Recently the House of Representatives narrowly passed a free trade agreement that allows a relatively unregulated movement of goods and services between the United States, Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua. This week, President Bush signed the bill into law. This so-called Central American Free Trade Agreement continues in the trajectory of the North American Free Trade Agreement (NAFTA) signed into law by President Clinton.

The slight margin of the House vote, 217-215, shows that free trade remains highly controversial. It has also become increasingly partisan. When President Clinton signed NAFTA into law, a sizable number of Democratic legislators voted for it. But CAFTA seems to have split the Congress along largely partisan lines. The vast majority of Republicans voted for CAFTA and the vast majority of Democrats voted against it. The Democrats raised one of their favorite bugaboos, "outsourcing." After the vote, House Democratic leader Nancy Pelosi called CAFTA "a step backward for workers in Central America and a job killer at home."

This gets it exactly half-right. Let's begin by acknowledging an element of truth in what Pelosi says. CAFTA will cause some Americans to lose their jobs. The reason is simple: free markets tend to direct economic activity in the direction of maximum efficiency. That means that if Salvadoran or Dominican workers can make shirts or shoes at a fraction of the price that it costs American workers to make those same products, then companies that make shirts and shoes are going to save a lot of money by establishing plants in El Salvador and the Dominican Republic.

This is by no means a complete loss for the United States. Some American workers--the ones who are no longer competitive--suffer. But American consumers--those who buy shirts and shoes--gain, because they are now able to purchase those items for a lower price. Ideologues like Pelosi pretend that it is always in the American interest to protect the interests of the displaced American worker, but they rarely explain why this interest is always presumed to outweigh that of the American consumer.

But this failure to weigh competing American interests is hardly the biggest problem for Pelosi and other opponents of free trade. The biggest problem is that these so-called champions of compassion find themselves opposing the best anti-poverty program ever devised. The party of the poor finds itself directly arrayed against the interests of the world's poor. In order to protect American jobs that pay $15 an hour, Pelosi and company seek to deprive poor people in the Third World from earning the few dollars a day that they need to climb out of desperate poverty.

An unlikely figure who has figured this out, apparently without an economics degree or attending any congressional hearings, is the lead singer for the rock group U-2, Bono. "International trade needs to give everybody a chance," he recently said. "The poorest countries deserve a chance to earn their way out of poverty." Bono's point is a simple one. The problem faced by poor people and poor countries is not capitalism or globalization. Their biggest problem is being left out of the global capitalist economy. Global capitalism represents their best prospect for the future.

For the first few decades after World War II, America sought to reduce world poverty mainly through foreign aid. This "handout" strategy proved effective in alleviating famines and fighting short-term disasters, but it offered Third World countries no sustainable path to development. After all, the beggar who receives a few dollars for a meal is back on the street again the next day. Countries like my home country of India continued to receive foreign aid year after year, and they remained poor as ever.

So America and the West tried another solution: loans. Generous loans were provided to poor countries through agencies such as the World Bank and the International Monetary Fund. The problem is that these loans were typically given to countries that did not produce anything of value. Consequently the IMF found itself being asked to provide new loans so that countries could pay back the old loans. Even paying interest on the loans proved to be a millstone around the neck of poor countries. Eventually the poor countries began to see indebtedness not as an achievement, but a curse.

Now, without any government effort, and even without the philanthropic exertions of Bill Gates or the Hollywood crowd, a new global anti-poverty solution has emerged. Yes, it's called free trade and sometimes goes by other names, such as "tariff reduction" and "outsourcing." These measures have turned out to be the greatest poverty-reduction program of all. They don't just give out money or make loans that cannot be repaid. They succeed by taking advantage of a resource that all poor people possess: cheap labor. They liberate poor people from poverty by employing them to make things that other people actually want to buy. Free trade has already lifted tens of millions of Chinese, Mexicans, Indians, and South East Asians out of hardship and destitution. Now it promises to improve the lot of millions in Central and South America.

It's possible to say that protecting high-paying American jobs should take priority over the interests of Nicaraguans and Hondurans, however indigent and needy they might be. This is in fact the Pat Buchanan position. It's a bit crude, but at least it's honest.

Nancy Pelosi wants to side with Buchanan, but she also wants compassion on her side. Thus Pelosi asserts that free trade is a "step backward for workers in Central America." In reality, if you want to be compassionate and to help poor people all around the world, there's no better way to do it than to support free trade.

Bush signs CAFTA agreement into law.

The agreement brings together the US and Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and the Dominican Republic.

In her recent book Professor Pietra Rivoli sets out to chronicle the story of her six-dollar t-shirt, examining the workings of the global economy along the way.

"After researching the elements of my T-shirts life story, I think it is clear that neither globalization’s champions nor its protestors have it quite right. This debate has centered on the virtues vs. the perils of competitive economic markets, especially the effects on the poor. One side claims that markets and trade will ultimately lift the poor, while the other side fears that markets and trade will impoverish them further.

My book, I think, shows that the argument over markets is the wrong argument. Markets are embedded in rules and social structures, and who writes the rules and how they are written, that is, politics, is much more important than markets in understanding the life of my T-shirt. It is politics, not markets, that determines who wins and loses.

If I were an activist trying to advance the welfare of the poor, my focus would be on including the poor in politics and enhancing their political voice, rather than on shielding them from the effects of economic markets. I have learned that is better to include people in politics rather than protect them from markets."

"I talked to one of these women when I was in Shanghai recently, and she said that if she weren't doing this she'd be working on her parents' duck farm. She was very fashionably dressed, with spike heels and dyed hair, and she was covered with glitter, and she was much happier in the city. That's one of the things that the anti-sweatshop activists miss: the autonomy and independence that these girls feel when they have a job, no matter how bad the working conditions are. It's not just a paycheck -- it's about not having to do what their dad tells them to do. It's about not having to go out in the mud and deal with duck eggs."

Professor Pietra Rivoli

"That we don't let Africans put products on our shelves, yet we crowd out their markets with our goods is a scandal. International trade needs to give everybody a chance, not just the nations that set the rules. The poorest countries don't want to forever rely on the nipple of our aid, they want to earn their way out of poverty -- they need a level-playing field."

Bono

Wal-Mart... love 'em or hate 'em, they're changing the world.

In today's NYT, Harvard Professor Pankaj Ghemawat, and Ken A. Mark take on Wal-Mart's critics with a big picture analysis that gets to the bottom line.

"This last point suggests that the debate around Wal-Mart isn't really about a Marxist conflict between capital and labor. Instead, it is a conflict pitting consumers and efficiency-oriented intermediaries like Wal-Mart against a combination of labor unions, traditional retailers and community groups. Particularly in retailing, American policies favor consumers and offer fewer protections to other interests than is typical elsewhere in the world. Is such pro-consumerism a good thing?

The answer depends on who these consumers are, and Wal-Mart's customers tend to be the Americans who need the most help. Our research shows that Wal-Mart operates two-and-a-half times as much selling space per inhabitant in the poorest third of states as in the richest third. And within that poorest third of states, 80 percent of Wal-Mart's square footage is in the 25 percent of ZIP codes with the greatest number of poor households. Without the much-maligned Wal-Mart, the rural poor, in particular, would pay several percentage points more for the food and other merchandise that after housing is their largest household expense.

So in thinking about Wal-Mart, let's keep in mind who's reaping the benefits of those "everyday low prices" - and, by extension, where the real conflict lies."

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