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US Investers Emerge as CAFTA Winners

U.S. Investors and Its Multinationals Will Emerge As Main Winners from CAFTA Ratification

• As part of the Bush administration’s move to expand and legitimize the interests of U.S. investment capital throughout the hemisphere, on May 28 Washington signed a multilateral free trade accord with five Central American nations that, if ratified, threatens to adversely affect living standards for a large percentage of the region’s population.

• Although the Central American Free Trade Agreement (CAFTA) clearly and forcefully addresses the most pressing demands of multinational corporations, such as protecting investor and intellectual property rights, it fails to ensure the enhancement and enforcement of labor rights and environmental regulations and limits the exercise of national sovereignty.

• CAFTA’s provisions undermine Central America’s sovereignty because they establish a set of supranational mechanisms that, by their very definition, supersede laws promulgated by each respective country’s legislative branch. These CAFTA-implemented mechanisms will mainly protect the economic interests of international and domestic investment sources, but will offer worker and environmental groups little protection or right of redress.

• CAFTA will exacerbate the unequal economic relationship that currently exists between the world’s largest economy and Central America’s underdeveloped societies, by eliminating the only recourses the latter possess to protect their national interests, to politically determine governmental policy and to mobilize social reforms.

• CAFTA advocates in Congress may attempt to ratify it in a lame duck session before the legislative chambers officially reconvene next January.


On May 28, 2004, Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua, together with the United States, signed a free trade accord whose underlying principle is the aggressive protection and expansion of individual and corporate investor rights. These privileges come at the expense of environmental protection, legislative independence, and a nation’s right to autonomously determine social and economic policy. Despite the assurances of its proponents, the Central America Free Trade Accord (CAFTA) is not likely to translate into a significant improvement for the region’s atrocious labor rights record because it does not institute the fixed penalties and incentives required for such a profound change. The absence of such provisions is especially distressing in Central American societies that, in a twisted and deadly caricature of respectable collective bargaining, have historically witnessed hundreds of labor leaders gunned down and intimidated by hired hands on the payrolls of land owners and factory managers.

The agreement’s limited and unbalanced scope is a result of a heavily delimited negotiating process that lacked any sense of transparency and only involved government-sponsored experts. In its present form, CAFTA represents a very significant undermining of the traditional sovereign rights of nations and exposes a lamentable deference on the part of Central American governments. This clearly demonstrates their intent of mainly serving privileged elements of their societies at the expense of the generality of their populations. Once implemented, CAFTA will, in fact, likely condemn the area’s agricultural, service and industrial workers to further marginalization, with the accompanying risk that they might fall into abject poverty. Most likely, comparable Central American enterprises will be hard-pressed to successfully compete with foreign competitors because they lack the economies of scale, investor control, access to low interest loans, investor pool and an outreach to skilled management which is readily available to transnational commercial entities.

Numerous NGO’s, civic organizations, trade unions groups and political figures in both Central America and the U.S. have expressed their opposition to the agreement. Despite the recent lull in activity regarding its ratification, due in large part to Washington’s absorption with the November U.S. presidential elections, many Republican advocates of the agreement, such as Rep. Kevin Brady of Texas, hope to push CAFTA through Congress during a possible lame duck session before it reconvenes next January 2. The Congress Daily quoted Brady as stating that “A lot depends on the November elections, [but] a lame duck session is a powerful weapon.” CAFTA critics maintain that now is the time for those likely to be adversely affected by the pact to make their arguments known and quickly form a broad-based domestic opposition and tap into the already existent anti-free trade international movement in order to coalesce against it, on an urgent basis, before it is too late. A victory by Democratic presidential hopeful John Kerry, who has repeatedly stated his intention to reevaluate all free-trade agreements, could also provide anti-CAFTA advocates with an opportunity to participate in producing a more balanced draft than the one now ready for ratification.

Uneven ground
If and when CAFTA is ratified, it will represent a momentous victory to business sectors in the U.S. and in Central America. The five Central American nations that are taking part in the agreement constitute a relatively underdeveloped region whose total GDP equals only $152 billion, or a negligible fraction of the U.S.’s $11 trillion economy. CAFTA fails to adequately consider this facet of the signatories’ asymmetrical relationship. According to renowned Nicaraguan academic Rene Oscar Vargas, “CAFTA is a vehicle for an increase of U.S. exports and an opportunity to maximize the potential of its basic industries: information technology, telecommunications, the service industry, agriculture and intellectual property.” On another occasion Vargas commented, “What is CAFTA but an agreement between unequal partners.”

The principle that states that free trade is beneficial to all those involved is misleading and simplistic as it disregards the fact that with unfettered access, the advantage almost always lies with the powerful. In its current format, CAFTA is the economic equivalent of a 220-pound heavyweight being allowed to step into the ring against a 112- pound flyweight. Although international trade and foreign investment are necessary components of any economy, it is a state’s responsibility to prioritize the interests of all its citizens, not just the privileged few, and certainly not that of transnational corporations.

For the CAFTA agreement to be ratified, it must be approved by the legislature and signed by the president of each signatory country. A full and transparent reexamination of its costs and benefits, and who will be the winners and losers, is imperative because renegotiation of contested clauses will be all but impossible once the agreement is ratified. A look at Mexico’s experience with NAFTA, and its unsuccessful attempts to renegotiate agriculture-related provisions, underscores the serious implications of ratifying CAFTA. Free-trade agreements are not in themselves pernicious instruments. However, they must prove beneficial to both parties, and the Central American Free Trade Agreement, in its current format, does not satisfy this overriding requirement. If this agreement is implemented without alterations, it will demonstrate that unscrupulousness and greed will prevail over the best interests of the citizens directly concerned.

Foreign investment is the panacea
Behind the rhetoric used to tout CAFTA’s virtues - that it promotes a win-win scenario - the reality is that it will provide already well-heeled international and domestic corporations and investors with lucrative incentives, protections, and almost plenary immunity from prosecution. In Article 10.28 of the agreement, the definition of an investor is purposefully vague as it encompasses any individual involved or considering participation in a business venture. If CAFTA is ratified, any investing individual or corporation will have the vested right to challenge a nation’s national or local policy, regulation, or law which they perceive as an impediment to their business dealings, and can call for it to be voided before a supranational dispute panel. This ability to circumscribe constitutionally enacted national legislation and regulation, or seek monetary compensation for their enforcement, gives rise to a new class of parties who essentially will be above the rule of local law. Like the North American Free Trade Agreement (NAFTA) ratified by Mexico, the U.S. and Canada and put into effect in 1994, this accord would provide private parties a protection that today is not in conformity with existing U.S. law. In addition, CAFTA does not clearly and reciprocally address a nation’s legitimate course of action when a corporation is thought to have participated in unlawful behavior within its boundaries.

To enforce its bylaws, CAFTA will create an unaccountable supranational body bestowed with the authority to redress any so-called infringement on a foreign corporation’s or investor’s economic interests. Not only is the burden of proof in these cases placed upon the respective government, the plaintiffs face little consequence if they submit a frivolous complaint. Past experience with NAFTA suggests that environmental regulations will be the object of most of the infringement suits that will be filed because, despite Central America being the second most biodiverse region in the world, sustainable development is not a central tenet of CAFTA. In fact, the mere threat of legal action, and the accompanying litigation costs, should discourage the region’s economically-strapped nations from aggressively enforcing environmental regulations.

The optimistic contention made by the Office of the U.S. Trade Representative in an August 2003 Interim Environmental Review, that “CAFTA may have positive environmental consequences in Central America,” is disputed by Dr. Angel Maria Ibarra, president of the Salvadoran Ecological Unit (UNES). He notes that “a simple reading of the text and its relationship to other chapters reveals its essentially cosmetic nature. CAFTA is a custom-made agreement for transnational corporations.” This is a thesis that U.S.-based private environmental organizations, such as the Center for International Environmental Law and the Sierra Club, have consistently reaffirmed.

In negotiations with the Central American countries, Washington pushed for and succeeded in institutionalizing a mechanism that suborns the very tenets of a country’s sovereignty. There is no doubt that CAFTA will hinder the ability of the region’s citizens to propose, discuss, and implement the rules of conduct which they may consider to be desirable and appropriate. The pact, therefore, challenges the very essence of using legislative action as a legitimate vehicle to achieve economic and social redress. Interestingly, whereas Washington refuses to participate in many supranational bodies, like the International Criminal Court and the Kyoto Protocol, citing their need to protect national interests, such fears are hypocritically brushed aside when lucrative private business transactions involving the state are at stake and the possibility of unfavorable rulings against enterprises are most likely to be minimal.

Handcuffing the state
The restrictions which CAFTA imposes on Central American governments will extend well beyond the capacity, or lack thereof, of states to bind companies to comply with domestic laws. In simplest terms, CAFTA will prohibit states from determining and implementing economic and social policies which their branches of government believe are most suitable to their developmental needs, thus forcing them to adhere to a “one size fits all” liberalizing recipe that does not account for the unique particularities of a given country. Under this system, the agreement’s provisions substitute for an objective cost-benefit analysis of the beneficial or negative impacts a particular policy, regulation, or law would have on society. If, for example, Costa Rican authorities decide that they wish to encourage an emerging and possibly lucrative sector of the economy through tariffs and incentives, as Ireland and the lauded Asian Tigers most successfully did with their information technology and manufacturing industries, respectively, CAFTA provisions could be used to prohibit them from doing so.

In addition, the eventual elimination of all tariffs will expose essential domestic industries to potentially devastating competition from multinational corporations that enjoy a tremendous advantage based on their economies of scale or, as is the case with white corn, Washington-subsidized production. Even government procurement, a mechanism that the U.S. government itself utilizes in certain instances to offset market inequities, will not be exempt from CAFTA’s strict regulations. According to Chapter Ten of the pact’s text, foreign actors must be guaranteed the same treatment, in both the public and private sphere, as a nation’s citizens. This begs the question of who the Central American negotiators were in fact representing when they agreed to these stipulations, because they demonstrably will not benefit the majority of their own citizens. In the long term, the region’s severely underdeveloped economies can be expected to fall prey to the natural forces of the market and will undoubtedly incur heavy domestic job attrition, the displacement of thousands of small and medium scale farmers and a more skewed distribution of wealth to the benefit of the nation’s privileged capital-holding minority. Salvador Arias, a Salvadoran legislator with the Faribundo Marti Liberation Front (FMLN), told La Nacion USA, a Washington D.C. area daily, that his country alone would likely lose upwards of 54,000 agricultural jobs during the first year of CAFTA’s implementation.

No new labor protections
CAFTA’s proponents assure critics that the agreement will encourage a marked improvement in labor rights for Central American workers. The chapter in CAFTA that addresses this issue, however, seems much more concerned with ensuring a level playing field for U.S-based corporations than protecting the region’s workers. The real aim of the agreement’s provisions appears to be the ability to retain the excessively low costs of production that grossly unsatisfactory working conditions help maintain without appearing to do so. In this respect, even though Article 16.2 states that Central American governments must “strive to ensure” compliance with their domestic labor laws and guarantee not to “encourage trade or investment by weakening or reducing the protections” these laws provide, this, and other passages like it, fall far short of constituting a sturdy defense of labor rights and make the chapter’s overall lackadaisical tone one of the agreement’s most grievous deficiencies.

In a March press release, Human Rights Watch (HRW) strongly criticized the agreement’s glaring reliance on current Central American domestic legislation that, until now, has been ineffective in curbing labor rights abuses. In addition, that organization maintains that real change will not come about unless CAFTA adopts strong “procedural guarantees for [their] enforcement.” Without clearer mechanisms that redress worker abuse (which ideally would be equal to those that CAFTA would provide to investors) only blind optimists foresee anything more than a marginal improvement of the currently corrosive, if not deplorable and inhumane, labor rights situation in Central America. In fact, the question of whether CAFTA, in its current format, will improve the overall standard of living of the region’s inhabitants is highly debatable at best.

This analysis was prepared by Gabriel Espinosa Gonzalez, COHA Research Associate.

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