THE COMMITTEE ON ENERGY
TRADE, AND CONSUMER PROTECTION
APRIL 28, 2005
DR. RUSSELL ROBERTS
SMITH DISTINGUISHED SCHOLAR, MERCATUS
GEORGE MASON UNIVERSITY
Mr. Chairman. Representative Schakowsky. Members of the committee.
Thank you for the opportunity to appear before you and discuss
CAFTA, the Central American Free Trade Agreement, which now includes
the Dominican Republic as well.
On the surface, CAFTA would seem to be an easy agreement for
the United States to support. Many products and services already
arrive duty-free in the United States from Central America. But
under CAFTA, many products and services currently protected in
Central America would now have to compete with American exports,
opening markets to numerous American products.
Yet CAFTA remains highly controversial with concerns that the
agreement will cost the United States jobs trying to compete
with low-wage workers in Central America working in a less demanding
Having recently traveled to Costa Rica at the invitation of
the State Department to speak on trade issues, I was struck by
the similarity of the concerns raised in Costa Rica. Surely,
little Costa Rica would have no chance of standing up to the
United States economy. Jobs would be lost to the powerful American
Both arguments cannot be right. It cannot be that employment
in both economies will shrink as the other expands. One of these
worries is wrong. Or both are. But both cannot be right.
Both are wrong. When NAFTA passed, we were told of the millions
of jobs that would inevitably flow to Mexico because of Mexico’s
lower wages and less rigorous labor and environmental standards.
Yet those fears were unrealized. They were no more plausible
than the notion that all of America’s jobs would end up
in Mississippi because of Mississippi’s low wages.
Trade changes the kind of jobs we do, but in a flexible labor
market, particularly one as dynamic as the United States, the
number of jobs is determined by how many people want to work
and the skills they have. The main effect of trade is to allow
both trading parties to use their skills wisely and effectively.
Costa Rica currently has a state monopoly on telecommunications.
There are a lot of engineers employed by that state monopoly.
What will happen to them when that monopoly is opened to competition
by CAFTA? Some will keep their jobs working in areas like land-line
phones that the government will probably still be able to provide
competitively. Some will find work with American firms now free
to operate profitably in Costa Rica. Some will lose their jobs
and find work as engineers outside of the telecommunications
industry. And some will lose their jobs and find work outside
The average Costa Rican who is not an engineer employed by
the state-run telecom company will be better off. The average
Costa Rican will enjoy lower prices and more choices. That will
mean more resources left over to do new things with, new products
and services to enjoy that were not affordable before. That in
turn will mean more employment in Costa Rica as those products
and services expand, offsetting any job losses in the engineering
The bottom line for Costa Rica is better phone service and
internet access at lower prices and more opportunities created
elsewhere in the economy. Understandably, Costa Rican engineers
are nervous about the uncertainty and challenges of the future.
But the net effect on Costa Rica would be positive.
The same logic applies to the Costa Rican car industry. Wisely,
Costa Rica doesn’t have a car industry—it would be
too expensive. It would create inefficient and unproductive jobs
in the car sector relative to other sectors. By importing cars,
Costa Rica gives up those jobs and creates jobs elsewhere. By
importing cars, Costa Rica uses the skills of its people more
wisely and the result is less expensive cars for Costa Ricans
I spoke to a wide array of people in Costa Rica—students,
journalists, labor representatives and government cabinet ministers.
Being a small country that has undergone a great deal of economic
change in the last 25 years, they were very aware of the benefits
of being part of the global trading system. They also understood
the uncertainty and unpredictability of the future. But most
Costa Ricans I spoke to embraced that change as an inevitable
part of growth and the transformation of their economy.
But they would always ask the same question. If trade is good,
why doesn’t CAFTA allow Costa Rica to export sugar freely
to the United States? Costa Rica is willing to cope with the
challenge of competing with American telecom engineers and American
telecom companies? Why isn’t America willing to cope with
the challenge of Costa Rican sugar farmers?
They were referring to the fact that while American farmers
and telecom companies and medical device companies would have
relatively open access to sell their products in Costa Rica,
sugar farmers in Costa Rica would have very little freedom to
sell their sugar in America. Despite the words “free trade” in
the title of the agreement, CAFTA would allow only the tiniest
of expansions in sugar imports phased in over 15 years. CAFTA
limits the expansion of sugar imports into the United States
to less than 2% of US consumption over the next 15 years.
Why do Americans fear Costa Rican sugar?
They don’t, I would explain to my hosts in Costa Rica.
Not most Americans, anyway. In fact, keeping out foreign sugar
punishes me and every other consumer in the United States. The
US price of sugar is roughly double that of the rest of the world.
We are punished, not you, I explained, by the decision to keep
out virtually all sugar from Costa Rica that might come in under
a truly open market. Jobs created in the sugar industry are offset
by job losses in the American candy and food industries and elsewhere.
So we negotiate a trade agreement with some of the poorest
countries in the region but we make sure that one of the things
that they do best, grow sugar, is essentially off the table.
There is no attractive way to defend that policy when you’re
standing in the fields of a poor country.
It makes no more sense for America to insist on always growing
its own sugar than it does for Costa Rica to use protectionism
to create a Costa Rican car industry. But that is what we have
decided with CAFTA.
So CAFTA is not perfect. In a perfect world, sugar would be
freely traded along with telecom services and cars and tourism
and ornamental plants and corn and chicken. But CAFTA is a step
in the right direction. It lowers trade barriers on an enormous
range of products that are traded in the region. The best should
not be the enemy of the good. CAFTA will encourage the signatories
to the agreement to do what they do best and the result will
be a higher standard of living for all of the partners to the
Ironically, despite the special treatment of the American sugar
industry in CAFTA, the American sugar industry has become the
flashpoint for the debate over the agreement in this country.
Even though the sugar industry gets preferential treatment, even
though the sugar industry has quotas and tariffs in place that
isolate them from world competition, even though the sugar industry
has made sure that CAFTA leaves their domestic monopoly virtually
intact, somehow, the entire debate over CAFTA is about fear of
losing jobs in the sugar industry.
That’s quite an achievement for an industry with less
than 60,000 employees. (The sugar industry claims there are 372,000,
but that number is inflated by counting corn sweetener jobs and
then multiplying the total by two and a half.) About 8 million
jobs are destroyed and created every quarter in the US economy.
When the economy is going well, more jobs are created than destroyed.
When we are in a recession, more jobs are destroyed than created.
But the norm is good times—a growing economy where there
is net job growth, where more jobs are created than destroyed.
But even in good times, millions of jobs disappear for thousands
of reasons—companies go out of business, consumers decide
they want fewer of one thing and more of another. These jobs
are replaced by new jobs in new companies or companies that are
Millions of jobs appearing and disappearing. That is a sign
of great economic health, that churning of jobs in response to
new desires, new information, new technology and new opportunity.
All of those jobs destroyed and created in response to economic
change. It is a strange thing to exert all this political energy
to stop economic change in one tiny sector, the sugar industry,
but because it is identifiable, the sugar jobs and the sugar
profits get special treatment.
Our natural concerns for workers in the sugar sector and other
sectors that will be affected by CAFTA should not confuse us
about the costs of stopping the economic changes that CAFTA will
bring. Economic changes like free trade create our standard of
living and the incredible opportunities that each generation
has to shape the world according to its dreams and skills. Without
economic change, without trade, without innovation, our economy
would be stagnant. A dynamic economy and a growing standard of
living are the greatest gifts we can give each generation.
Even with such benefits, economic change is always challenging,
no matter its source and no matter how small or how fair such
change is. I was explaining to my children how understandable
it is for people to fear change and competition. For example,
I explained, imagine being a white baseball player when there
was discrimination in baseball and African-American players were
not allowed to play in the major leagues. You would be worried
about losing your job to a better player. My seven-year old did
not find this understandable. What about Willie Mays, he wondered.
And he told me that the white players should have been in favor
of letting African-Americans play because it would be good for
the team. Besides, he said, keeping out some players because
of the color of their skin isn’t nice.
That got me thinking about the Dominican Republic. At the start
of this year’s baseball season, 385 players born in the
Dominican Republic had played in the major leagues including
Pedro Martinez, Sammy Sosa, Albert Pujols, Miguel Tejada, Vladimir
Guerrero and Manny Ramirez. Surely, the game of baseball is better
for allowing them to play here. Surely our lives as fans have
been enriched by their excellence. And surely their lives have
been enhanced by the opportunity to play here.
Who would argue that we should keep them out in order to create
more opportunity in baseball for native-born Americans? As my
seven year old understands, that would not be nice. And it would
be bad for baseball and its fans.
It is good that we have let players from all over the world
come to America to use their skills to their greatest advantage.
Both America and those players benefit. And it will be good to
let other things besides baseball players come to the United
States from the Dominican Republic and her fellow nations in
Central America. In return, we will send our products using our
skills to help them in return. CAFTA will be good for the United
States, good for the Dominican Republic and good for Central
America. It will raise the standard of living of each nation,
but perhaps more importantly, it will make sure that the peoples
of each nation have the greatest opportunity to use their skills
in the most effective and productive ways.