Dealing With a Bad Deal

Two Years of DR-CAFTA in Central America

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.

Mary Tharin is a research associate for the Council on Hemispheric Affairs based in Washington, D.C. Read other articles by Mary, or visit Mary's website.