CAFTA: A View From Central America

By Fabian Borges
 

From the start of trade negotiations on January 8 of last year, through nine for-mal negotiating rounds that followed, and now as legislators begin to study the treaty’s final text, the proposed Central America-United States Free-Trade Agreement (CAFTA) has divided the region. Thirteen months of negotiations concluded January 25, as the last of the Central American countries—Costa Rica—joined Guatemala, El Salvador, Honduras and Nicaragua as part of CAFTA. 

Labor unions and leftist student groups label CAFTA another example of “Yankee imperialism” aimed at plundering the region’s wealth. Anti-CAFTA groups held several protest rallies and marches throughout 2003 in Central America and in the United States. 

Small farmers (who continue to make up a large portion of the workforce in Guatemala, Honduras and Nicaragua) fear CAFTA would drive them out of business by forcing them to compete with highly subsidized U.S. farm staples, including rice, corn, dairy products and meats. The United States refused to discuss elimination of agricultural subsidies as part of CAFTA, deferring such discussions to ongoing World Trade Organization (WTO) negotiations. 

Central America’s growing export sector sees CAFTA as an opportunity to consolidate and expand the trade privileges the region’s export products receive from the United States under the Caribbean Basin Initiative (CBI). 

The Negotiating Process 

From the start, CAFTA negotiations put Central America’s fragile integration efforts to the test. During the first round in January 2003 in San José, Costa Rica, Central American countries vowed to stand united, and drafted a joint negotiating position. As negotiations dragged on, the initial unity faded. 

Going into the ninth and final round in Washington in December, Central America had consolidated CBI privileges for practically all of its industrial production and most agricultural exports, such as fruits, coffee, flowers, sugar and seafood. Agreements on the most sensitive issues for the region—agricultural staples and textiles exports—had yet to be reached. 

Textile exports make up about 80 percent of the combined exports of Guatemala, Honduras, El Salvador and Nicaragua. Agricultural staples, such as corn, rice, beans, meats and dairy products, are not major exports, but rather are threatened by subsidized imports from the United States. 

At this point, the joint regional position was abandoned. Each country began negotiating its sensitive products bilaterally with the United States. Guatemala, El Salvador, Honduras and Nicaragua concluded negotiations in December, but Costa Rica continued negotiating into January, focusing on U.S. insistence on the opening of its telecommunications and insurance monopolies. 

Costa Rica Agrees to Open Services 

The opening of Costa Rica’s publicly owned monopolies has traditionally been a sensitive issue for the country. An important segment of the country’s population and politically influential labor unions have seen the Costa Rican Electricity and Telecom Institute (ICE) and the National Insurance Institute (INS) as synonyms of the country’s social-democratic development model, which helped create a large middle class during the latter half of the 20th century. Many Costa Ricans consider any measures affecting these institutions as a threat not only to the institutions themselves, but also to the country’s democracy. 

Previous attempts to open ICE’s monopoly, such as the ill-fated “ICE Energy Combo Bill” in 2000, resulted in widespread protests. During the 2002 Presidential election, all three major candidates vowed to protect it. The eventual winner, Abel Pacheco, repeatedly promised to “honor the will of the Costa Rica people” and not discuss the opening of ICE or INS. 

Early in the CAFTA negotiations, Pacheco remained firm on his stance—Costa Rica would not participate in the free-trade agreement if it affected the country’s service monopolies. His position changed dramatically in October, following a visit by U.S. Trade Representative Robert Zoellick, who warned that Costa Rica would be excluded from CAFTA if it protected its public monopolies. 

On October 31, Pacheco announced Costa Rica would negotiate a partial opening of ICE’s monopoly in three key sectors—broadband Internet, cellular telephones and private data networks. Costa Rica also prepared a rough proposal for the partial opening of insurance, to be discussed during the ninth round. 

Hours before the ninth round was set to end, U.S. negotiators presented Costa Rica with a proposal demanding the complete opening of the insurance market. Costa Rica requested additional time in January to discuss insurance and to finalize CAFTA. 

It’s hard to believe Costa Rica’s negotiating team, particularly head negotiator Anabel González—an expert in trade with the United States—would think it was possible to sign a free trade agreement with the United States that excluded key services sectors. After all, the United States has included telecom in every free-trade agreement it has signed and, in some cases, such as the free-trade agreement with Singapore, it even demanded privatization of state-owned providers. 

Service industries are one of the main motors of the U.S. economy. In the past, the telecommunications industry has intensely lobbied for increased trade. Securing new markets for U.S. service companies is cited in the findings of the Bipartisan Trade Act of 2002 as one of the main objectives of the U.S. trade agenda. 

During the January bilateral meetings, Costa Rica agreed to open the three telecommunications sectors by 2007 and the insurance monopoly by 2011. Direct pressure from the United States made it possible for Pacheco to propose what no Costa Rican politician in the past 15 years had been able to propose—the opening of the country’s publicly owned service monopolies to foreign, private investors. 

The concessions in services provided Costa Rica with greater leverage with which to request improved protection for its sensitive agricultural products. Compared to the rest of Central America, Costa Rica obtained longer liberalization periods for rice, meats and other sensitive products, as well as larger export quotas for sugar and ethanol. The United States also agreed to exclude from CAFTA Costa Rican potatoes and onions, which are grown primarily by small farmers. 

Local Reaction to CAFTA 

The presidents of the five Central American countries, the United States, and possibly the Dominican Republic are expected to sign CAFTA in late April. Before the trade pact goes into effect, it will first need to be ratified by the legislative bodies of each country. 

The conclusion of CAFTA talks has incited a flurry of activity by anti-CAFTA groups. Labor unions have vowed to defeat the trade pact by taking to the streets if necessary. In addition to regular protest marches in individual countries, union leaders are planning a series of protest rallies to be held simultaneously in all five Central American countries. 

In Costa Rica, public sector labor unions, including those of ICE and INS, plan to hold conferences to inform the general public of the truth about CAFTA and what it will mean for the country’s institutions, farmers and social security system. Unions have also threatened to hold a general strike aimed at “paralyzing” the country if CAFTA is approved by the country’s Legislative Assembly. 

To counteract the efforts of these groups, business and export chambers from throughout the region have begun an intense lobbying campaign aimed at convincing legislators in their countries and in the United States to approve CAFTA. They argue the treaty will create much-needed jobs, attract increased foreign investment, create a more secure business environment and give consumers access to less-expensive imported goods. 

Legislative Opposition to CAFTA 

CAFTA will face legislative opposition from the Sandinista National Liberation Front in Nicaragua and the Farabundo Marti National Liberation Movement (FMLN) in El Salvador. CAFTA’s future looks equally uncertain in Guatemala, where no party holds a clear majority in Congress and the recently elected coalition government of Oscar Berger has openly criticized the results negotiated by the preceding government. In Honduras, where no opposition group has been able to constitute a major political force, CAFTA should have no trouble in being approved. 

In Costa Rica, the Citizens’ Action Party and its splinter faction, the Patriotic Bloc, which hold 14 of the Assembly’s 57 seats, have already announced they will vote against CAFTA. Support for the treaty by the National Liberation Party, which holds 17 seats, will depend on compensatory measures the government promises to assist sectors likely to suffer under CAFTA. 

CAFTA’s future in the U.S. Congress also looks uncertain. In this election year, Democrats are likely to become increasingly critical of CAFTA and other trade agreements as part of strategy to appease key constituencies such as organized labor and environmentalist groups. Over the last year, several legislators, including influential Montana Democratic Senator Max Baucus, Ranking Member of the Senate Finance Committee, have questioned Central America’s track record on the protection of the environment and workers’ rights. 

Conclusion 

If approved, CAFTA will advance the U.S. trade agenda in ways not possible through the WTO. By negotiating a bilateral agreement with economies many times smaller than its own, the United States was able to obtain concessions on protection of intellectual property rights, opening of foreign service markets and drafting of rules aimed at protecting cross-border investments, without having to make politically unpopular concessions of its own, such as reducing domestic farm subsidies. 

The United States is Central America’s main trading partner and primary source of foreign investment. From the position of the Central American business community, any trade agreement that secures permanent access to the United States for the region’s exports is a deal Central America can’t afford to refuse. Even so, important sectors of the population fear the effects the treaty could have on the way of life of farmers and the sovereignty of Central America’s democracies. 

As a result of the setbacks agricultural subsidies have caused in recent WTO talks and during last month’s Free Trade Area of the Americas (FTAA) meeting, the United States will continue to push its trade agenda through a “divide and conquer” strategy of bilateral negotiations with smaller countries. In that sense, CAFTA is just the beginning. 

Fabián Borges is a Costa Rican journalist, who covers Central American trade issues for the Tico Times.