El Salvador and tariffs and CAFTA

I am teaching Econ 3, our introduction to international economics and development here at Santa Clara University.  I had a student in office hours today. She had spent last quarter in El Salvador on Santa Clara’s Casa de la Solidaridad program.  We started talking about the international trade theory section we had just completed (models of comparative advantage and effects of a tariff).  It was all very relevant to El Salvador.  One of the points I try to make generally in the class is that protection, in the form of tariffs and quotas, is a very expensive (socially costly) way to protect the jobs and livelihoods of workers.  First, because there is often a large loss of consumer surplus, and second because many imports are inputs into other products, and so protecting one sector harms other sectors that use the imports.  Like the maize sector: tariffs on corn hurt urban consumers, in the first instance, and also tortilla makers, retailers and restaurants, in the second instance.  Quantifying these effects is hard, and is what economists do for a living.  I’d take a good economist’s  quantification over an anecdote any day of the year.

So I was pleased to find Sam Morley’s (and co-authors) assessment of the effects of CAFTA-DR to be positive but small for El Salvador.  (CAFTA doesn’t change the tariffs on corm until 2020 apparently, they stay fixed at 20%.)  This doesn’t mean that there are not income redistribution effects: consumer definitely benefit, those willing to go work in maquila jobs benefit, and owners of small, low productivity farms are probably on net hurt by CAFTA.  The job of the Salvadoran government is to ensure sufficient social safety net for those displaced.  Guess what? There is an election in El Salvador today, we’ll see who wins.  Hopefully competent and compassionate policy will triumph. Here is the abstract of Samuel Morley Eduardo Nakasone and Valeria Piñeiro’s paper The Impact of CAFTA on Poverty, Distribution, and Growth in El Salvador (from 2007):

In this paper we develop a dynamic CGE model to examine the impact of CAFTA on production, employment and poverty in El Salvador. We model four aspects of the agreement: tariff reductions, quotas, changes in the rules of origin for maquila and more generous treatment of foreign investment. The model shows that CAFTA has a small positive effect on growth, employment and poverty. Tariff reduction under CAFTA adds about .2% to the growth rate of output up to 2020. Liberalizing the rules of origin for maquila has a bigger positive effect on growth and poverty mainly because it raises the demand for exportables produced by unskilled labor. We model the foreign investment effect by assuming that capital inflows go directly to capital formation. This raises the growth rate of output by over 1% per year and lowers poverty incidence in 2020 by over 25% relative to what it would be in the baseline scenario.

Now, there is another aspect to international trade treaties, and many argue this is the more important aspect. These treaties typically involve changes in regulatory practices and policies. For example, many trade treaties now regularly prescribe policies and practices for protecting foreign investors (against so-called “regulatory takings”, e.g. the Methanex case, that actually ended up being ruled in favor of the U.S. and California!) and for protecting foreign intellectual property (extending copyright and secrecy).   There are good reasons to strongly object to these provisions of trade treaties, including the Trans Pacific Partnership agreement that President Obama touted in his Sate of the Union speech.

About mkevane

Economist at Santa Clara University and Director of Friends of African Village Libraries.
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