When "Free Trade" Agreements Are a Polite Form of Protectionism

Even some libertarians are under the delusion that regional free trade agreements are motivated by a desire to reduce trade barriers. In reality, states form trade associations to increase their bargaining powers on a global scale. As such, trade agreements are merely tools to promote the agenda of elites. Although Americans may be uninterested in the parochial affairs of Caribbean states, a recent trade dispute among members of the regional trade bloc Caricom aptly demonstrates the ironic effects of agreements purporting to advance trade. Essentially, here we see an international “free trade” agreement being used by a Dominica-based company to demand more limits  on trade between Jamaica and a country outside the bloc. A report published in the Jamaica Gleaner on December 11, 2020 puts the issue into perspective:

Dominica Coconut Products Successors [DCPS] Limited, the sole Caricom producer of animal fat and palm oil-based noodles that are the core ingredient for the production of soap bars, wants to lock Jamaican companies into buying its raw material over their current suppliers in Indonesia, in order for the local firms to continue qualifying for “community origin status” and the waiver of the 40 per cent common external tariff, CET, applied to products of non-Caricom origin…Jamaican government trade agencies sought clarification from the World Customs Organization, WCO, which ruled that soap noodles and finished soap products were designated under the same tariff code and should be treated similarly in the application of import duties.

The “problem” here is that it makes more sense for many Jamaican producers to get raw materials from Indonesia—which is outside the trade bloc—instead. The article continues:

The Jamaican producers, once designated by Jamaica’s trade authorities as legitimate manufacturers transforming raw materials into finished products, are allowed under local legislation to import raw materials from any source—including soap noodles from Indonesia—duty-free. This is a regime that Dominica is said to have also challenged, with significant pushback from the Jamaican Government, which has insisted that the Eastern Caribbean country cannot determine Jamaican law and policy.

By following the report, it is obvious that Dominica is seeking to protect its market from competition at the expense of Jamaican manufacturers aiming to secure cheaper inputs. Dominican businessman Yvor Nassief in a piece published by the Gleaner vigorously defends protectionism:

The soap-making process is called saponification….The Jamaican companies do not engage in this process. Instead, they import soap in chip form and skip the saponification process….By way of example, it is like importing chocolate chips used in chocolate chip cookies, heating and extruding those chips into bars and then claiming that you are making chocolates….None of us can ever compete against countries with populations of 70 million. Implicit in the Revised Treaty of Chaguaramas (RTC) is that no territory in this region—Jamaica included—can successfully compete against larger economies given their scale and lower labour costs, and hence the need for the protection as provided by the RTC.

From an economic standpoint, forcing countries to obtain expensive inputs from a designated provider makes no sense. But we should not be surprised, because regional trade agreements are usually a diplomatic form of protectionism. Member states demand duty-free access to regional markets on conditionalities, yet outsiders are often subject to high tariffs. However, when competition becomes really aggressive, the losing party like Dominica in this case will leverage antitrade mechanisms to punish competitors under the guise of breaching trade rules. As Nassief writes: “Why should a country of (more than) 2.5 million people seek, through unfair trade practices, to disenfranchise a small island with 70,000 people from its rights under the RTC? If DCPS can afford to play by the rules, they certainly can.”

Nassief could instead encourage Dominican manufacturers to invest in a sector in which they possess a competitive advantage or innovate. However, expecting protectionists to embrace competition when rent seeking seems more lucrative is foolhardy. The example of Caricom should instruct Americans to be wary of leaders cajoling them into regional agreement in the name of facilitating free trade.