Fair Trade or Free Trade Understanding CAFTA What is CAFTA and why is it important By the Washington Office on Latin America for more information contact Vicki Gass or Gabi Kruks Wisner at 202 797 2171 The proposed U S Central America Free Trade Agreement CAFTA promotes trade liberalization between the United States and five Central American countries Costa Rica El Salvador Guatemala Honduras and Nicaragua Modeled after the ten year old North American Free Trade Agreement NAFTA CAFTA is widely considered to be a stepping stone to the larger Free Trade Area of the Americas FTAA that would encompass 34 economies CAFTA must be approved by the U S Congress and by National Assemblies in the Central American countries before it becomes law Rushed and Closed Negotiations The Bush Administration aggressively pursued the CAFTA negotiations on a very short timeline whereas NAFTA took more than seven years to negotiate and the FTAA has been negotiated for almost a decade CAFTA was completed in one calendar year with limited civil society or Congressional participation Negotiations for CAFTA began in January 2003 shortly after the U S Congress approved a bill to confer Trade Promotion Authority to the White House An Asymmetric Agreement CAFTA is the first sub regional agreement to be negotiated between such unequal trading partners where the combined GDP of Central America is equal to 0 5 percent of U S GDP CAFTA would require market liberalization for the majority of goods and services in Central America including agriculture manufacturing public services and government procurement In return the U S has promised increased market access for certain sectors in Central America including textiles and a limited increase in sugar quotas Rigorous impact assessments of CAFTA have not been conducted in Central America Rather Central Americans are forced to judge the potential impact based upon the ten year record of NAFTA Analysts expect that as occurred in Mexico CAFTA will attract foreign direct investment and boost Central American exports in certain sectors but will provide little benefit to the rural and urban poor of the region Opposition to CAFTA grows While there are many reasons for concern within CAFTA workers rights agriculture and worries over U S job loss have galvanized opposition to the agreement Labor unions development organizations religious groups and private sector lobbies have spoken out against the agreement both in the U S and Central America Legislators in the U S Congress and Central American assemblies have also voiced their concern LABOR CAFTA is a step backward for organized labor in Central America as unlike earlier trade agreements it does not require compliance with international labor standards CAFTA only requires that participating countries enforce their domestic labor laws which are grossly inadequate in Central America AGRICULTURE Central American farmers are concerned that they will be unable to compete in the face of an influx of highly subsidized U S exports under CAFTA Two thirds of Central America s poor live in rural areas and rely on agriculture for employment and food security U S JOBS Free trade policies have become a topic of renewed debate in the U S as the country experiences jobless growth and the outsourcing of manufacturing jobs Textile manufacturers and the sugar industry are actively lobbying Congress against CAFTA Other industries and states that lost jobs or suffered under NAFTA have also expressed their skepticism about the agreement Fair Trade or Free Trade Understanding CAFTA Central American Development Trade Liberalization in the 1990s By Vince McElhinny InterAction vmcelhinny interaction org Trade Liberalization has already occurred in Central America Tariff levels have dropped and imports have surged dramatically in the 1990s In the region s poorest country Nicaragua the average tariff has dropped from 43 2 to 5 in less than a decade But has development followed Export Growth Exports more than doubled in the 1990s from 5 to 15 billion but imports rose even faster and the hoped for diversification has not happened Over 45 of uncompetitive primary products An increased reliance on remittances and replacement migration is now required to finance the 10 billion Central American trade deficit Economic Growth Growth has been relatively stagnant compared to the 1970 s growth rate of 6 2 7 per capita In the lost decade of the 1980 s growth averaged only 1 in the 1990s growth rose to 4 1 1 8 per capita but has been flat since 1997 and well below the East Asian average of 7 for last three decades IDB 2002 In 1975 Central American GDP per capita was about 22 of U S GDPpc but has since fallen to about 13 Foreign Direct Investment FDI On average Central America has seen an increase in FDI of 1 400 million per year 1996 2001 However with the exception of Costa Rica this investment was driven largely by privatization and is now declining biased toward construction rather than productive fixed investment and domestic savings which remain far below levels necessary for sustainable development El Salvador the star neoliberal student has seen its FDI collapse from 1 1 billion in 1998 to less than 100 million in 2003 Few forward and backward linkages were created Export oriented investment ie Maquilas use of local inputs remains minimal Productivity Total factor productivity rates have actually fallen in Central America over the past decade especially in the agricultural sector IDB Research Dept 2002 Total Factor Productivity Growth 1991 2000 has been disappointing for Costa Rica 0 2 Guatemala 0 5 El Salvador 0 85 Nicaragua 1 6 and Honduras 1 95 Competitiveness Central American countries rank close to last on the World Economic Forum s Growth Competitiveness Index El Salvador ranks 48 Costa Rica ranks 51 and Guatemala Nicaragua and Honduras rank 89 90 and 94 out of 102 countries Poverty Trade liberalization has failed to lower poverty the principal Millennium Development Goal Relative poverty in the region is 55 and 2 or every 3 Central Americans in rural areas are poor Inequality Trade liberalization has increased income inequality in the region even in Costa Rica Central America has sustained one of the highest levels of income inequality in the world with a Gini coefficient of 0 55 A recent agrarian census in Guatemala shows that the distribution of land is essentially unchanged since 1979 Trade has also failed to diminish the gap between Central
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