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What Is CAFTA?

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Written by correspondents at:
The Washington Office on Latin America

The proposed U.S.-Central America Free Trade Agreement (CAFTA) promotes trade liberalization between the United States and five Central American countries: Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua. Modeled after the ten-year old North American Free Trade Agreement (NAFTA), CAFTA is widely considered to be a stepping stone to the larger Free Trade Area of the Americas (FTAA) that would encompass 34 economies. CAFTA must be approved by the U.S. Congress and by National Assemblies in the Central American countries before it becomes law.

Fast Track Negotiations
The Bush Administration aggressively pursued the CAFTA negotiations on a very short timeline; whereas NAFTA took more than seven years to negotiate and the FTAA has been negotiated for almost a decade, CAFTA was completed in one calendar year, with limited civil society or Congressional participation. Negotiations for CAFTA began in January 2003, shortly after the U.S. Congress approved a bill to confer Trade Promotion Authority (or "Fast Track") to the White House. Under "Fast Track" Congress is limited to an up or down vote and cannot amend a trade agreement. The agreement was signed on May 28, 2004 in Washington D.C. and is now waiting to be submitted to Congress after the elections.

An Asymmetric Agreement
CAFTA is the first "sub-regional" agreement to be negotiated between such unequal trading partners, where the combined GDP of Central America is equal to 0.5 percent of U.S. GDP. CAFTA would require market liberalization for the majority of goods and services in Central America; including agriculture, manufacturing, public services and government procurement. In return, the U.S. has promised increased market access for certain sectors in Central America, including textiles and a limited increase in sugar quotas. Rigorous impact assessments of CAFTA have not been conducted in Central America. Rather, Central Americans are forced to judge the potential impact based upon the ten-year record of NAFTA. Analysts expect that--as occurred in Mexico--CAFTA will attract foreign direct investment and boost Central American exports in certain sectors, but will provide little benefit to the rural and urban poor of the region.

Cafta - More Empty Promises

By Leigh Brandon Ferrara, Entremundos Nov/Dec 2004


On July 8, 2004, Guatemalan campesinos protested the pending passage of CAFTA, the Central American Free Trade Agreement. Spurred by state seizures of land, the campesinos wanted to send a message to the government that they understand the potential detriments of CAFTA. Their foresight as to the potential affects of CAFTA is grounded in the experiences of Mexico under NAFTA, the North American Free Trade Agreement.


CAFTA, which mirrors NAFTA, is actually an extension of this agreement through the Free Trade Area of the Americas(FTAA). Because of this parallel between the trade agreements, it is useful to peruse the documented evidence of NAFTA's outcomes, as to ultimately understand the potential consequences for Central America.


NAFTA was sold, in the years leading up to its implementation in 1994, under false pretense to the American, Canadian and Mexican people. It was touted as an agreement that would lower consumer prices, create jobs in Mexico and open up export markets to all three countries that would benefit the people. Free Trade was promised to increase the quality of life for the people in each of the three countries. The evidence clearly reveals that these promises were never manifested. However, the true beneficiaries of NAFTA were the US and Canadian corporations, looking to use the agreement to take advantage of cheap labor in Mexico. Due in part to the fact that corporations were facing huge efforts of union organizing in Mexico and therefore a threat of having to pay their Mexican workers higher wages, NAFTA had been a necessity for these corporations in order to continue to profit from Mexican labor that they were exploiting.


NAFTA has had detrimental affects for workers in all three countries, but these have been most severely felt by workers in Mexico. Creating what many call a "Race to the Bottom", corporations pitted workers in the three countries against each other leveraging low Mexican wages and lax labor and environmental laws to threaten the higher wages and stronger worker protections in Canada and the US. Due to the lax local and national laws and low wages in Mexico, corporations chose Mexico as their prime investment area inevitably robbing many US and Canadian workers of work. Immediately after NAFTA passed, US and Canadian companies outsourced their manufacturing to Mexico where they faced no opposition to investment and utilized the cheap labor. 500,000 workers lost their jobs due to this outsourcing.


In addition to the jobs exported to Mexico with the manufacturing industry, agribusiness from Canada and the US utilized big plantations in order to mass-produce goods. Within these large farms, they have challenged Mexican local and national as well as international laws in order to create the lowest production costs to thereby ensure the greatest profit. Mexican workers who continue to work on these farms suffer from unsanitary conditions, zero protection for their labor rights and a hideous wage. As for the other 2.5 million farmers who were driven from their farms, due to their inability to compete with agricultural corporations, they have also suffered. The entrance of large agricultural corporations created this imbalance, offsetting competition. Lack of competition paved the way for a monopoly within which many small Mexican farmers could not survive.


US and Canadian workers were affected under NAFTA as well, however, not as severely as Mexican workers due to the economic stability of these nations. In Canada, due to the threat that business could access a freer market (freer meaning no obstructions to investment barriers and a higher profit) in Mexico, their environmental protections and labor regulations were under siege. US farmers as well, who were promised lower prices because of the access to a greater import market were sorely disappointed when the promised consumer savings ended up in the bank accounts of large agricultural corporations. With a 20% increase in agricultural consumer prices in the United States, Washington definitely did not get what it was promised by the proponents of NAFTA.


Another empty promise under NAFTA was the assurance that it would maintain environmental and labor protections. However, because its investor protections are so extensive, companies are able to defy local, national and international environmental and labor regulations. Because corporations are able to act above all levels of environmental and labor laws, the processes by which countries trade under the NAFTA agreement are unjust and undemocratic, yielding to foreign corporations more power and rights, in a country, than those held by the people of that nation.


NAFTA is intrinsically undemocratic because it prioritizes corporate interests over the state and its voting population. But, the initial idea behind NAFTA's protections for foreign investors was to ensure protection of companies from state seizures of private property. Instead they have proved to be an offensive mechanism by which to manipulate law and regulation, instead of a defensive tool with which to protect companies. They include vague language that protects foreign investment in Canada, US, and Mexico by allowing investors and companies to challenge any environmental protection, labor law and governmental regulation that they consider an interference in their business. The mechanism by which corporations can challenge these laws is called an "investor-to-state dispute resolution". These resolutions are held in a closed legal tribunal in which investors have the systematic advantage. The private tribunals are compromised of three "industry experts" who arbitrate the disputes. These experts are often corporate lawyers and consultants who are employed by private companies. This model of dispute resolution is mirrored after the arbitration system of the World Bank and the United Nations. The issue with this system lies in the difference between private and public disputes. The disputes handled through the private tribunal system by the World Bank and the UN have been private disputes, which lacked consequences for the public. Because the public had nothing at stake, the process does not allow for public comment or public involvement, which is necessary if there is a public interest at risk. However, by contrast, the very laws the public has decided on are being debated at these tribunals. Therefore, this same system is unable to serve a public dispute in a just manner. As if the closed tribunal system is not unjust in and of itself, one cannot help but question the jurisprudence of the system, since not one ruling of "investor-to-state disputes" has gone against the investor. It is important to clarify that these rulings do not entirely overturn the challenged law, but do exempt the corporation who challenges it. Furthermore, in addition to the damage that the exemption inevitably engenders within the country, in whatever form it takes- environmental degradation, labor malpractice, unsanitary conditions for workers…, a payment is mandated by the arbitrators. Responsible for the payment are the taxpayers of that nation, who have to pay large amounts to corporations for the inconvenience of the challenge, the barrier to the investment and the money ultimately lost due to the existence of the challenged regulation.


CAFTA is similar to NAFTA in many ways, of which, two stand to be the most critical. These similarities highlight the potential for the history of NAFTA to repeat itself. One similarity is CAFTA's investor protections and dispute mechanisms that parallel NAFTA's chapter 11. This similarity grants corporations the super- legal status to act above local, national and international law. Due to the imbalance of this power, CAFTA poses a grave threat to Central America as a whole by favoring international corporations. Secondly, CAFTA threatens the agricultural sector most severely. Right now, agricultural farmers around the world, face an incredibly volatile market for their goods. In part due to subsidies created by the World Bank and the US, individual markets for agricultural products are flooded, creating an oversupply of that good, which in turn drives the price down. Theoretically, in this time of volatility, these farmers do need Free Trade, because according to academic ideals, it should yield more competition between farmers resulting in better prices for consumers. But, the free trade of CAFTA, hampered by international and national subsidies, serves only to undermine the rights of workers by destroying competition. The United States will continue its high "domestic subsidies and publicly funded export promotion programs", and complemented by World Bank subsidies, Central America will not even recognize the Free Trade that is being touted by proponents of CAFTA. Instead, in this environment, workers need tools to combat the volatile market and imbalanced subsidies. Central American farmers now, more than ever need price floors for export products, price caps for consumer prices, import controls on foreign products and other types of supports that allow these small farmers to compete in this uneven and highly volatile market. Ideally, they need a fairer and more sustainable trade that helps their quality of life and removes the inconsistency from their negotiations.


CAFTA will do just the opposite. CAFTA calls for the removal of all price support mechanisms, tariffs and safeguards against export and import influxes. These eliminations will leave Central America wide open to the fluctuations of the market and considering the extensive investor protections within CAFTA, they will face a monopolized agricultural sector by few large corporations (reminiscent of Mexico's history under NAFTA). This is a scary prospect considering the amount of people in Central America employed in the agricultural sector. 


CAFTA has been signed by all involved nations and now is pending its passage in the US Senate, as the US House has already passed it. The likelihood of CAFTA's implementation reinvigorates our fight against the continuation of injustices by large corporate interests. The state of the agricultural sector in Central America and local, national and international law as well, stand to be compromised.


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