The U.S. free trade agreement with five Central American countries and the Dominican Republic (known as the CAFTA-DR) has been in limbo since the summer of 2004. Recently, the Administration appears to be embarking on a major push for its ratification. Notwithstanding the Administration’s efforts, the CAFTA-DR still faces formidable opposition in the U.S. Congress. This opposition is largely rooted in a few issues: concerns about the impact of the agreement on U.S. sugar and textiles producers, and concerns about the lack of effective protection of basic worker rights in the Central American region.

To date, the Administration’s strategy for passage has focused on courting U.S. sugar and textiles producers’ support. That strategy, however, comes at a very high cost – namely, undoing the already meager benefits in the agreement for the Central American countries and the Dominican Republic. The Administration initiated its ill-advised strategy for passage in the beginning of May, when the new U.S. Trade Representative, Rob Portman, promised Senator Elizabeth Dole that he would re-open the agreement to protect the interests of a narrow segment of U.S. textile producers, in this case, North Carolina pocket makers.

In contrast to its outreach to parochial sugar and textiles interests, the Administration has been singularly unwilling to engage those who have expressed concerns about the labor situation in the CAFTA-DR countries. This is despite the fact that many of the Members raising these concerns have supported every trade agreement considered by Congress since the NAFTA. Ironically, addressing these Members’ concerns would not have required undoing the minimal market access granted these developing countries, and in fact, would have given the Administration room to negotiate a more generous agreement that would actually help them to reduce poverty.

This course of action is not entirely surprising; the Administration took the same approach in seeking support for Trade Promotion Authority (or fast track) in December 2001, passing that legislation by a single vote. Again, in that instance, the Administration chose to build support for the legislation with side deals antithetical to trade liberalization, rather than address concerns about treatment of worker rights in trade agreements. In 2001, the collateral damage from the Administration’s trade strategy included imposition of steel safeguards for political reasons, bigger subsidies for U.S. farmers (which helped to derail global trade talks in Cancun in 2003 and remain a serious issue), promises to shield U.S. citrus and sugar growers in future trade deals (which helped chill progress in the FTAA), and a deal to undo minimal benefits provided to the Central Americans and the Dominican Republic under a 2000 law (the impetus for initiation of the CAFTA-DR negotiations).

BACKGROUND ON SPECIFIC ISSUES

Agriculture/Sugar

Treatment of agricultural trade is probably the most significant factor in determining whether the CAFTA-DR is a net positive or negative for the Central American countries. It will certainly determine whether poverty increases or decreases in those countries for many years to come, because agriculture is the single largest source of employment in Honduras, Nicaragua, Guatemala, and El Salvador. Agricultural production in the region includes staple crops such as corn, beans, and rice for household consumption, production of these crops and poultry and meat for local markets, and cash crops such as coffee and sugar for export. The optimal combination of trade terms for regional rural development would be to phase out the tariffs on staple crops very slowly and gradually, so that subsistence farmers have time to adapt to competition from subsidized U.S. production, while increasing access to the U.S. market for traditional cash crops such as sugar and other agricultural products that exploit the comparative advantages of the region.

As negotiated, the CAFTA-DR gets less than half of this equation right. The Administration did recognize the need for the countries in the region to slowly open their markets for a few staple products, but does not provide adequate transition periods for all such products. This half-measure will mean little for poor farmers in the region, who typically produce more than one staple product, be it rice, beans, corn, chickens, onions or potatoes. For poor farmers, lower prices for any of the products will put already precarious household incomes at risk.  Malnutrition in the region is rising due to low coffee prices.  The shock of CAFTA would likely mean more hunger in Central America.

Moreover, and even more significantly, the CAFTA-DR does not provide new opportunities for rural populations to utilize and benefit from. For example, production of sugar could absorb some of the labor displaced from staple crops. Yet, sugar from Central America and the Dominican Republic is denied meaningful access to the U.S. market. (Lamentably, the Administration boasts of allowing only one additional teaspoon of sugar from the region a week.) Likewise, it is not likely that displaced farmers can be absorbed in the manufacturing sector. As discussed below, the largest manufacturing industry in the region, textiles and apparel, is not likely to expand and may even contract under the CAFTA-DR.

This is not the textbook picture of free trade, and more importantly, it is not a happy outcome for Central America. While households there would face cheaper prices for some food products, the bulk of rural households would lose the cash income needed to maintain already poor living standards. Moreover, such an outcome will take place at the same time that one of the major agricultural exports of the region – coffee – is facing historically low prices, leading to abandonment of many coffee plantations and destruction of existing wage labor jobs for rural workers. Faced with hunger, poor rural families will drift to the cities to join the ranks of the underemployed or migrate to the United States as illegal immigrants.

Textiles and Apparel Issues

The apparel industry has been a leading engine for economic growth in each of the five Central American countries and the Dominican Republic. The competitiveness of the industry to date is due almost entirely to two factors: (1) U.S. extension of preferential access for regional exports beginning in 1986; and (2) U.S. restraints (quotas) on apparel producing countries outside the region.

On January 1, 2005, the Central American countries lost one of these two competitive advantages when the United States, along with all other WTO members, eliminated its quotas on apparel exports from other WTO members, as required under the WTO Agreement on Textiles and Clothing. That will have profound repercussions for producers in the region. Studies by World Bank staff, WTO staff, and the U.S. International Trade Commission estimate that elimination of global quotas will largely benefit a few large, industrialized developing countries, such as China and India. The dominance of China and other large suppliers will come at the expense of smaller developing country suppliers, including the countries in the Central American region. Our study estimates that the region’s share of the U.S. apparel market will drop precipitously, from 16 percent today to less than 5 percent over the next five years.

The CAFTA-DR, unfortunately, is not likely to help the region remain competitive after quota elimination. The CAFTA-DR provisions governing textiles and apparel trade are largely modeled after the NAFTA. While the restrictive NAFTA model did help boost Mexico’s apparel exports for much of the 1990s, the model worked only while global textiles and apparel quotas were in place. For example, from 1997 through 2000, before any meaningful quota elimination, Mexican apparel exports grew substantially. However, with the second and third stages of quota liberalization (1998 and 2002), and China's entrance into the WTO, Mexico's apparel exports began to decline sharply. In 2004, Mexico's apparel exports were close to 20 percent lower than they were in 2000. Over this period, China supplanted Mexico as the largest foreign supplier of apparel to the U.S. market.

The missed opportunity in the CAFTA-DR will have long term economic and social implications for these countries, and in particular, for countries most reliant on apparel trade, such as El Salvador, Honduras and Guatemala. From an economic standpoint, the countries may lose a major source of export earnings, a significant tax base, and indirect employment (e.g., jobs in the transportation sector). From a social standpoint, the expected contraction will have implications for each of these societies. Female workers, who often are the sole wage earner in their households, dominate the apparel sectors of each of the countries. While salaries and working conditions in the apparel sector are far from optimal, employment has enabled these women to raise household incomes and give their children some minimal access to education and basic health care.

Labor

The region suffers from the most egregious income inequalities in the world, and this is both reflected in and partly explained by the highly unequal distribution of rights and protections in the laws of those societies. In most of the countries of Central America, small ruling classes (referred to locally as the oligarchs or "families") have dominated both the economies and the polities for centuries. The societies are still deeply polarized today. Laws are inadequate to balance the rights of the weak (workers and the poor) with the de facto power of the oligarchs and employers. Enforcement is irregular and impunity for the powerful is the norm. Collusion of government labor inspectors with employers is not uncommon. When workers attempt to organize to improve their bargaining power with private sector employers, they are routinely fired. The employers often circulate their names to other firms and the workers may be blacklisted and denied employment elsewhere. Thus, the existing unequal economic and power relationships in society are preserved and perpetuated in the workplace. Some of the worst abuses of the right to organize occur in export sectors, including apparel and export agriculture.

These problems are widely documented and well known to the U.S. government. The U.S. Department of State, Department of Labor, and the Office of the United States Trade Representative have engaged the Central American governments in recent years to seek reforms of weak laws and enforcement capacities. Technical assistance has also been provided, but little has changed. The Administration has decided to perpetuate this unsatisfactory status quo under the CAFTA-DR by refusing to make a condition of the agreement that the Central American governments finally make the changes to law and practice needed to protect the most basic human rights of workers.

Necessary legal changes in each country have been identified by the ILO, which has been designated by all CAFTA-DR countries as the international standard-setter and interpreter of fundamental labor rights. Most of the Central American countries and the Dominican Republic have made previous commitments to improve their labor laws, whether as part of peace agreements to end civil wars or to qualify for preferential trade benefits under programs that the United States extends unilaterally to the region. However, these commitments have not been fulfilled. The governments clearly have not had sufficient interest or political will to do so. Their desire to conclude a free trade agreement with the United States should have been (and still could be) used as leverage to secure the reforms they have long promised to their own citizens and to the United States.