Dealing with a Bad Deal: Two Years of DR-CAFTA in Central America

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Dealing with a Bad Deal: Two Years of DR-CAFTA in Central America

WASHINGTON - Critics argue that for over
a decade, the United States has been striving to create commercial
inroads into Latin America by way of bilateral free trade agreements
that benefit U.S. economic interests to the detriment of those of Latin
America. A recent example of this trend was the passage of
the Dominican Republic-Central America Free Trade Agreement (DR-CAFTA),
a pact designed to promote trade and foreign investment between the
U.S. and its Caribbean Basin neighbors. The agreement was signed in
2004 by El Salvador, Guatemala, Honduras, Costa Rica, Nicaragua and the
Dominican Republic. Most DR-CAFTA countries finalized the deal a few
years later; El Salvador, Guatemala, Honduras, and Nicaragua
implemented the agreement in 2006, and the Dominican Republic followed
in 2007.

When it was being negotiated, advocates of DR-CAFTA repeatedly
assured skeptics that the agreement was a "win-win" situation, arguing
that it would economically benefit all countries involved. The White
House issued a statement proclaiming that "expanded trade opportunities
will improve life in Central America and the Dominican Republic." The
World Bank concurred, reporting that "the treaty holds the potential of
increasing trade and investment in the region, which in turn is key to
lifting economic growth and improving the welfare of the people of
Central America and the DR, including those living in poverty."
Similarly, El Salvador Ambassador Rene León enthusiastically stated
that "people are expecting from DR-CAFTA better living conditions, more
economic opportunities, and more social equity." It was argued that
DR-CAFTA would expand Central America's export market, create jobs in
textile production and other manufacturing industries, and lower the
prices of consumer goods. However, two years have now passed since some
Central American countries implemented DR-CAFTA's mandates, and
governments, farmers, and workers across the region are beginning to
suffer the consequences of an unfair deal.

Nothing Gained on Trade
Contrary to initial promises, DR-CAFTA has largely failed to expand
Central American export markets, instead bolstering imports from the
U.S. to the region. In fact, Central American countries were better off
prior to DR-CAFTA. Before this new deal was signed, 80 percent of
Central American exports already entered the U.S. duty-free under
existing agreements including the Caribbean Basin Initiative, which was
implemented in 1984. Under this previous initiative, Central American
countries maintained tariffs on many U.S. imports to prevent goods from
flooding domestic markets and paralyzing the growth of nascent
industries in the region. However, in a push to implement DR-CAFTA, the
Bush administration threatened Central American governments with the
removal of existing trade preferences, thus strong-arming them into
signing an agreement that was not truly in their best interests.
Despite rhetoric about DR-CAFTA's benefits to Central America, the
accord was in fact designed to remove the region's existing protective
tariffs, "leveling the playing field" to give the U.S. significantly
more access to Central American markets.

Upon implementing DR-CAFTA, Central American governments removed all
tariffs on 80 percent of U.S. industrial goods and most agricultural
products. United States Trade Representative Robert B. Zoellick
enthusiastically pointed out that "small countries can be big export
markets for the United States," and went on to say that "CAFTA will
expand opportunities for U.S. exports in everything from construction
equipment to high-tech software, from fruits and vegetables to
financial services." Indeed, many Central American countries have seen
imports from the U.S. grow dramatically since the implementation of
DR-CAFTA. In 2006, imports to El Salvador from the United States jumped
16.7%, turning the country's previous trade surplus of $118 million
into a deficit of over $286 million. Likewise, in Honduras and
Guatemala, trade deficits with the U.S. multiplied by 2 and 3 times in
the first year after DR-CAFTA's implementation. Not surprisingly, these
uneven trade balances are causing negative repercussions in a number of
Central American and Caribbean countries, and consequently lowering the
standard of living across the region.

Agriculture Loses Out
With the loss of protective import tariffs, most Central American
farmers have no chance of competing with the U.S. government-subsidized
agricultural sector. For example, economist and CAFTA specialist Adolfo
Acevedo explains that farmers in the Sébaco Valley of Nicaragua can
produce rice for about US$8.45 per 100 pounds, while U.S. farmers
produce the same amount for US$9.40. According to Acevedo, this should
imply a comparative advantage for Nicaraguan farmers. However, due to
government subsidies, U.S. rice enters the Nicaraguan market at the
artificially low price of $7.65 and beats out domestic producers. Rice
and corn, two of the most heavily subsidized U.S. crops, have flooded
into Central American markets as a result of DR-CAFTA. Between 2006 and
2007, rice exports to the region rose 31 percent, while corn exports
rose by 36 percent, according to the U.S. Department of Agriculture.

Nevertheless, DR-CAFTA enthusiasts argue that Central American
farmers can gain through the production of "specialty products" -
fruits, nuts, and other goods not produced in the United States - for
which the region would have a comparative advantage. However, the vast
majority of Central American farmers do not have the capacity to trade
these products on the international market. Small to medium-scale
producers, a category that includes about 80 percent of farmers in
countries like Nicaragua, are unable to produce such product lines on a
large enough scale to compete in the export market or to comply with
strict sanitary standards imposed by U.S. regulations. According to
Matilde Rocha, a Nicaraguan activist, "the producers of specialty
products are [often] too small to export individually and they lack
knowledge about the rules of the market and trade regulations." Thus,
most of these farmers are forced to either sell their products to
intermediary export companies (which skim off most of the profits) or
to sell their land to large-scale agro-businesses.

This has led to the concentration of the food export industry into a
very limited number of hands. In Nicaragua, 70 percent of the country's
export earnings go to a mere fifty businesses that possess the
facilities and capital to take advantage of trade with the U.S. To cite
an example, only one dairy processing plant in the entire country has
the capacity to pasteurize milk according to USDA standards, and that
plant is owned by a foreign dairy conglomerate, Parmalat. Thus, while
Central American economies may have experienced a moderate amount of
growth over the past few years, the benefits of U.S. trade are being
reaped by only a select few, causing economic inequality to sharpen
throughout the region.

Labor and the Maquiladora
In response to the contraction of agricultural sectors in Central
America, supporters of DR-CAFTA promised a boom in manufacturing jobs
as a result of direct investment from the United States. However, jobs
at "maquiladoras"
(U.S.-financed assembly plants) not only provide low wages and poor
working conditions, but they are also proving to be more scarce than
had been predicted by overly optimistic proponents of DR-CAFTA.

Maquiladora workers in Nicaragua earn about $0.70 per hour,
making them some of the lowest paid garment workers in the world.
According to a report by Witness for Peace, these workers often put in
"10-12 hours a day in hot, airless facilities with few breaks and
little choice about how many hours they work." Furthermore, the ability
of workers to protest and bargain collectively is severely limited in
many Central American countries. A recent analysis by the International
Labor Organization (ILO) found that labor laws in the region fall short
of international standards in a number of areas, including restrictions
of workers' rights to strike. In April 2008, the AFL-CIO and five
Guatemalan labor unions co-sponsored a petition to the U.S. government,
which addressed several cases of failure on the part of the Guatemalan
government to enforce its labor laws. The petition reported two
incidents of union leaders being murdered, others receiving death
threats, and many more being fired illegally due to union membership.
With respect to DR-CAFTA, AFL-CIO president John Sweeney observed:
"Guatemalan workers are being targeted for their union activity.
Without the freedom from fear to join unions and bargain collectively,
how can we expect any workers to benefit from a trade agreement?"

Many of these hardships facing Central American workers can be
traced back to the weak language of DR-CAFTA's labor charter. According
to a Human Rights Watch report, "DR-CAFTA only has one enforceable
labor rights requirement: that countries apply their own labor
laws-even if they are grossly inadequate." Governments are also allowed
to modify their labor laws at any time. Thus, the United States is
directly contributing to the daily strife facing Central American
workers by promoting an economic arrangement that depends on low wages
and poor labor standards, without ensuring reliable protections for
workers' rights.

A Race to the Bottom
In order to draw foreign investment into a developing country,
governments often lure corporations by ensuring lower production costs
through lax environmental and labor regulations. This creates a "race
to the bottom," with countries all over the world striving to offer the
cheapest labor force, and the least protections against corporate
exploitation of workers, communities, and the environment. This trend
is being replicated across Central America. Earlier this year in
Honduras, government officials and business interests struck a deal
that lowered the wages of workers in the country's poorest regions to
20 lempiras less than the national minimum wage. The Honduran popular mobilization coalition, Bloque Popular,
reported that "this ‘incentive' to investment in one of the poorest
zones of the country was established so that the transnational
companies do not leave for cheaper Nicaragua."

Despite efforts to draw foreign investment through the exploitation
of the region's labor force, global competition is nevertheless hitting
Central America particularly hard. In recent years, the United States
has been importing an increasing percentage of textile goods from China
and other Asian countries where labor is even cheaper. The New York Times reported
that between January 2004 and January 2005, the number of cotton shirts
imported by the U.S. from China jumped from less than 1 million to 18.2
million. As a reaction, Guatemala's textile industry declined in 2007,
forcing 35 factories to close and approximately 17,000 workers to lose
their jobs. Although the Guatemalan textile industry originally backed
DR-CAFTA, the Comisión de Vestuario y Textiles recently
reported that textile export revenues have dropped since the accord was
signed. These statistics point to a broader trend of investment flowing
across the Pacific and away from Central America, despite the free
trade agreement. Thus, people of the region are now left with fewer
industrial jobs just as their agricultural sectors are disappearing and
labor standards declining.

The Consumer Gets Squeezed
Free trade advocates have argued that, under DR-CAFTA, consumer prices
in Central America would fall as a result of cheaper products flowing
in from the United States. However, so-called cheap imports have failed
to balance the dire effects of the global food crisis, which has caused
food prices to rise drastically in the region. According to the United
Nations World Food Programme (WFP), between September 2006 and February
2008 the nominal cost of the basic food basket in Guatemala rose by
22.1%; in Honduras by 12.8%; and by 17% in El Salvador. As a result, an
increasing proportion of the region's poor must reduce the quality and
quantity of their food intake, "creating a major risk of
under-nutrition," according to the WFP. Additionally, with their
domestic agricultural sector crippled, Central Americans are replacing
their traditional diet with unhealthy, processed imports from the
United States. According to William Rodriguez at Managua's Center for
International Studies, "because the more accessible food to Nicaragua's
poor majority is unhealthy...the people are poisoning themselves by
buying artificial food like cookies and chips."

Certain restrictions written into DR-CAFTA are taking a further toll
on the health of Central Americans by reducing access to affordable
medications. According to an OXFAM report, the agreement has forced
governments "to impose new, more stringent patent and related
protections that seriously limit or delay the introduction of generic
competition and reduce access to new, affordable generic drugs." The Washington Post
reported that "CAFTA imposes a five -to-10 year waiting period on
generic competitors," extending the ability of pharmaceutical
monopolies to keep prices high. Indeed, six months after DR-CAFTA was
implemented, imported medicines in the Dominican Republic almost
tripled in price, according to a report by The Stop CAFTA Coalition.

A Sinking Ship
The recent economic downturn in the United States and across the world
has caused significant alarm in Central America, especially due to the
region's close links with the U.S. economy. Some Central American
officials have begun to question the wisdom behind integration with an
economy that seems to be imploding, and are taking steps to immunize
their own economies from the effects of the crisis. Member states of
the Central American Integration System met on October 4, 2008 in
Tegucigalpa, and agreed on a strategy to promote regional economic
cooperation and development. The plan includes the investment of $5
billion into the region's agricultural sector, with a special emphasis
on grain production. However, it will be no easy task for Central
America to withstand the economic decline of their number one trade
partner, especially since economic integration with the U.S. has been
developing over the past several decades. Costa Rican economist Eduardo
Lizano summed up the problem by stating: "The chief hope was that
Central America would receive increased investment to produce goods for
export to the United States. With a considerably lower level of
consumption in the United States, those investments will not be made
and the expected benefits will not materialise, or will be diminished."
This points to one inherent danger of global integration: that it
leaves countries vulnerable to the ripple effects of poor economic
decisions made elsewhere in the world.

Where do we go from here?
Two years into the agreement, DR-CAFTA has failed to fulfill its
promises in Central America. The pact has been controversial since its
onset, drawing criticism from across the globe and sparking numerous
popular protests in El Salvador, Costa Rica, and Guatemala. DR-CAFTA
has plenty of critics in Washington as well; it passed the U.S. Senate
and Congress by very slim margins of 54-45 in the Senate and 217-215 in
the House. A new administration under Barack Obama, who voted against
DR-CAFTA in the Senate, may re-address the stipulations of the accord,
as the President-elect has promised to do with NAFTA. However, solving
the chronic problems caused by this trade pact would require a vast
overhaul of U.S. foreign policy, as well as a fundamental shift in its
economic ideology. The United States should promote a foreign policy
that values and promotes strong and stable allies through a fair-minded
economic program that no longer rewards global exploitation. A major
reassessment of DR-CAFTA, and the unbridled capitalistic profiteering
which it embodies, could be an important step in this country's path to
progress and positive change in Latin America, and across the globe.

This analysis was prepared by COHA Research Associate Mary Tharin

 

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