CAFTA's one-year anniversary

This week marked the one year anniversary of the effective date for El Salvador of the Central American Free Trade Agreement (CAFTA). As was true when the treaty was adopted, the views of whether the agreement is benefiting El Salvador are sharply split. US and Salvadoran government officials praised perceived benefits of the treaty, saying that 29 new businesses have opened in El Salvador since CAFTA went into effect, and another nine have expanded their operations.

According to figures from the El Salvador's Central Reserve Bank, exports to the US market totaled $2.005 billion in 2006, a little less than the $2.057 billion in 2005. However, Salvadoran authorities pointed to "excellent" growth in exports of El Salvador's traditional products -- coffee, sugar and shrimp -- and in non-traditional products -- artisan objects, ethnic foods, medicines, fruits and vegetables. Those traditional and non-traditional areas grew by 68% or $403.7 million over 2005. However, the maquila textile sector declined by $216 million, largely because of competition from China. (For another view that CAFTA has had positive effects, see this article from the Wall Street Journal).

Protesters in the streets did not see the results of CAFTA in such positive terms. Hundreds took to the streets object to an agreement which they see benefiting only certain business interests, while threatening small farmers and others. 27 college age protesters were arrested for blocking streets. They pointed to the fact that imports from the US grew much more rapidly than El Salvador's exports. One analysis was published by Equipo Maiz which asserted that under CAFTA in 2006, foreign investment actually declined from $300 million in 2005 to $222 million, unemployment stayed the same, and inflation hit a 10 year high of 4.9%.

In fact, it is much too early to deduce the impact of CAFTA. It seems odd to credit a rise in exports to CAFTA, since most goods from El Salvador already entered the US duty-free. The decline in textile exports because of China's competition would have happened with or without CAFTA. The decline in foreign investment probably has more to do with violent crime scaring off investors than anything else. Inflation probably stems from increasing oil prices in the past year.

Other impacts will be harder to measure. For example, I would guess that the acquisition of all of El Salvador's major banks in the past year by foreign financial institutions is partly related to CAFTA and its investor protections for foreign interests and partly related to dollarization.

Time will tell.