CAFTA Could Cause 1000s of Farmers to Lose Jobs

Council On Hemispheric Affairs
Monitoring Political, Economic and Diplomatic Issues Affecting the Western Hemisphere
Memorandum to the Press 03.73 Thursday, December 4, 2003

CAFTA Would Likely Cause Thousands of Central American Farmers to Lose Their Jobs as Highly Subsidized U.S. Agricultural Goods Flood Their Markets

- The countries of Central America — with predominantly agricultural economies — stand to gain little trade benefits from the proposed Central American Free Trade Agreement (CAFTA), as most of their exports already enter the U.S. duty free under the Reagan-era Caribbean Basin Initiative (CBI).

- CAFTA will not lead to job creation within the United States, but is almost certain to accelerate the continuation of manufacturing job loss.

- Washington-pressed CAFTA talks could be useful to U.S. trade negotiators by providing additional leverage against South America in faltering FTAA negotiations.

- Washington will overlook corruption and drug trafficking in Central America so as not to delay the trade agreement.

In January 2002, President Bush announced his intention to “explore a free trade agreement with the countries of Central America,” modeled after the North American Free Trade Agreement (NAFTA) and as another precursor to the proposed region-wide Free Trade Area of the Americas, scheduled to be achieved by 2005. The Central American Free Trade Agreement (CAFTA), whose members include Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua (negotiations with the Dominican Republic will begin in 2004), has undergone a series of negotiating rounds with the U.S. throughout the past year that are expected to conclude in the ninth and final gathering, scheduled to take place in Washington from December 8-12.

U.S./Central American Trade

Central America represents an important market for U.S. goods, being this country’s 18th largest area export market. In 2001, the region imported more U.S. goods and services than Russia, Indonesia and India combined, totaling $9 billion. Trade with Central America has grown substantially in recent years due largely to the Reagan era’s Caribbean Basin Initiative (CBI), which slashed U.S. tariffs for Central American and Caribbean exports. Under the initiative, 74 percent of the $11 billion in Central American exports to the U.S. in 2002 entered duty free, with the remainder coming in at reduced rates. However, U.S. goods entering the region faced a much steeper average import duty of 10 percent.

One of Washington’s goals in negotiating CAFTA is to correct what it believes to be an unfair trade relationship with Central America. The Office of the United States Trade Representative (USTR) lists the main objectives of the CAFTA negotiations as “strengthening democracy,” “promoting prosperity” and “leveling the playing field for U.S. products.” Washington believes that U.S. trade with the Central American nations is at a disadvantage when compared to that of Mexico, Canada, Chile and other South American countries, all of which have free trade arrangements with that area’s nations.

Leveling the Playing Field

The U.S. claims that CAFTA will benefit all parties. Although Central America already enjoys almost nonexistent tariffs with the U.S. market, averaging 1.1 percent, the agreement would grant greater access to the U.S. market and facilitate foreign direct investment in the five nations making up the area. However, the reality is that Central American governments currently rely heavily on import duties for fiscal revenues, and while area countries would have to eliminate these revenues from tariffs, the U.S. has been insisting on retaining domestic subsidies and other trade protections.

Anti-CAFTA groups point to the shortcomings made evident by the NAFTA agreement to support their thesis that highly subsidized U.S. goods would devastate Central America’s agricultural producers. Since NAFTA’s enactment in 1994, the Mexican agricultural market gradually has come to be flooded by highly subsidized U.S. goods. Prior to NAFTA, Mexico imported 17 percent of the rice and 12 percent of the wheat it consumed. Now the numbers have exploded to 53 and 35 percent respectively. This upsurge in grain imports is not due to any natural U.S. comparative advantage, but rather, derives from U.S. subsidies which allow American rice to be sold at 22 percent below the cost of production, and corn at 33 percent under such costs.

As a result, 40 percent of Mexico’s small rural farmers have lost their jobs or have been forced to sell their plots. A direct correlation to this is that the purchasing power of the poorest 80 percent of Mexicans has declined 39 percent since 1994, causing the magnitude of the segment of Mexicans living in poverty to rise from 58 percent to 79 percent.

Agriculture has been the Mexican economic sector most damaged by the implementation of NAFTA, and Central American countries would stand to be even more wounded, as agriculture is one of the region’s major industries, employing approximately one half of its population and accounting for over 30 percent of Nicaragua’s gross domestic product (GDP) and 22.6 percent of that of Guatemala. Despite Central America’s far lower wages than their U.S. counterparts, rural farmers still cannot compete against U.S. farmers who receive an average of $21,000 annually in U.S. government subsidies. The Bush administration, although claiming to promote trade liberalization, recently guaranteed $170 billion in agricultural subsidies to U.S. farmers over the next ten years. If CAFTA were approved, these subsidies would automatically afflict upon Central American farmers a built-in disadvantage for at least a decade.

CAFTA Snags

In November, trade officials met in Miami and Honduras to advance CAFTA deliberations prior to the final round of negotiations taking place this month. Because the negotiations have occurred behind closed doors, it is difficult to identify the exact progress that has been made, as well as the direction the agreement is headed, but it appears that many of the sensitive issues have yet to be resolved. Sugar presents some of the most delicate problems. According to executive director Charles Melancon of the American Sugar Cane League, 27,000 jobs and $750 million of Louisiana’s economy are directly linked to the industry. With relentless help of cane and beet lobbyists, sugar has long been subsidized in the U.S. to protect the domestic market from much lower world prices. If sugar tariffs are reduced — an issue that is far from being resolved, but which Trade Representative Robert Zoellick has said is still on the table — producers fear that they will be forced to add to the almost net 800,000 jobs that Robert E. Scott of the Economic Policy Institute estimates have been lost in the U.S. due to NAFTA.

Telecommunications liberalization is an issue that is particularly sensitive for Costa Rica. The country’s current telecommunications are run by a state-owned monopoly, which the government argues would require a constitutional amendment in order to liberalize. It is questionable whether Costa Rican President Abel Pacheco could muster enough votes to force through such an amendment. The many country-by-country obstacles that still remain in finalizing CAFTA pose the question whether it is feasible to believe that all of the remaining negotiations can possibly be completed by the December deadline.

Passing CAFTA

An added complication is that Congress appears not as eager to enact CAFTA as it was to approve NAFTA in 1994. Opposition for free trade has become very vocal as the issues become better known. The September breakdown of talks in the Doha Round of the WTO in Cancún, and the protestors applauding the U.S.’s conformance to an “FTAA-Lite” in Miami last month, has only increased the opposition’s resolve. Opponents believe that an increase in foreign investment under the current CAFTA proposal will allow U.S. multinational corporations to further manipulate cheap Central American labor, causing a “race to the bottom” resulting in even lower wages and worsened working conditions. In Honduras, employees working in factories producing goods for the U.S. market average a paltry 90 cents an hour. Human rights advocates fear that increased competition would further drive down wages.

Protesters in Central America, including trade unions, environmentalists, religious groups and university students have actively gathered outside the CAFTA negotiation sessions, pressuring their governments not to agree to the proposal. Alvino Vargas, Costa Rican secretary-general of the National Association of Public Employees voiced the concerns of many of these protesters when he commented, "We oppose the way the treaty has been negotiated, in that there has been great exclusion of social and productive sectors, and it will ultimately break down the social model that for more than 50 years has sustained the Costa Rican people."

On September 15, the White House showed its true concern towards Central America when it used doctored information and skimpy statistics to recommend to Congress the recertification of Guatemala, reversing a Bush administration decision made last January in response to the dramatic evidence of Guatemala’s failure to meaningfully cooperate with Washington’s anti-drug efforts. The White House, concerned at the time mainly with fulfilling its free trade aspirations in Central America, realized that these would not likely be achieved if Guatemala remained decertified.

Fast Track to Nowhere

Last year, Congress approved granting fast track trade negotiating authority to the president. Under its terms, Congress has 90 days to either accept or reject trade agreements presented to them without the ability to amend them. Due to their resulting inability to restructure the CAFTA agreement by amendment, lawmakers have sought ways to influence the negotiations. In November, 21 senators joined together to demand increased environmental regulations in CAFTA. They argued that the current “provisions are not sufficient for the CAFTA countries, where environmental standards and enforcement capacity are lower, democratic institutions are more fragile and sustainable development concerns are more critical.” Along with these legislators, environmental groups are seeking much stiffer requirements to be placed on large companies whose operations could adversely affect the environment of weakly structured Central American countries that have lax standards and corrupted judiciaries.

Help From Washington

Washington, with great insouciance, has taken only diminutive steps to reduce the damage that CAFTA would cause both in this country and throughout Central America. For example, the Bush 2003 budget request includes $47 million in U.S. trade capacity-building assistance for Central America, 74 percent more than was allocated for 2002. Also, the Organization of American States has offered advisory assistance and the World Bank has approved funds to help Central American business firms increase their competitiveness and to facilitate their restructuring in response to CAFTA. However, the large percentage of the local work force that the agreement threatens to displace could profoundly undermine to the frail Central American countries that, unlike the U.S., do not have an adequate safety net system to support those who have lost work and help them to make a transition into new jobs. In addition, as an increased number of countries lobby for the limited amount of foreign investment available, and with many maquiladora factory jobs moving from the U.S. - Mexico border to China, it is doubtful that the number of jobs created will equal the numerous jobs that are being lost right now due to cheaper wages in China and elsewhere in Southeast Asia. As Victor Suarez, director of Mexico’s National Association of Commercial Farms, sardonically observes, “Free Trade is the best recipe to impoverish the region.”

This analysis was prepared by Joshua Woodbury, COHA Research Associate.

Issued 04 December 2003

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