Trump’s Strangest Trade Idea Yet

January 16, 2019

This article was originally posted on World Politics Review.

The US government is still shut down over President Donald Trump’s demand for money to build a wall on the southern border. Children, mainly from Central America, are dying in a desperate effort to cross that border and escape violence in their home countries. So how in the world did somebody in the Trump administration decide it might be a good idea to cut trade ties with some of those countries?

Though trade officials would not confirm it, an unnamed official told McClatchy last week that the administration is considering kicking the Dominican Republic, El Salvador and Nicaragua out of the US trade agreement to which they are parties, along with Costa Rica, Guatemala and Honduras.

The administration is right to be concerned about Nicaragua’s return to authoritarianism under President Daniel Ortega, and tougher measures may well be necessary to discourage his government’s violence against the opposition since protests erupted there last spring. In the cases of the Dominican Republic and El Salvador, it seems they may be collateral damage in the administration’s trade war with China. Despite the fact that the United States broke formal diplomatic ties with Taiwan when it normalized relations with China many decades ago, the Trump administration last year withdrew its ambassadors from the Dominican Republic and El Salvador, as well as Panama, after they broke diplomatic ties with Taiwan in favor of recognizing Beijing. China views Taiwan as a breakaway province and refuses to establish formal relations with countries that recognize Taiwan’s sovereignty.

Administration officials are apparently concerned that the US trade agreement in Central America gives China backdoor access to the American market, despite strict rules of origin designed to prevent exactly that. Moreover, Costa Rica broke relations with Taiwan a decade ago and Panama did so in 2016. After these defections, only 17 countries worldwide maintain formal diplomatic relations with Taiwan. So why pick on these two countries? Why now? Are other US trade partners at risk?

The Dominican Republic-Central America Free Trade Agreement, known as DR-CAFTA, was signed by President George W. Bush and his counterparts in the region in 2005. The agreement achieved the Central American countries’ main goal, which was to preserve their export access—and the associated jobs—in the US market. When the negotiations began in 2003, those governments were afraid that a major export sector—apparel—would be devastated when the quota system used for decades to manage trade in the sector ended in 2005. At that point, China and other major apparel producers would no longer be constrained by quantitative restrictions, though their exports would still face relatively high tariffs in the US market.

By negotiating DR-CAFTA, apparel exporters from Costa Rica to the Dominican Republic could avoid high American import duties. They did, however, have to cope with rules of origin that required them to mostly use local or American yarns, fabrics and other materials in order to be able to export the clothing back to the United States duty-free. Those rules offset some of the tariff benefit by raising costs for the garment industry. But the deal also meant that, contrary to the Trump administration’s fears, the backdoor for Chinese transshipment of goods through the region was closed, at least in the apparel sector

Knitted garments, which were less affected by the rules of origin, remain the region’s largest export sector, by far. But it is also true that American negotiators regularly oversell the economic and political benefits of trade agreements. In Central America, the trade deal never delivered on Bush’s broader vision that, “By transforming our hemisphere into a powerful free trade area, we will promote democratic governance and human rights and the economic liberty for everyone.” While Costa Rica has remained democratic and largely stable, the Dominican Republic slipped from “free” to “partly free” on Freedom House’s annual rankings, and El Salvador and Honduras have been wracked by brutal gang violence. Amid a crackdown on protests that raised the specter of civil war, Nicaragua barely hung on to its “partly free” status in Freedom House’s 2018 report.

The violence and political repression, along with continued high levels of poverty in some areas, have contributed to the surge in migrants at the US-Mexico border, most of them from El Salvador, Guatemala and Honduras, as well as Mexico. Trade has clearly not promoted peace and democracy as hoped. But it is a mystery how the Trump administration thinks cutting off trade access and destroying jobs could do anything but increase pressure on the southern border.

With respect to Chinese influence in the hemisphere, there may be a basis for the administration’s concern. But under the right conditions, increased Chinese investment could contribute to economic growth, job creation and, maybe, fewer migrants. Even if those benefits fail to materialize, isn’t it more likely that cutting diplomatic relations and trade reduces US influence and drives those countries closer to Beijing?

Of course, the situation in Nicaragua is different. The administration has already imposed targeted sanctions on individuals in the Ortega government and others supporting it, and additional measures may be needed. Even if the sanctions do not elicit changes in Nicaragua’s behavior, they send an important signal for the Nicaraguan opposition and for international norms. But even in this case, broad trade sanctions would deepen the economic pain many ordinary Nicaraguans are already feeling as a result of the political unrest. And it would allow Ortega and his allies to deflect blame for the country’s economic woes.

As so often happens with Trump trade policies, the strategy behind this apparent threat against Central America is baffling. In none of these cases is it clear how kicking these three countries out of DR-CAFTA solves anything. And it would almost certainly make the humanitarian crisis on the US-Mexico border—largely manufactured by the administration’s own restrictive asylum and immigration policies—worse.

No one knows how seriously the administration is taking this idea. And the demurral by the US Trade Representative’s office suggests Robert Lighthizer may not be on board. One can only hope that this is just a trial balloon that will quickly be shot down.

Kimberly Ann Elliott is a visiting scholar at the George Washington University Institute for International Economic Policy, and a visiting fellow with the Center for Global Development. Her WPR column appears every Tuesday.


CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.