CAFTA Clears the Senate

The Central American Free Trade Agreement (CAFTA) has cleared the Senate by a vote of 54-45 and moves on to the last hurdle the House of Representatives. The vote was one of the narrowest votes for a free trade agreement in over a decade. Further, the vote in the House is expected to be much closer since there has been quite a bit of resistance to the trade agreement.

The resistance has come from some Democrats and also some Republicans. The latter being elected offiicials from states that rely on the sugar industry. CAFTA will allow a 50% increase in sugar imports overa 15 year period of time. Basically, you get to witness the fine art of rent protection.

Rents are economic profits that are not earned. For example, a monopolists profits (i.e., economic profits, or profits over and above accounting profits) are due solely to the monopoly status of the firm and nothing else. Hence these profits are “unearned” in that they are merely a transfer of consumer surplus to the producer (monopolist). Now, rents can be aquired via the political process and this is termed rent seeking. Further, one might very well have to protect whatever rents one has acquired and this is rent protecting.

Tariffs and other barriers to trade restrict competition and raise prices and allow firms in the protected market to earn economic profits (although not necessarily monopoly profits). Thus, these profits are rents and these firms will fight to protect these rents. In this case, the reduction of trade barriers on sugar imports are seen as a direct threat to these rents and the industry is fighting to keep it from happening. The problem with rent seeking and rent protecting is that it is “socially wasteful”. Since it restricts output, the economic profits are due only to limits on trade, and increases the price it is basically considered a bad thing.1

So it will be interesting to watch what happens with CAFTA. Who will win? The sugar related industries or the consumers/free trade advocates. For those of you who have read Mancur Olson the advantage would seem to go to the sugar related industries in that they are smaller, and the costs of organizing are probably smaller than it is for consumers.
1One possible exception is where the restriction on trade also improves the quality of the good in question. For example, if a law was passed requiring periodic testing to assure current knowledge of a given field of service then it is possible that the losses due to the restriction on trade is offset by the gains in quality. However, this is not a given and is an empirical question, and can’t be settled by theory alone.

FILED UNDER: Economics and Business, Latin America, US Politics
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.