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Leaders Convene Amid Mounting Pressure For FTAA

Caribbean Leaders Convene Amid Mounting U.S. Pressure To Form FTAA


Council on Hemispheric Affairs Press Release

For Immediate Release August 16, 2002 02:31

Caribbean Leaders Convene amid Mounting U.S. Pressure to form FTAA

* Washington gets nasty with CARICOM's Richard Bernal

* Coercive U.S. FTAA demands force Caribbean nations to act in self defense

* Washington could rue the day it came up with a strategy whereby self-serving trade considerations dominate its Caribbean strategy

* Heads of government of 15 CARICOM member states will meet in St. Lucia today to seek solutions for dire economic problems facing the region

* CARICOM countries could become a potential dumping ground for U.S. agricultural products, while U.S. protectionism will choke off Caribbean agricultural exports to the U.S.

* FTAA regulations would cause huge drop in Caribbean import revenue used to fund essential social programs

* CARICOM leaders call for Special and Differential Treatment (SDT) and reasonable timetables in order to protect local industry and fragile economies

* Countries that enjoyed regional and other advantages through trade with the EU will be left competing with the U.S. as well as their Latin American neighbors

While the Caribbean teeters on the brink of economic disaster, 12 heads of government are scheduled to participate in an economic summit today in Castries, St. Lucia. They meet at a time in which Washington continues battering the region with a policy that is bad for both the U.S. and the Caribbean region. If successful, the consequences of U.S. policy toward the Caribbean could wreak havoc on the area's threadbare economies, eventually all but emptying the islands of their populations, which out of desperation, will look for illegal methods to try to enter to the U.S. Many of those remaining could turn to the drug-trafficking and smuggling.

U.S.-Caribbean policy is clearly short-sighted and self-destructive but it is also mean-spirited. The underground attack launched by the State Department and the U.S. trade representative, Robert Zoellick against one of the Caribbean's most distinguished public figures, former Jamaican ambassador to the U.S. and now CARICOM's trade ambassador, is all but unprecedented as well as patently unfair. Furthermore, the deteriorating economic consequences which would inevitably result from Washington's economic plan for the islands would contribute to already high crime rates in the region and make them vulnerable to a broad range of anti-social activities, including money laundering, tainted offshore banking and the sale of passports, which could inadvertently contribute to terrorist activities.

Though little time has passed since the July summit of leaders in Guyana, St. Lucia's Ambassador to CARICOM, Anthony Severin, asserts that the gathering represents, "A clear commitment on the part of the governments to deal with this [economic crisis]." In what Severin describes as a "no thrills" meeting, Caribbean leaders are expected to tackle a number of issues, including the establishment of a Regional Stabilization Fund in order curb significant economic losses caused by low commodity prices, the loss of the preferential banana market and an increasingly suffering tourism industry. The meeting represents preliminary efforts at regional integration and economic coordination meant to prepare for CARICOM's entry into the Free Trade Area of the Americas by 2005.

Belt-Tightening Time

As the bells of free trade toll ominously throughout the hemisphere and the apostles of free market reforms continue on their spiritual march toward neo-liberalism, orders from the U.S. lead Washington Consensus to drastically lower agricultural tariffs according to unreasonable timetables have been met with harsh criticism in the Caribbean. Many of the small island nations of the Caribbean Community (CARICOM), as well as non-member states, have explicitly expressed concern over the feasibility of removing tariffs altogether, arguing that their economic realities and vulnerabilities render their prospects for prosperity under the Free Trade Area of the Americas (FTAA) quite small. They worry that rapid-paced integration under austere conditions may hurt local industries, namely sugar and rice, while sucking much-needed import revenue out of their fragile economies. These policies are likely providing a prime dumping ground for cheap U.S. agricultural products.

Reacting to what the U.S. State Department termed "unconstructive and uncooperative" measures, U.S. Trade Representative Robert Zoellick openly criticized Dr. Richard Bernal, CARICOM's Director General of Negotiating Mission to the FTAA, and other leaders during recent trade negotiations in Panama for taking an obstructionist position and stalling progress in the FTAA negotiations. The U.S. State Department, in an almost unprecedented action, proceeded to bully prospective Caribbean FTAA participants in a threatening letter sent to CARICOM members in July. The letter reminded Caribbean leaders that failure to modify their position could adversely affect efforts to secure special consideration for small economies in the negotiations. In response, Bernal claims that the U.S. is pressuring CARICOM to sign agreements before they feel fully comfortable with what they are signing. As a result of forceful dealings in the Caribbean, CARICOM has cited the U.S.'s own unilateral protectionist measures, including its controversial US$180 billion Farm Bill and stressed that the Caribbean must also look out for its own interests.

Tension over Tariffs

Mounting tension over tariff rates is likely to be a key issue at today's trade talks in St. Lucia. CARICOM favors "bound" tariffs agreed on by the World Trade Organization (WTO), whereby a country establishes specific duties for a particular product. This practice would allot Caribbean states ample time to gradually equip the regional economy for free trade, allowing countries, on a transitional basis, to shape trade policy in the way that best suits their individual economies. The U.S., however, supports "applied" tariffs, which are implemented on all members according to a flat rate and would be significantly lower than bound tariff rates. This policy would greatly benefit the U.S.'s own agricultural export sector, which is plagued by gross overcapacity due to generous agricultural subsidies and is cushioned by an enormous trade surplus with the Caribbean.

In the last 15 years, the U.S. has managed to acquire a US$19 billion balance of trade with its Caribbean neighbors, making efforts to achieve a "level playing field" quite difficult. Spurred by U.S. farm subsidies and a large trade surplus, cheap U.S. agricultural goods have already flooded some Caribbean island-nations. Jamaica claims that subsidized imports have nearly wiped out its local farmers and that the only way to combat this is to either tax imported goods or subsidize farmers. However, FTAA conditions will inevitably forbid tariffs, and the Jamaican government cannot afford to subsidize farmers when debt servicing amounts to nearly 60 percent of the national budget. In 1999, agriculture employed nearly 21 percent of Latin America's economically active population. Haiti, the newest CARICOM member, is the most dependent on agriculture in all of Latin America and the Caribbean, with over two-thirds of its citizens working in this sector. Moreover, Caribbean economies are disproportionately dependent on trade with the U.S. In 1999, 63 percent of agricultural exports among the countries of the Association of Caribbean States (ACS) went to the U.S. market. This fact causes concern over the viability of Caribbean agricultural exports to the U.S., given that U.S. domestic production is bound to increase due to its new round of subsidies.

While the removal of tariff barriers and the implementation of destructive U.S. farm subsidies have left many Caribbean officials feeling unnerved, the loss of import revenue to Caribbean governments is sure to prove devastating. In some CARICOM nations, import duties on goods from North America and Europe account for between twenty and forty percent of government income-as much as fifty percent for the Eastern Caribbean. This suggests that tariff eradication may do more harm in the area than originally foreseen, as a significant portion of society will inevitably suffer the loss of social services such as education, health care and social security. According to David Jessop, Executive Director of the Caribbean Council for Europe, these services, "Provide a measure of equity that ultimately underwrites Caribbean democracy.... Negotiations to liberalize trade will see import tariffs traded away and the government revenue that goes with them." Although some Caribbean nations have begun to seek alternative sources for government funding, many of the smaller nations are still ill prepared to remove their trade barriers. This may pose further complications, as new systems of taxation in a region accustomed to a very low income tax are likely to create civil unrest and political instability-the least desirable context for trade agreements. Accordingly, analysts reason that it is in the U.S.'s interest to have politically stable trading partners in the Caribbean, yet its officials are slow to recognize this. Jessop charges that, the "Direct relationship between Caribbean politics, social service provision, trade negotiations, taxation and political thinking is infrequently understood outside of the region," also maintaining that, in the U.S., trade negotiations are seen as a matter of security and trade advantage rather than one of development.

Preparing for the Inevitable

Just as other Latin American leaders are preparing for the FTAA by looking after their own interests through securing regional Free Trade Agreements (FTAs), including the Andean Trade Preference Act (ATPA) and the Southern Cone Common Market (MERCOSUR), Caribbean leaders have attended several regional summits over the last few months and taken measures to protect their own vulnerable economies. As a preparatory response, CARICOM is hastily trying to bring the Caribbean Single Market Economy (CSME) up to speed in order to "facilitate economic development of the Member States in an increasingly liberalized and globalized international environment." The CSME, launched in 1992, intended to create a "single, enlarged economic space which would support competitive production in CARICOM for both the intra and extra regional markets." It aims to increase regional employment, improve standards of living and work, coordinate and sustain economic development, increase economic leverage and expand trade and production.

Yet, while it is reported that 95 percent of intra regional trade is free of all restrictions, Dr. Aleem Mohammed, a business leader from Trinidad and Tobago, observed at the last Caribbean Transnational Conference in Montego Bay that there are at least five countries that still have restrictions on goods of CSME origin. More importantly, a number of key obstacles remain in place that prevent CSME from reaching genuine common market status. These include failure to implement the free movement of services, capital and labor and coordination of macro-economic, monetary and fiscal policies. Mohammed poignantly pointed out that, "If we cannot compete against ourselves in the region without calling for protection, how can we hope to compete against larger players in a wider hemispheric and international space that will soon be a reality."

As a firm step in the right direction, CARICOM's Secretary General, Edwin Carrington, recently announced the ratification of the Caribbean Court of Justice (CCJ), the so-called "sine qua non" of the CSME. As disputes will inevitably arise in the region, an impartial tribunal was considered necessary to interpret rules for the15 member states. Perhaps an even bigger incentive to ratify the court was the prospect of fomenting investor confidence in CSME. While this is essential to successfully build trade capacity (given the region's reliance on foreign direct investment), it appears that this alone will not secure CARICOM immediate access to the fruits of hemispheric free trade.

Caribbean Seeks Special Consideration

The FTAA negotiations have highlighted larger issues than trade barriers: the integration of small island developing states (SIDS) into the global economy and the role of Special and Differential Treatment (SDT) for such nations. At the Sixth FTAA Meeting of Ministers of Trade of the Hemisphere in Buenos Aires last year, trade ministers affirmed, "the need for technical assistance as well as specific provisions to meet needs of those countries with different levels of development and size of economies, including the special needs of the smaller economies, to enhance their capacity to derive maximum benefits from the participation in the FTAA."

During hearings on the FTAA in 1999, Dr. Bernal stated that, "Given the large number of small countries, the issue of "smallness" must be addressed both as a political and economic phenomenon. The majority of countries in the Western Hemisphere are small, and their participation in the FTAA is an issue that must be examined and accommodated in any hemispheric-wide political organization or trade arrangement."

Due to differences in level of development and size of economies in the hemisphere, many smaller countries have suggested the need for special and differential treatment, a policy recognized by the WTO but not yet adopted under the FTAA. Moreover, judging from the U.S.'s impatience and coercive behavior regarding its proposed negotiation timetables in the Caribbean, it has blatantly ignored the special treatment that CARICOM states desperately need. This would entail abandoning, "the principle of equal treatment of unequals on the grounds that it is inherently inequitable; and entrench the principle of differentiated and asymmetrical treatment of unequals," according to Norman Girvan, Secretary General of the ACS. This would be done on a case by case basis, pin pointing where certain economies are at a disadvantage. Financial provisions, for "less developed" and "socially disadvantaged" groups might also be allotted, as well as mechanisms to subsidize public goods such as health and education. Plans could even include development assistance, as the European Union (EU) has done with many of its Caribbean trading partners.

Free Trade Could Increase Caribbean Vulnerability

The need for differentiated treatment and financial provisions clearly stems from the great disparities that exist between Caribbean nations and the more developed nations involved in the FTAA. Mr. Girvan attributes such disparities to a number of factors including lack of resources, lack of economic diversification, loss of trade preferences, fiscal impacts and overall vulnerability to both external and man-made shocks. The FTAA, Girvin argues, without necessary precautions, would exacerbate inequality in the hemisphere in relation to a number of areas, by increasing production costs due to lower scale of production, increasing infrastructure costs because of diseconomies of scale, damaging productivity as a result of limited physical and human capital and a limited capacity to respond to market opportunities under FTAA.

Perhaps one of the biggest blows that CARICOM will suffer is the loss of one-way preferential access to U.S. markets, when it is required to grant reciprocal access to its own markets. It will also have to compete with other Latin American countries for investment, further driving down wages and creating pressure to relax labor and environmental standards. According to a World Bank task force, 26 of the 28 states most vulnerable to change in the world market are small states of 1.5 million and 10 of these are in the Caribbean. Another five are high/medium vulnerability countries, making 15 out of the 25 Caribbean countries vulnerable to economic volatility due to a lack of export diversification, export dependence and natural disasters, a fact that the FTAA is unlikely to alter in the absence of remedial measures.

As preferential trade deals become a thing of the past and Caribbean nations watch their minimal economic stability fade away, CARICOM representatives will meet today to discuss the further integration of Caribbean nations into the FTAA. Lamentably, the current conditions for hemispheric integration offer few solutions to the region's economic woes. While foreign investment and free-trade may have the potential to improve these islands' economies, the protocol that the U.S. has followed thus far in conducting negotiations has been anything but helpful to its Caribbean counterparts. It should be clear at this point, that not all nations are in the same position-financially, economically or politically-to sign onto what are essentially biased free trade deals. Considering the dubious success that Mexico has experienced as a result of NAFTA, one can only imagine the difficulties that will follow once Caribbean islands, hardly a fraction of Mexico's size, begin to compete with the U.S. and other Latin American giants.

This analysis was prepared by Alexander Wolk of the COHA research group.

The Council on Hemispheric Affairs, founded in 1975, is an independent, non-profit, non-partisan, tax-exempt research and information organization. It has been described on the Senate floor as being "one of the nation's most respected bodies of scholars and policy makers." For more information, please see our web page at www.coha.org; or contact our Washington offices by phone (202) 216-9261, fax (202) 216-9193, or email coha@coha.org.


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