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Global Market Brief: A Time for Reflection on U.S. Trade Pacts?
In the first ever national referendum on a free trade agreement, held Oct. 7 in Costa Rica, the Central American Free Trade Agreement (CAFTA) garnered support from 51 percent of the voters (48 percent voted against the agreement). The referendum followed large-scale campaigns from both sides; U.S. labor groups supported a 100,000-strong demonstration against CAFTA in Costa Rica's capital while U.S. trade representatives warned that a rejection might lead the United States to withdraw preferred trade status for the Central American nation. Although the vote was close (a recount is currently under way), CAFTA's democratic approval in Central America's most politically stable country indicates that leftist and anti-trade sentiment is no longer sweeping Latin America, and a gradual reorientation to globalization, if not a complete embrace, is possible.

However, the day after Costa Rica's referendum, leading Democratic presidential candidate U.S. Sen. Hillary Clinton, who voted against CAFTA in the Senate, solidified the burgeoning anti-trade sentiment within her party by calling for a pause in negotiations on future free trade agreements until after a national reassessment of the role trade will play in the United States this century.

.Clinton's remarks and commitment to increased protectionism reflect not only the decidedly trade-weary labor and environmental constituencies within her own party, but also the growing skepticism on trade deals on the other side of the aisle.

In the Oct. 9 Republican U.S. presidential debate, leading candidates warned that the U.S. economy would be seriously harmed if the government turned against free trade, but many "second-tier" candidates advocated a more cautious approach to trade. A recent Wall Street Journal-NBC News poll found that six in 10 Republican voters think free trade is bad for the U.S. economy -- a sign that most Republicans could, in fact, be skeptical of further trade deals. This concern within the Republican Party is emanating largely from its evangelical base; ; many members of that base work blue-collar jobs that are most affected by trade agreements.

Public sentiment on trade changes with a nation's economic condition. Though free trade deals usually increase growth for the economies involved, there are always winners and losers, and the social dislocation and job insecurity that arise from increasing globalization often lead to a backlash against free trade. The United States is now experiencing this backlash, and right now -- particularly in the wake of CAFTA and the North American Free Trade Agreement (NAFTA) -- most Americans will not be receptive to a presidential candidate adamant about forging new free trade agreements.

Since NAFTA's implementation in the 1990s, labor unions across the United States have claimed that middle-class workers have lost jobs to Mexico as certain industries have sought cheaper labor south of the border, and that U.S. gains from NAFTA have benefited businesses and top wage earners without trickling down to the rest of the country. Furthermore, environmentalists have lamented clauses in NAFTA and other free trade agreements that allow investors and businesses to challenge national environmental laws that could restrict corporate operations and profits. The enormous influence China's economic success has had on the U.S. public's psyche and the perception that U.S. jobs are being eliminated by cheap Chinese labor also play no small role in the free trade backlash. The recent Chinese recall scares have brought consumers on board the anti-trade bandwagon as well.

Upon taking office, the 110th U.S. Congress' Democratic majority made it clear that it would demand certain labor provisions, including guarantees on foreign workers' standards and union rights, and that environmental laws would be enshrined in upcoming trade deals -- particularly those pending with Peru, Panama, Colombia and South Korea. Though the Democrats did work out a compromise with U.S. President George W. Bush on labor and environmental standards, many activists on the left in the United States say that such compromises are superficial and fail to meet their demands. These activists are not appeased and will keep the issues in the spotlight. Labor in particular is likely seeking a radical transformation in how Americans perceive trade and has plans to go beyond criticizing individual trade agreements.

Clinton's announcement eliminates any doubt that the entire Democratic Party, likely to be in control of Congress -- if not the presidency -- in 2008, is not hesitant to question the basis of current free trade deals. Because Clinton is generally taking the most moderate policy positions in the Democratic race in order to increase her chances in the general election, her stance on free trade leaves very little room within the Democratic Party for others to propose new trade deals in the next few years. Clinton has proposed reviewing trade deals every five years to ensure that the deals are meeting U.S. needs, though she has not specifically defined these needs and has called for more conversation on the subject. Furthermore, Clinton, among all candidates, would not take such a position unless her campaign felt that most voters would support that stance.

For the next few years, regardless of any decreasing antagonism in Latin America -- or anywhere else -- toward free trade, an increasingly populist U.S. Congress, which consists of many newly elected members who ran on an anti-free trade platform, will halt progress on any new free trade negotiations and possibly seek to revise existing agreements such as NAFTA. This has important implications for global trade agreements. For example, a breakthrough on the Doha round of World Trade Organization (WTO) talks will be postponed indefinitely, as few nations are indicating that they are willing to budge on agricultural subsidies and the U.S. farm lobby has not lost strength after national Democratic gains.

Furthermore, the new attitude toward free trade will affect the United States' geopolitical standing in the Western hemisphere. After CAFTA and a likely free trade agreement with Peru, further economic integration in the Western hemisphere likely will stall for several years as the U.S. political and economic landscape readjusts and stabilizes. After the 2008 elections, a Republican president would be hard-pressed to gain domestic labor's trust and push through any new trade initiatives; a Democratic president would hold off on such proposals at the beginning of his or her term in order to shore up support from the Democratic base. (However, it was a Democratic president -- Bill Clinton -- who oversaw NAFTA's passage and presided over the WTO's formation.)

One of the more geopolitically significant developments that will arise from the growing populism in the United States is China's growing influence among many developing nations the United States could be less prone to make deals with. Beijing is keen to tap into Latin American nations' commodity and energy supplies, and to secure their diplomatic recognition over Taiwan. It has spent a good part of the last decade courting Latin American governments with aid and loans but shied away from overtly threatening U.S. economic interests. Beijing will continue to approach countries in search of an export market and financial assistance as U.S. isolationism takes hold.

Some type of new trade paradigm, or pact "with the American people," would appear -- at least in rhetoric -- with varying degrees of enforcement under a Democratic government. To reassure its labor and environmental constituencies, the government could propose implementing environmental and labor standards that apply to all nations. This would decrease the haggling that takes place during every trade agreement negotiation and increase overall certainty for business. However, it would require increased tampering with other countries' domestic laws and make foreign nations less competitive. Furthermore, it would be extremely difficult for U.S. populists to get China -- the United States' second-largest trade partner -- to budge on its domestic policy, while less powerful nations would be more compliant. This is what makes setting a single, consistently enforced trade policy so difficult.

If U.S. populists cannot get the government to force further change abroad, ultimately there could be an agreement with business and labor for increased U.S. domestic spending on job retraining and increased federal provisions for "safety net" programs, such as higher minimum wages and greater union rights, as a precursor to any further trade expansion. This means that future trade deals will have costs beyond making labor constituencies angry; they will be accompanied by policies that require increased government spending and regulation