Why I oppose CAFTA

I have had more articles on this blog concerning CAFTA than any other topic. (Here's a list if you are interested). It is fair to say that my past articles have tended to slant against CAFTA, but I have not laid out in one place my own reasons for coming to the conclusion that CAFTA is, on balance, a bad deal for El Salvador and the other Central American countries and the Dominican Republic. So here I go.

I actually start with a bias in favor of trade. Protectionism is usually a bad thing. Trade and commerce are necessary to permit development and increase the level of economic well-being for all levels of society. This includes international trade and commerce. Since tariffs will increase the price of imported foodstuffs and other goods into a country, they will have the impact of increasing prices which will impact all sectors of the country, including the poor. Protecting local industries can leave them inefficient and costly, which may benefit only local elites.

What is the bargain in CAFTA? Central American countries get access to the US markets and the US gets access to Central America. But most Central American goods already come into the US tariff free. The treaty does not actually lower barriers for many manufactured goods from those countries, although it does prevent barriers from being raised in the future. This fact alone undercuts the argument that CAFTA will be a economic boom for Central America.

At least part of US exports to Central America will take the form of agricultural products. This explains why US agricultural interests (other than sugar) favor the treaty. But is this free trade with the US "fair trade"? It is worth noting the US sugar producers cannot compete with sugar from Central America and the Caribbean, and so the US has long used rigid import quotas to protect the US sugar industry. These barriers to sugar imports are lowered only slightly under CAFTA. (But even those slight changes are too much for the sugar industry which is the biggest opponent to the treaty). Yet CAFTA forces Central American countries to lower many barriers to imports from the subsidized US agricultural sector.

If imports compete with local Central American farmers and drive down prices, consumers may benefit but at the cost of even more small farmers losing their farms and moving to urban areas. This appears to have been one of the measurable impacts of NAFTA in the rural sectors of Mexico, and it seems likely that this process would be repeated in Central America. Those rural workers who do not move to the cities are likely to join the dangerous journey of illegal emigration to the US.

So there needs to be job creation for the rural to urban migration of displaced agricultural workers. But is this realistic? In the face of global competition from China and elsewhere, it seems unlikely that Central American countries like El Salvador, lacking a skilled work force, will quickly become job-creating economic engines. Already the maquiladora factories of El Salvador, Guatemala and Nicaragua are losing jobs to China. President Tony Saca of El Salvador talks about creating jobs exporting traditional Salvadoran foods like pupusas to Salvadorans living in the US, but that is a farce (despite how much I enjoy pupusas). Countries like Honduras, Nicaragua and El Salvador do not have educational systems strong enough to start creating a skilled workforce in the short term. These countries are not prepared to confront all the forces of globalization.

Thus one impact of CAFTA is likely to be a decrease in the cost of imported goods, including food, in the country, but at the cost of a rural to urban migration without available jobs in the cities.

But there are other provisions in CAFTA, besides lowering trade barriers, which further tip the balance. Fundamentally CAFTA seeks to lock into place an economic system often referred to as "neo-liberalism" and to eliminate the future prospects for these countries experimenting with alternative regimes.

For example, investor protection provisions in the treaty are designed to protect multinationals who invest in CAFTA countries. The protections take the form of subjecting regulation which impacts those investors to review in international arbitration proceedings. A country's court system, and hence some of its sovereignty, is traded for the benefit of giving these investors comfort. Under NAFTA, multinationals have already shown a propensity to use the threat of enormous damage awards and costly arbitration proceedings to fight economic regulations in both Canada and the United States. Provisions of the treaty which encourage privatization and which can block nationalization of industries, act to lock in the neo-liberal model.

To the extent that jobs come to Central America, there is a real risk that the CAFTA countries will participate in the "race to the bottom" of labor protections. The labor provisions of CAFTA have no teeth. Approving the treaty sends a message to countries like El Salvador that its abysmal record of protecting recognized international norms of worker rights is acceptable to the US.

Finally, the intellectual property provisions of CAFTA are a gift to the pharmaceutical industry. CAFTA locks in protections for drug patents and generic drug information which go contrary to the spirit of the Doha Declaration's recognition that public health must sometimes trump pharmaceutical property rights.

On balance, CAFTA is a bad deal for Central America. The treaty will increase urban migration without a corresponding increase in jobs, and will freeze in place a neo-liberal set of policies, policies which may hamper the ability of governments to deal with problems which CAFTA may create.


boz said…
I disagree in part, but I think you lay out one of the better anti-CAFTA cases that I have read.

I think one question you have to answer is, if CAFTA will create a race to the bottom in terms of labor standards, what keeps that race to the bottom from happening today in a non-CAFTA world? Are Central American tariffs on US goods really that effective?

Just something to think about. Thanks for your contribution to the debate.
Tim said…
I don't think anything stops the race to the bottom in the current regime.

The US, as the largest market of consumers, can, however, use that power to work constructively to improve respect for workers rights. That is what the European Union is doing with El Salvador. The EU is indicating that El Salvador's ability to get certain trade preferences depends on the country's ratification of certain Internation Labor Organization (ILO) protocols. And recently El Salvador, in direct response, decided to change its constitution to ratify those protocols. CAFTA represents a missed opportunity for the US to exercise the same kind of brake on the "race to the bottom."
Anonymous said…
Tim, I hear the argument that agricultural products will be exported to El Salvador at lower prices than the local farmers can compete with, and I disagree. I'm not an economist, but here's my observation. I live in El Salvador, and in the supermercado, almost all vegetables and fruits are cheaper than in say, a Wal-Mart in the U.S. If I leave the air-conditioned supermercado and go to the mercado, which is a much more interesting place, the price drops about 20% and the quality goes up. You have to wash the produce carefully, but it's riper and less expensive. If I leave the city, which I do several times a week here lately, I can buy produce from vendors on the roadside at about another 10% discount. Example, a bag of 100 oranges for $3. Can someone explain to me how this same fruit or vegetable that is sold for higher prices in the U.S. be shipped thousands of miles to be sold at prices at least 30% cheaper than it is sold for in the U.S.? If that were a reality, why are U.S. sugar farmers so worried about Salvadoran imports? The evidence suggests that agricultural products can be grown and brought to market much cheaper here than there. If I'm missing something here maybe you can help me out. But if I'm not, let's tell the local Salvadoran farmer the truth. They have enough to worry about already.
Tim said…

I'm not sure your examples successfully make the point. Most persons worrying about the impact of CAFTA, are concerned about the production of staple crops such as corn, rice, and beans. The only good way I know to evaluate the possible impact is to look at the experience under NAFTA in Mexico. There is a fairly good study by the American Farm Bureau Federation about NAFTA which showed that US exports of such staple crops increased under NAFTA, and the prices for those commodities fell. It is also the case, that fruits, such as the oranges in your example, increased in exports from Mexico to the US. This suggests that one thing El Salvador may need to do is convert to more specialty produce production. But will the resources be given to small farmers to help them do this?
El-Visitador said…
Tim, very good posting. My comments below:

You are correct that CAFTA will not be an economic boom for CA because of lower US tariffs, because we already have few. No: CAFTA will be a boom because El Salvador agreed to protect foreign investment and to binding arbitration. Our courts are pits of non-functioning misery: outsourcing economic disputes to arbitration firms or U.S. courts means, for the very first time in history, that investors can sink their funds in large projects here, and be relatively safe. It is only because of CAFTA that AES can plan a carbon plant here, to provide the power and jobs that we so desperately need. Eventually, steel, manufacture, even silicon should be able to follow.

CAFTA forces Central American countries to lower many barriers to imports from the subsidized US agricultural sector. True. But, first, without CAFTA, we would not have gotten even the microscopic increases to sugar we got. This is realpolitik, not an ideal world. Something is better than nothing. Second, hey!, if US taxpayers want to subsidize the US chicken industry so that Maria can purchase cheaper wings at the Mercado, I have no beef with that. Salvadoreans will not be able to compete in wheat or chicken, but will learn to sell tomatoes and avocados. You'll see. And thanks for the subsidized Wisconsing corn! Made this pupusa that much cheaper.

Were farmers, including those at the subsistence level, adversely impacted in Mexico 10 years post-NAFTA? The World Bank does not think so. I have linked to it on El-Visitador. This was a canard hoisted by opponents to free trade, and evidence a decade later shows it was fakery.

So there needs to be job creation for the rural to urban migration of displaced agricultural workers. But is this realistic? Here is what happened in Mexico: "there is little evidence of adverse impacts of NAFTA on workers [...] Wages and employment tend to be higher in states with higher FDI and trade, and out migration from those states is lower. Wages are also higher in sectors with more exposure to imports or exports. President Tony Saca of ES may talk about creating jobs exporting traditional Salvadoran foods like pupusas, but the poor fellow could not tell a calorie from a carb. You can safely ignore the ignoramus. ES will export jewelry boxes, clothing, and, once foreign direct investment comes in, electric wire harnesses and toys.

Is El Salvador trading away some sovereignty? Arguably. Do you give up some rights when you walk into an airport and have to submit photo ID, being searched, abandon property the State may consider dangerous such as screwdrivers, and limit, for instance, the amount of cash on yourself, under severe penalties? Should you stay incommunicado at home? It's your choice. Both the US and ES have chosen, through their legislative bodies, that trade is worthwile.

Will Salvadorean worker rights be weakened? First of all, when you do not have a job, flipping burgers sounds pretty good, though upper middle class pundits may wince at the concept. And Salvadoreans need jobs, desperately. Second, jobs are voluntary. If your boss is abusive, you can leave. As a result, it is disingenuous to argue that workers are "exploited" ---we are not a serf society. Any person who thinks the job's disadvantages outweigh its advantages can leave, and they do, in ES, every day. Third, workers in ES have rights US jobbers can only dream of. Overtime at 50% and even 100% higher. Mandatory severance, accrued at 1 month salary for every year worked. Mandatory medical insurance (unfortunately, administered by the State through ISSS, so pretty pretty bad). Mandatory pension contributions, 401(k)-style. And Tim, if you are a company of any size, say 50 people, you can't avoid these regulations. I'm sorry. You cannot. The State will encroach you and cease issuing solvencias and permits until you cannot function. People will show up in the newspapers and stuff, especially when businesses go bankrupt (duh!), but for 99.999% of workers, these benefits are guaranteed and a daily reality. The issue in ES is not people getting shafted by employers. People leave the country because simply they cannot get a decent job. We need jobs. We need investment.

As to pharma and intellectual property, I'll leave it for another day. Suffice it to say ES has not invented any useful medicaments I am aware of, and we should be grateful that people in Germany, Switzerland, the UK, the US and elsewhere have invested their money for about 200 yrs, so we can enjoy a readily available 25¢ Aspirina Bayer or a $100 retroviral shot. We truly are a beneficiary of market externalities.

On balance, CAFTA is a great deal for Central America, and that is why March 1st was a great day for ES and even for the US.
Anonymous said…
El-Visitador must be lost. First, people get paid in Colones and buy things with Dollars in El Salvador. Because Dollars arent made there but bought from the US, so the comment on worker rights is lame. Second, if you actually beleive what you read from the world bank then bill o'reilly must seem like a genius to you because all in all, the world bank is plainly a biased corporate US benefactor. a benefactor of NAFTA and CAFTA, keeping countries in poverty levels, that are obviously wrong, still existing especially when we have all this medication that the europeans invented right, (actually marketed from existing home remedies of third world countries)Aspirina has been recorder as far back as ancient egypt when it was taken out of a bark of a tree and crushed all for freee, cheaper that 25 cents i would say.
The fact is that Tim is accurate in his explenation of CAFTA. I suggest you visit El Salvador or any other country you will write about before you form an opinion from biased reports. And if you have been there then leave the cozy private, gated community and walk down to where real folks are barely surviving and instead of analyzing them, actually listen to their stories.