the case for clothing made in China and the rest of Asia, where most basic garments are sewn.

CAFTA has the official support of all the governments involved, but it is not universally loved in Central America. Costa Rica, which is relatively advanced economically, has misgivings about competing with its neighbors’ lower costs in exporting to the U.S.

There is still plenty of opposition to CAFTA in this country, as well. U.S. sugar producers, which are heavily subsidized, want to block any imports, and unions object to low labor standards in the region’s developing countries.

But a little perspective is helpful in understanding the stakes in Central America. The region’s countries and economies are too small to have a major effect on any U.S. interest. The total population of the six CAFTA countries is under 50 million, and their annual economic output of about $170 billion is less than half that of Los Angeles County.

Furthermore, the U.S. has a vested interest in lifting living standards in these poor countries. The numbers of Salvadorans, Dominicans, Guatemalans and Nicaraguans who have immigrated to the U.S. total in the millions. And population growth is rapid in all the CAFTA areas. So improving regional prosperity could ease the flow of poor people seeking employment in the U.S. That said, free trade with Central America is not just about addressing social problems. It no doubt would provide a direct boost for some U.S. companies, too. For example, Southern California’s fashion business, which sends its designs to Central American factories for basic sewing, would “unequivocally benefit,” says Jong Kim, owner of Impressions Inc., an apparel distribution company in Los Angeles.

The Los Angeles fashion industry specializes in “juniors,” Kim explains, referring to the smaller sizes for young women. Such a trend-conscious business demands speedy turnaround on orders, which is easier and cheaper to accomplish from Central America than from Asia.

Indeed, that’s one reason Korean and Taiwanese garment companies own many factories in Central America and are shipping machinery there to expand production, says Bruce Berton, a director of Stonefield Josephson Inc., a Santa Monica-based accounting firm serving the textile and apparel industries. This promises a gain, not a loss, for the roughly 1,200 Los Angeles-area apparel companies, Berton says.

“The garment workers here are not sewing on machines, but designing and doing patterns on computers, handling merchandising and quality control,” he says. “More than three quarters of the value is with the U.S. company.”

Clearly, though, by far the most important effects of CAFTA would be on the poor countries of the region. They would suddenly be exposed to the enormous efficiency, productivity and skill of U.S. agriculture, industry and finance -- essentially a forced-march modernization.

“Our farmers produce basic corn, rice and beans. They will need time and assistance to upgrade their technology and productivity or they would be swamped by competition from U.S. agriculture,” says Alejandro Martinez Cuenca, a Nicaraguan economist and tobacco producer.

The main benefit to these countries is that an agreement would help qualify them for investment. “We would get an increase of foreign investment, but only if our financial and governmental institutions would improve,” Martinez says.

To aid that process, Martinez suggests the kind of infrastructure-building assistance that the European Union gave over the years to formerly remote and impoverished areas of Sicily, Spain, Portugal and Ireland, all of which flourish today.

Will the U.S. be as farsighted in raising standards among remote and impoverished neighbors in its hemisphere? The beginnings of an answer will come this summer as CAFTA moves toward passage.

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James Flanigan can be reached at jim.flanigan@latimes.com.