Central America Free Trade, Yes
Political and Economic Integration, No
Second only to the law of supply and demand, wealth creation through trade is a fundamental economic truth. The discovery of this truth is most often credited to David Ricardo and his theory of comparative advantage.
There are many and varied political currents about free-trade and free-trade zones, and special economic zones and export-zones and the like. These political currents come and go, but the underlying economic truth of win-win through trade remains. The US Congress is now debating whether to participate in a Central American Free Trade Agreement.
Whether or not to join or help create such an entity as CAFTA is not the purpose of this blog. Readers of Workers of the World Relax would know that, yes, I support free trade, unilaterally, as it helps those of all socio-economic classes (like other economic laws when untainted by politics) but the poor, who need cheap goods, most of all. Lower the borders to all goods and let the wealth creation for everyone begin! Keep the borders up and protect the special interests.
However one should be forwarned about going too far with political integration. Free trade is good as it creates wealth and self-respect in trading value-for-value, but economic policy integration is bad as it removes government accountability and creates counter-incentives for the governments involved to do the right thing.
Fiscal policy - government's unique ability to tax and spend - and monetary policy - government's unique ability to mandate use of its own currency within its borders - work in tandem. A government needs to borrow money if its fiscal policy is in the red eg when it spends more than it takes in. If a government is consistent in this behaviour it will have to pay more for its debt, and the interest rate for its government-issued currency will rise.
If a government is part of a common currency zone - sharing its currency with other nations who have their own national governments and their own fiscal policies - then it creates a beggar-thy-neighbor (known as moral hazard in economic law) - race for the bottom where everyone tries to outspend every one else. If the interest is set at one rate for all - then why not borrow more than your neighbor and take advantage of the low interest rate to borrow more cheaply that you would on your own ? Incentives matter.
Just like NAFTA, CAFTA has vocal well-organized professional passionate opposition. We all fear change, and no doubt hearts are in the right place. However, its best to deconstruct any hot-button topical argument: trade good, macroeconomic policy integration bad.
If the US Government is sincere about creating economic liberty and wealth-creation for all, we would expend our political efforts, and demonstrate leadership, by creating and sticking with a plan to untilaterally remove all barriers to trade imports to the USA. This would benefit those living in our country, and those trading with us.
Second only to the law of supply and demand, wealth creation through trade is a fundamental economic truth. The discovery of this truth is most often credited to David Ricardo and his theory of comparative advantage.
There are many and varied political currents about free-trade and free-trade zones, and special economic zones and export-zones and the like. These political currents come and go, but the underlying economic truth of win-win through trade remains. The US Congress is now debating whether to participate in a Central American Free Trade Agreement.
Whether or not to join or help create such an entity as CAFTA is not the purpose of this blog. Readers of Workers of the World Relax would know that, yes, I support free trade, unilaterally, as it helps those of all socio-economic classes (like other economic laws when untainted by politics) but the poor, who need cheap goods, most of all. Lower the borders to all goods and let the wealth creation for everyone begin! Keep the borders up and protect the special interests.
However one should be forwarned about going too far with political integration. Free trade is good as it creates wealth and self-respect in trading value-for-value, but economic policy integration is bad as it removes government accountability and creates counter-incentives for the governments involved to do the right thing.
Fiscal policy - government's unique ability to tax and spend - and monetary policy - government's unique ability to mandate use of its own currency within its borders - work in tandem. A government needs to borrow money if its fiscal policy is in the red eg when it spends more than it takes in. If a government is consistent in this behaviour it will have to pay more for its debt, and the interest rate for its government-issued currency will rise.
If a government is part of a common currency zone - sharing its currency with other nations who have their own national governments and their own fiscal policies - then it creates a beggar-thy-neighbor (known as moral hazard in economic law) - race for the bottom where everyone tries to outspend every one else. If the interest is set at one rate for all - then why not borrow more than your neighbor and take advantage of the low interest rate to borrow more cheaply that you would on your own ? Incentives matter.
Just like NAFTA, CAFTA has vocal well-organized professional passionate opposition. We all fear change, and no doubt hearts are in the right place. However, its best to deconstruct any hot-button topical argument: trade good, macroeconomic policy integration bad.
If the US Government is sincere about creating economic liberty and wealth-creation for all, we would expend our political efforts, and demonstrate leadership, by creating and sticking with a plan to untilaterally remove all barriers to trade imports to the USA. This would benefit those living in our country, and those trading with us.
posted by Cameron Weber at 5:37 PM
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