Omar Chedda, Guest WriterIn February of this year, US presidential candidate Senator Barack Obama proposed that he would stop providing tax breaks for companies that were shipping jobs overseas through outsourcing activities and instead give tax breaks to companies that invested in the United States.
This was an ominous sign of a possible protectionist attitude that the US could adopt to curtail outsourcing activities of US firms were Obama to win the November Presidential elections.
Outsourcing jobs
Obama's statement against outsourcing of jobs by US companies rang alarm bells among the corporate sector and even countries like India which benefits from these outsourcing of jobs.
However, on June 9, he said that his proposed policies would make the US economy strong and competitive again by expanding opportunity outward rather than clamping down on outsourcing to countries like India and China.
This apparent contradiction can be interpreted as Obama's response to the varied interests that he has to consider in the run- up to the Presidential elections. By 2015, Forrester Research in the US estimates that as many as 3.3 million US jobs and US$136 billion in wages could be moved to such countries as India, China and Russia.
However, despite the voices of opposition from those sectors that have lost out from the global restructuring of firms, most economists agree that outsourcing has increased the competitiveness of US firms and, hence, their profitability.
Notwithstanding Obama's predilections, a major form of outsourcing by US firms to utilise the advantages of Offshore Financial Centres (OFCs) has been coming under increasing regulatory and legislative restrictions which threaten to suffocate the industry.
Pressure on OFCs
Global financial governance has to some extent facilitated the stability and safety of the international financial system.
However, the massive increase in international conventions and legislation in developed countries, such as the US, to monitor and regulate the flow of capital has made the establishment and maintenance of OFCs much more difficult, and has restricted the demand for such centres.
This regime of global financial governance has created barriers to entry for small developing countries, and has resulted in additional costs on the use of OFCs. Consequently, the developmental potential has become limited for small economies, as these countries find it increasingly difficult to meet all the required standards.
Within a competitive market, less intrusive environments were used as a marketing tool to attract capital from jurisdictions that were more highly regulated. However, with the new global regulatory structure, small economies have lost this competitive advantage.
The Republican and Democratic presidential candidates have differentiated their campaign strategies on trade policy by appealing to either free trade or protectionist interests, with a view to mobilising a support base that will lead to victory in the November elections.
Republican John McCain has voiced unreserved support for free trade deals, while his Democratic rival, Barack Obama, has argued that labour and environmental concerns must come first.
Renegotiating NAFTA
Obama originally proposed renegotiating the North American Free Trade Agreement (NAFTA) to include stronger labour and environmental provisions but, as was expected, he has since softened his position.
He has also expressed opposition to free trade agreements with Colombia, for similar reasons, and with South Korea because of the failure to remove regulatory barriers for US exports.
He has promised to be much more vigorous in making sure China and other countries honour their trade commitments.
Obama supported a free trade agreement in 2007 with Peru after the Bush administration included more stringent labour and environmental provisions demanded by Democrats. Colombia agreed to the same changes in its arrangement with the United States. However, responding to pressure from US labour groups, Obama has argued for further review of Colombia's treatment of workers.
Professor Dan Tarullo of Georgetown University, Obama's trade adviser, explained that he was not anti-trade, but would shift US trade policies to protect workers and the environment and would make sure that US exports were not put at a disadvantage in trade arrangements.
Obama's trade focus will be on reciprocity.
The presidential candidate explained that America's current trade policy was based on an era when the US was the dominant economic force in the world, and many countries were struggling to catch up.
Those countries have now caught up, especially in the case of India, China, Brazil, at least in trade competitiveness. However, many of these countries continue to have lax labour and environmental laws, giving them a cost advantage.
Part of the problem that the US is facing in its trade agreements, according to Obama, is that US companies outsource or seek OFCs in order to get out from under standards that are important to US consumers and workers, or avoid regulatory scrutiny, then export the goods or services back into the United States.
This apparent friction between the promise to protect US workers from the ill effects of trade and the pledge to boost US cooperation with the rest of the world has been explained by some analysts as election posturing.
They argue that after the election, the new president, whoever he is, will adopt a middle ground position in balancing the competing interests in American society.
This was confirmed by the appointment of the leading economic advisers from the Clinton regime in the Obama camp, such as Robert Rubin and Jason Furman.
These economists support the consensus that trade promotes general economic well-being even if it causes a decline in certain industries which cannot compete. The loss of manufacturing jobs in the US has been attributed more to labour replacing technological innovations rather than trade.
Implications for Jamaica
The preferential benefits under the Caribbean Basin Economic Recovery Act (CBERA) were extended until 2010 in May 2008. There are concerns about the extension as the expiration date in September 2008 approaches. The region has now been given a two-year breathing space to begin the formulation of a new trading relationship with the US based on reciprocity.
Ethanol exports from Jamaica enter the US without paying the present US$0.54 per gallon import duty under CBERA.
Jamaica has taken advantage of this tariff advantage to attract Brazilian capital to develop the local ethanol industry (a classic case of using preferential rules of origin for local development).
The US market for ethanol has grown significantly over the last few years, and the projections are for increasing demand due to the high cost of oil.
Supporting the farm bill
Obama supported the recent Farm Bill, which extended subsidies for domestic US corn ethanol and maintained the tariffs on imported sugar-cane ethanol. He is said to have prominent supporters with close ties to the domestic ethanol industry, and is opposed to the importation of sugar-cane ethanol.
Jamaica and other CARICOM countries will need to negotiate binding provisions for market access for ethanol and other products included in the current arrangement under a reciprocal FTA. Otherwise, the country could lose its preferential advantage for ethanol, and the industry would subsequently decline.
This means that by the end of this decade, Jamaica would have entered into FTAs with all its major trading partners. This opens up possibilities to access new markets for non-traditional exports of goods and services, especially in diaspora and Caribbean markets.
Non-competitive industries
The downside, of course, will be the decline of non-competitive industries and the loss of jobs. Measures will have to be put in place to facilitate the retraining of workers and the development of competitive businesses.
The region can expect higher labour and environmental provisions than might currently exist locally in a FTA with the US. This could result in higher costs to businesses in the implementation of the agreement, especially in respect of environment. Manufacturing industries, in particular, will be hard-pressed to acquire new technologies to meet higher pollution reduction standards.
If we assume that Jamaica will have to negotiate a FTA with the US similar to the EPA, minus the developmental provisions, Jamaica's position at the multilateral level in the WTO would have to be brought into alignment with its bilateral positions, thereby reducing the country's negotiating space.
The writing has been on the wall since the period of structural adjustment and liberalisation. The global trading environment is moving into an era of free competition and reciprocity.
This will mean the restructuring of business and labour practices to adjust to increased competition and opportunities on a level playing field.
omar@ppsoj.org