Graduate School of Development Studies
The Politics behind the Free Trade
Agreement between Guatemala and the
United States of America
A Research Paper presented by:
Carlos Alberto García Reyes
Guatemala
in partial fulfilment of the requirements for obtaining the degree
of
MASTERS OF ARTS IN DEVELOPMENT STUDIES
Specialization:
Master in Governance and Democracy
M.A. G&D
Members of the examining committee:
Dr Karim Knio (Supervisor)
Dr. Rosalba Icaza (Reader)
Dr. Sylvia Bergh (Reader)
The Hague, The Netherlands
November, 2010
Disclaimer:
This document represents part of the author’s study programme
while at the Institute of Social Studies. The views stated therein are
those of the author and not necessarily those of the Institute.
Research papers are not made available for circulation outside of the
Institute.
Inquiries:
Postal address:
Institute of Social Studies
P.O. Box 29776
2502 LT The Hague
The Netherlands
Location:
Kortenaerkade 12
2518 AX The Hague
The Netherlands
Telephone:
+31 70 426 0460
Fax:
+31 70 426 0799
2
Introduction
iv
Chapter 1
The DR-CAFTA Negotiation Process
6
Chapter 2
Free Trade Agreement Background
2.1 Brief overview of the negotiations
and signing of the Treaty.
10
10
Chapter 3
Negotiation Objectives of the DR-CAFTA
3.1 General Objectives
3.2 Structure and Conditions of Trading
12
14
Chapter 4
Nexus between the General Objectives of the
DR-CAFTA and Neoliberalism.
16
Chapter 5
The Context
5.1 Globalization, Integration and development
5.2 Inclusion into the global economy and
Central American integration
5.3 The DR-CAFTA in the globalization context
24
25
29
31
Chapter 6
The DR-CAFTA Political and Economical analysis
6.1 External Environment
6.2 Internal Environment
34
36
38
Chapter 7
Government Commercial Policy Plans and the
Relationship between Guatemala and the United
States of America
7.1 Beneficiary sectors
7.2 Analysis of important beneficiary sectors
of the DR-CAFTA
42
42
44
Chapter 8
Critical Analysis of the four principal rules
of the DR-CAFTA
49
Conclusions and Reflections
52
Bibliographic References
55
3
I.
Introduction
The Research presented below contains an analysis of the process
of negotiation of the Free Trade Agreement between the United
States of America, Central America and the Dominican Republic,
giving a specific approach to what has happened in Guatemala.
In this research paper, we will observe how since the beginning
of the negotiations some Guatemalan productive sectors were
involved in the process of negotiation of the bases of Dominican
Republic, Central America free Trade Agreement (DR-CAFTA).
The document begins with a brief description of the antecedent
or background of the Treaty as well as the nature and the need to
negotiate a Treaty that could allow the Central American region a
possible economic and social development in all its scales, specially
in this case, Guatemala. Subsequently it enters in the history of the
negotiation of DR-CAFTA as well as the primary and secondary
actors.
It is important for the interest of the present document to clarify,
that this documents intention is not to describe the process itself, but
even more, tries to provide a political-critical analysis, analyzing the
various components of the free trade agreement by stages.
Through out the document, the author seeks to show and
analyze the nexus between the objectives of DR-CAFTA and the
prevailing economic model that not only Guatemala but the Central
American region follows.
Once detailed the particulars of the negotiation it proceeds to
give an analysis of the context of DR-CAFTA and the possible results
in the short and long term, analyzing how a free trade agreement
with the most important commercial partner in the region plays an
important role in globalization, integration and development of the
region particularly in the case of the Republic of Guatemala.
It is without a doubt for Guatemala, DR-CAFTA along with the
Association Agreement between the European Union and Central
America consists in two of the economic events of more relevance in
the last few decades, also as well you will see in this document, this
Treaty is not only an agreement for tariff barriers liberalization and
opening of markets, but also is a treaty which provides assistance to
the Central American region to take a step forward in the integration
of the region as well as to enable the incorporation in a global
economy.
iv
Subsequently, as it is evidenced in the document, there are
internal and external contexts which are of singular political
importance to Guatemala, due to the reason that through this
negotiation Guatemala was obliged to create and generate a series
of reforms to its political and legal system to accommodate a
possible accession to the US market and thus enhance
competitiveness and productivity of the different productive sectors of
the country.
Next in this document, we refer to the commercial policies of the
Government, referring to Government plans from political parties that
have held the Presidency of the Republic in the last decade; these
parties are the Gran Alianza Nacional (GANA) and the Unidad
Nacional de la Esperanza (UNE) actual political party at the head of
the Government of the Republic. In the same order of ideas, it is
analyzed the commercial relationship between Guatemala and
United States of America, with an emphasis on certain benefited
sectors as a sign of the possible outcomes of DR-CAFTA.
After delivering this clear theoretical and situational framework of
DR-CAFTA in Guatemala and the Central American region, proceeds
a critical analysis of the implications of the Treaty for the political
system of Guatemala, where it can be highlighted with crystal clear
clarity how the Government of the United States of America offers,
proposes and stimulates the country (Guatemala) to concretize this
Treaty with the aim of having higher exports of its products to a
developing country. It is here where we can highlight a bit how
history repeats it self, where a powerful commercial and
economically country such as the United States of America does not
give suggestions or possibilities but forces a "developing country" to
opt for a mechanism of exchange of products and opening up of
markets with certain unfavorable parameters for the last.
Subsequently it is presented a critical analysis of the four
principal rules of DR-CAFTA, giving a better approach for the reader
of the bases on which a Treaty of singular importance is founded and
that without a doubt, will bring along it side the possible negotiation of
new and better free trade agreements with other economically
developed countries such as Latin American countries and others in
different continents of the world.
Finally this Research Paper offers the reader a number of
conclusions which seek to show relevant aspects on the productive
sectors involved and other less privileged, as well as a series of
public policy recommendations for Guatemala and its possible
impact in the short, medium and long term.
v
Chapter 1
The DR-CAFTA Negotiation Process
In the past five years the process of globalization of markets for
goods, services and capital has deepened, generating greater
interdependence between countries and regions. These forces,
especially small countries as Guatemala to raise its competitiveness
to achieve a better integration in the global market, and thus
countries achieve sustainable economic growth and development
process. However, given that, in a world more interconnected there is
greater sensitivity to external shocks; it is necessary to have
strategies to leverage the benefits of globalization in general and free
trade agreements in particular. In this vein, in the present research
plans of Government of both parties such as the Gran Alianza
Nacional (GANA) and the Unidad Nacional de la Esperanza (UNE)
are described and discussed, with the expressed purpose of
comparing these plans with the governmental actions implemented in
this field, with the exception that it only discusses the first year of
UNE government.
Economists, academics and civil society had focused on a great
discussion and impasse, especially concerning economical growth by
the raise of exportations of goods and services, the increase in the
national and foreign investment rates, all this strengthened by the
juridical certainty provided by the consolidation and improvement of
unilateral preferences granted through the Caribbean Basin Initiative
(CBI)
Before this FTA, the Central American Countries spoke about
their economical issues in a closed and weak environment, without
paying attention in what was being debated on the neighbor
countries: yet, with this FTA the debate has completely regionalized
the debate. The ones in charge of the decision making,
entrepreneurs, academics and civil society had been involved in a
whirlwind of discussions in which have been brought out numerous
positions and reactions about diverse topics that the FTA includes.
by that time it was comprehensible that the discussion about a
free trade agreement could become polarizing, departing from
ideological discussions, in which it was pretended that the DRCAFTA could be sold as the miracle that will save the Central
American economies or as the apocalypses that would cause their
complete collapse. The sides were clearly established and limited.
The debate about the FTA became instead as an extension of what it
had been discussed since few decades before 2002 between
defenders and critics of globalization, radicalized even more because
6
this FTA involved nothing less than the United States of America,
country which in several occasions has raised diverse discussions
and reactions in Latin America.
After the promulgation of the Decree 11-2006 of the Guatemalan
National Congress “legal reforms for the implementation of the Free
Trade Agreement DR-CAFTA”1 on July the 1st 2006, all negotiations
that started in January the 8th 2003 concluded, after nine exhausting
rounds in which Guatemala, El Salvador, Honduras, Costa Rica and
Nicaragua jointly participated.
Even when the FTA with the United States of America
commercial normative is applicable to all signing States, some
chapters are applied in a different manner in the bilateral commercial
relations, issue that makes, from a legal point of view, that the FTA
constitutes a different juridical entity for each one of the commercial
associates. From this point of view, it is wise to refer to this
commercial agreement as the Bilateral Free Trade Agreement
between Guatemala and the United States of America, and due to
this, from here on further the DR-CAFTA is going to be treated in
bilateral terms.
With a process duration of 12 years, on January the 1st, 1984
the Caribbean Basin Initiative (CBI) imposed the introduction of a
program of the United States of America government, designed to
promote economical development in the Central American region,
through the free import taxes for most of the products from the
Central American countries and the Caribbean to the United States
territory. Later in the 1990’s the CBI was modified by the “Law of
expansion of the economical recuperation of the Caribbean Basin,
which introduced improvements to the program of benefits apart from
giving to it a permanent character. In the year 2000, the expansion of
the CBI was approved, improving its coverage while giving access to
certain products which had been excluded by the previous
agreement, such as clothing goods, the equity in taxes for canned
tuna was accomplished, shoe industry and some leather goods that
Mexico was already enjoying due to the previous North American
free Trade Agreement (NAFTA), and by then it was agreed that by
the 30th of September 2008 or la date in which it could enter into
force the Americas Free Trade Area by its abbreviation in Spanish
(ALCA)2, or a similar agreement between the United States of
Reformas legales para la implementación del Tratado de Libre Comercio República
Dominicana-Centroamérica-Estados Unidos de America; translated into english by
the author
2 Área de Libre Comercio de las Américas
1
7
America and those beneficiary countries from the Caribbean Basin
Initiative. Es 30
Under the scheme of the CBI, Guatemala was allowed to export
tax free the 30.66% of its total tariff, equivalent to 3,262 tariff
fractions, which comprehended the vast majority of products oriented
towards the North American market. Yet, products such as coffee
and bananas enjoyed a free trade before the CBI, some others like
oil and precious metals, the existing tariffs, had more a symbolic
character. In this sense, it is probable that the effects of the FTA over
the increase in exports, at least in a short term, could be below the
generated expectations.
With the DR-CAFTA, it was added around 6,404 fractions of the
tariffs to the list of products that already enjoyed of free tariff, with
which the coverage for this category was expanded to 90.88% of the
Guatemala’s total tariff, which is precisely where the non explored
potential is settled. “Never the less, it is imperative to recognize that
still now, Guatemala has to make great efforts not only in investment,
infrastructure, technology and human resources training, to take all
this possibilities, but also to be well prepared to accomplish all the
high quality standards, technique normatives, phytosanitary
measurements, customs control and other possible dispositions not
less important that are essential to access the North American
market.”3
Referring to the impact of the Free Trade Agreement in the
region’s economies, the World Banks argues:
“…the magnitude of this positive effects and the form in which
they are distributed inside the national economies of Central
America, will depend primarily on the capacity of each country in
taking the opportunities that the agreement offers, specially because
the benefits of the foreign commerce depend on the ability which
each economy owns to change its patterns of production and
employment, and of adopting new foreign technologies. To be more
precise, the evidence suggests that the institutional reforms and the
public investment in innovation and infrastructure will affect the
magnitude of the impacts of the foreign investments, the transfer of
technologies and international commerce.”4
3
Evaluación De Las Relaciones Comerciales Guatemala-Estados Unidos De America:
Dos Años De Vigencia Del Tratado De Libre Comercio. Ministry of Economy, Guatemala,
2008 (translated into English by the author)
4
World Bank Los efectos económicos del CAFTA-RD: Más arte que ciencia,
capítulo IV. Mayo 2005 The Economical Effects of the DR-CAFTA: More art than
Science, chapter IV, May 2005 ( Translation into English by the author)
8
Indeed, the United States of America is the main economic power in
the world, which even in this juncture of economic recession is the
largest market worldwide, and in the case of Guatemala, continues to
be the main trading partner. In this context, Guatemala in conjunction
with the other countries of the isthmus5 and the Dominican Republic
signed a Free Trade Agreement with the United States of America,
popularly known as DR-CAFTA in order to consolidate the trade
preferences granted in previous agreements. The implications of this
Treaty in the commercial area are also studied and analyzed in this
paper.
5
El Salvador, Honduras, Nicaragua and Costa Rica
9
Chapter 2
Free Trade Agreement Background
Before the term of DR-CAFTA in July 2006, Guatemala enjoyed
preferential access to the market of the United States of America
through the Caribbean Basin Trade and Partnership Act (CBTPA)
whose validity was from October 2000 to June 2006. The CBTPA
was a program of preferential tariffs benefits granted unilaterally by
the United States of America to the countries of Central America and
the Caribbean basin. Through this via the United States of America
granted preferential access to more than one third of Guatemalan
exports.
The history of the CBTPA was the Caribbean Basin Initiative
(CBI), whose validity was from 1984 to the year 2000 and it granted
tariff-free access to a wide range of export goods that met the
conditions for preferential access. It is worth mentioning that the
CBTPA awarded best entry to products agreed at the CBI, quotas
and tariff benefits only if they were produced with American raw
materials.
Finally, it is important to emphasize that the preferential access
granted to Guatemala under the aegis of the CBI and then the
CBTPA, favored the change in the structure of exports, because if at
the beginning of the 1980s the Guatemalan exports to the United
States of America consisted primarily of coffee, bananas, sugar,
cotton and meat, and by the end of the 1990s non traditional
products represented more than half of exports.
2.1 Brief overview of the negotiations and the signing of the
Treaty.
On January 16th 2002, the President of the United States of America
George W. Bush announced the intention of its Government to
negotiate a free trade agreement with Central America and the
Dominican Republic. On August 2 of the same year, the Congress
gave authorization to the Fast Track6 to initiate negotiations with
Central America and Dominican Republic. January 8, 2003, was
It is the authority granted by the Congress to the presidential administration to
negotiate trade agreements that may not be amended by Congress and can only be
approved as have been negotiated. The trade promotion authority expired at the end
of June 2007.
6
10
officially announced the start of negotiations for the free trade
agreement7.
The rounds of negotiations were conducted with little more than a
month of separation between each one, a timetable quite tighter if
compared to other agreements (i.e. Association Agreement between
the EU and Central America); it is worth noting that in the middle of
each round of negotiation the Central American countries met to
agree on common positions.
Once completed the negotiations, another process of decisions
took place in each country, in which everyone should pass through
its legislative power the entry into force of the agreement.
Prior to the delivery of the deposit of ratification before the
Organization of American States (OAS), Guatemala had to adapt its
legislation as agreed in the Treaty, which justifies the period of more
than one year from the publication in the Official Journal of
Guatemala to the deposit of ratification to the OAS. It is during this
period where the dispute stands in the case of Guatemala, and when
some sectors started to demand a renegotiation of the Treaty, when
almost it had been developed with a year of anticipation8.
The DR-CAFTA ratification process in the United States of
America was not free from difficulty, since the Democrat Senators
showed a firm opposition to any attempt to negotiate trade
agreements with other regions. On February 20th 2004, the President
of the United States of America, George W. Bush, notified to the
Congress of his country the intention to subscribe a free trade
agreement with Costa Rica, El Salvador, Honduras, Guatemala and
Nicaragua - Dominican Republic was incorporated on August 5,
20049
United States took as a model for this Treaty agreements that had been previously
signed with Chile, Peru and Mexico: the contents of DR-CAFTA is therefore quite
similar to these agreements, excluding only chapters of temporary entry of business
people and the chapter policies monopoly, competition and State enterprises.
8 This reflects little information from all sectors, as well as limited government
capacity to reconcile the various interests.
9 Extract: Cabrera, M. and J. A. Fuentes (2004) El CAFTA y el desarrollo humano en
Centroamérica. Guatemala, Programa de Naciones Unidas para el Desarrollo PNUD
(translated into english by the author)
7
11
Chapter 3
Negotiation Objectives of the DR-CAFTA
3.1 General Objectives
Employment and investment generation, exports increase,
competitiveness improvement, fight against poverty, rural
development, consumers benefits.
To maximize the benefits of a Free Trade Agreement between
Central America and the United States of America (DR-CAFTA) is
important that the negotiations were conducted in a pragmatic and
simple way to reach a mutual fulfilment in a reasonable time. The
conduct of negotiations would be headed by the Ministers
responsible for Foreign Trade of each Central American country and
the representative of the Commercial Office of the United States.
Regarding to this point, the Central American countries
presented the following ideas regarding the negotiation process with
the U.S.:
The ongoing building of a partnership based on common
interests and shared values, in this case resulted from the Free
Trade
which will contribute to the development of a strategy in
Central America and the consolidation of democratic systems as well
as the principles that promote freedom, human development and
social equity.
Seek into the negotiation results that privileged the
establishment of more and better opportunities to provide improved
standards of living for people, to strengthen the position of Central
America as a region for investment and development and enhance
productive capacities, employment generation and sustained
economic growth.
To promote with DR-CAFTA economic and social development
in Central America through the consolidation of economic
liberalization achieved so far and to promote the continuance of the
process leading to economic growth and improve living standards of
people in Central America, helping to ensure the sustainability of
democracies in the region.
To maintain the building of open economies and eradicate any
existing protectionism, based on modernization and trade facilitation
with the conviction that the best option to promote economic and
social development is free trade.
12
Likewise the DR-CAFTA was intended to reach a free trade area
between the parties, providing new and expanded trade opportunities
for the presented and potential export supply, both in the area of
goods and the services; the purpose of all this was to make this “free
trade zone” a boost factor to the process of negotiating the Free
Trade Area of the Americas.
In a time it was proposed to set out, or to create a stable legal
framework to promote and develop investment, joint ventures and
strategic association in the territories of the Parties, taking the
opportunity to improve, expand and extend the market access
conditions resulting from U.S. existing trade preferences.
It was evident that dealing about these issues brought out the
necessity to regulate the trade in goods and services by establishing
clear, transparent and stable regulations, which allowed the required
dynamism to the growth of business in order to promote sustainable
development of production and trade flows among member
countries.
It was necessary to establish mechanisms to avoid the
application of unilateral and discretionary measures that affected
trade flows in order to achieve, increase and promote competition by
improving productivity and competitiveness of goods and services in
the region.
The DR-CAFTA seeks to promote economic cooperation and
complementarity between member states of the free trade area
through the implementation of specific projects on priority issues for
each of the countries and also promote ongoing communication with
civil society in the negotiation process.
It is worth mentioning that within the framework of negotiations,
the strict obedience to the Constitutions of the countries was
imperative in order to uphold the rule of law and thus be consistent
with the rights and obligations of the World Trade Organization.
Within DR-CAFTA negotiation the principle of reciprocity of
rights and obligations ought to be imperative and also the
recognizing of the differences in dimensions and levels of
development between the parties, which promoted the stipulation of
asymmetric treatment for Central American countries to be
implemented in accordance with the nature of the different disciplines
covered by the Treaty.
During the first negotiations arose the necessity of recognition of
Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua as a
sole negotiating party and the United States of America as the other
13
part, with the objective of negotiating the legislation part jointly, this
mechanism was also used to establish the Annexes that will conform
the Treaty, however, aspects of each country had to be considered
separately.
In conclusion, it is important to emphasize that within the
negotiation was established that the negotiation process was tolerant
and would be governed by the principle that “nothing was agreed
until everything was agreed”, thus providing greater certainty for the
parties that the DR "CAFTA was negotiated as a package that would
have the following effects:
1. A third-generation agreement with a broad and comprehensive
scope that would include, in addition to provisions for exchange of
goods, provisions regulating trade in services, temporary entry of
business people, investment regulations and other relevant issues at
that time, such as electronic commerce, business facilitation, among
others.
2. Provisions concerning the build-up in the area of origin with regard
to trading partners with whom all parties have an effective free trade.
3. Working from a base text which could be agreed at the beginning,
except those provisions that still require further negotiation.
3.2 Structure and Conditions of Trading
1. Central America privileged a simple structure with a limited
number of trading desks that deal with related issues, such as:
 Market access (at the beginning this group focused on: market
access for goods, rules of origin, custom procedures, safeguards, trade facilitation, technical barriers to trade and sanitary and phytosanitary rules);
 Services and investment (this group was responsible to deal
mainly on, cross-border trade services, temporary entry of
business people and investment)
 Institutional provisions and dispute settlement (this group was
responsible for dealing, mainly, about institutional chapters of
the treaty and dispute settlement);
 Other topics of interest (this group was in charge of dealing
with the topics as unfair trade practices, competition policy
and government procurement)
 Negotiating Group Heads. (Conformed by Deputy Ministers or
the respective Chief Negotiator appointed by each country;
they were responsible to carry out the negotiations on a global
basis).
2. The foreign trade Ministers were the highest decision-making
instance by the end of this negotiation. The technical leadership in
the negotiations was entrusted to the Deputy Ministers or Heads of
14
delegation, appointed by his country's delegate. Also, the directors of
each country were responsible for the coordination of the respective
negotiating groups.
3. Among Ministers and Deputy Ministers, Central America appointed
a spokesman on behalf of the five countries, through a pattern of
rotation according to the President pro tempore, with the support of
representatives of other countries. And, among the Coordinators of
the negotiating desks, a spokesman was appointed by consensus
among Central American countries.
4. It was proposed that the meetings were held in alternative venues,
two meetings in Central America and one in the United States of
America, in the case of Central America the headquarters will be
determined according to the alphabetical order of the countries.
5. The Private Sector participation into the negotiations was
characterized by adjoining a fourth party, leaving aside private
interests for the different economic sectors, which in my opinion,
generated distrust between public and private sector, not knowing
under which arguments the negotiation would be.
At last, it is essential to mention that although, throughout the content
of DR-CAFTA the objectives are not fully developed, the precepts
under which they should negotiate a treaty that grants equal
conditions to both parties are fully evidenced in a concrete and clear
way.
Nevertheless, as Foucault suggests, there are a number of ways
in which the exercise of power can be resisted. In this specific sense,
the Central American countries could have made resistance to some
of the positions adopted by the US Government towards what should
be negotiated and what should be inputted into the DR-CAFTA. It is
also wise to affirm, that also according to Foucault “at one point that
resistance is co-extensive with power, namely as soon as there is a
power relation, there is a possibility of resistance”10. So in this sense
it is obvious to argue that, Central American States, could negotiate
under different terms the DR-CAFTA, but we also have to remember
that an economical strong State such as the United States of
America, has more tools to coerce this source of treaties under their
own scope, rather to live an open context for the less powerful
nations to discuss.
10
http://www.michel-foucault.com/concepts/index.html
15
Chapter 4
Nexus between the General Objectives of the DR-CAFTA and
Neoliberalism
It is important to mention that although the model of the Central
American economies is not frequently discussed, is the neoliberal
model that prevails.
As Joseph Nathan Cohen argued “Neoliberal policies are
widely argued to have helped developing countries prosper, and the
historical record can be read as validating these claims… Neoliberal
policies differentiate fast- from slow-growth countries in only one period - the early 1990s - and its effects may be attributable to the considerable influx of desperately-needed foreign capital and debt relief
that accrued to reformers during that period.”11
Professor Cohen argues that freer markets are not intrinsically
more prosperous, and might render little benefit apart from attracting
foreign capital.
Once seen Dr. Cohen’s position, we can discuss the topic that
really concerns us and is nothing more than to clarify which aspects
can be unified overall DR-DR-CAFTA objectives with the neoliberal
model followed by some of Central American countries, in this
particular case Guatemala.
After DR-DR-CAFTA negotiation (mid-2004), during 2005 DRCAFTA was analyzed and ratified by all the National Congresses,
with the exception of Costa Rica. The government of the United
States of America was trying to achieve an economic objective, but
above all a very apparent geopolitical fact, DR-CAFTA represents,
after 12 years into the North American Free Trade Agreement
(NAFTA ), the next step toward a possible new economic, military
and politics colonization in Latin America. It was certainly at that time,
a necessary step, given the serious difficulties being experienced by
all the processes of liberalization negotiated multilaterally, and in
particular those that have been discussed within the World Trade
Organization (WTO) given the stumbling Doha Round ministerial
meeting in Cancun, Mexico (September 2003) and Hong Kong
Neoliberalism’s Economic Success: Market or State-Engineering? November 3,
2010 The Graduate Center, Queen, New York
11
16
(December 2005) and the rejection that has led to the Free Trade
Area of the Americas.
It is convenient to analyze three preliminary considerations to
clarify the nature of the negotiated agreement:
1. DR-DR-CAFTA has nothing new. Represents rather the
destination and the legalization of policies imposed on the region
beginning in the 80's through Structural Adjustment Policies, which
led to a gradual opening of trade borders and financial. As Joseph
Stiglitz concludes, before drawing a new reform agenda for Latin
America, addressing poverty reduction and social transformations
under way, and before macroeconomic stability the following topics
must be considered:
a. The reforms increased the vulnerability of countries at risk,
without increasing their financial capacity to address them;
b. The macroeconomic reforms were not balanced;
c. The reforms pushed privatization and strengthening to the
private sector, but underestimated the public sector.
2. The DR-DR-CAFTA is attached to the Plan Puebla Panama (PPP)
since 2001, which tries to create in the southwest of Mexico and
Central America, the physical infrastructure to make the region
attractive to international capital investment and facilitate the
exploitation of natural resources. The completion of the PPP is
subjected to the capacity of debtedness of the countries in the region
with international and regional financial institutions, and to attract
private investment during the phase of the project.
3. Despite the introduction of PPP as a regional integration project,
the main problem is that Central American countries have lacked a
true national integration. Indigenous minorities or, in the case of
Guatemala's indigenous majority, have been marginalized from
economic and political life of countries. Their rights have been
trampled. Huge peripheral and marginal areas throughout Central
America have remained as such, without having experienced the socalled "development" or "progress." The model states that "marginal
citizens" are relocated to the major industrial corridors to be
developed around high-speed arteries (motorways), although even
today the majority of roads have not been paved. It is a paradox of
development.
The ratification of DR-CAFTA is given in a context of widespread
opposition, even in the U.S. In the U.S. Congress, the Treaty was
approved with 217 votes to 215 against; this represented a minimal
support to an initiative defined as "the number one trade priority for
17
Bush on 2005." There was also opposition from trade unionists,
social organizations and civil society. In Central America the main
actors were unions, rural and indigenous communities. Throughout
the region, the popular forces were mobilized against the treaty,
claiming that its application would undermine the right to life of
millions of human beings, causing the death of American agriculture,
the total loss of national sovereignty, the weakening of labor rights
and the granting of natural resources to foreign companies.
The reasons for their opposition are quite obvious and just by
reading some of the reports published on the tenth anniversary of
NAFTA in 2004, both versions, those developed by oppositional
NGO's to free trade, and the framers of World Bank officials, millions
of peasants and indigenous Mexicans expelled from their land by
unfair competition from subsidized agricultural products by the
government of the United States of America, forced to move to urban
centers and look for a job in industrial areas, or to seek their fortunes
beyond the borders of Mexico.
Considering the remarkable similarities between the NAFTA and
DR-CAFTA (none considers the profound economic asymmetries
between the signatories), it is easy to foresee the possible
consequences of DR-CAFTA in Central America in the economic and
social aspects.
In a time, there was no opposition from the governments or
parliaments to the Treaty in the Central American region except for
Costa Rica, where the Treaty had not been approved, and where civil
society was very well organized and also had sort of a greater
access to education. It is also important to mention the incapacity of
Central America representatives to negotiate an agreement that
serves the interests of citizens.
The problem lies in the political class:
"Negotiating means having a project and making it viable through
negotiation.” During the negotiation of DR-CAFTA, one of the parties,
the United States of America, have built a project and its viability.
The other part, which represents the interests of the Central
American oligarchies, does not have a plan B. And as evidenced in
the DR-CAFTA signing, either had the will to resist the draft
counterpart. In fact his project is part of the project to the other party.
18
To have a better understanding of the critics about DR-CAFTA, it
is important to analyze the implications of the Treaty on these three
aspects: its impact on the agricultural sector, the maquiladora
industry and the control of natural resources.”12
The agricultural sector
In October 2003 an analytical article published by the World
Bank clarified the opportunities that DR-CAFTA represented for
Central American agricultural and agribusiness sector as well as the
biggest challenges for a true effectiveness of the treaty.
According to researchers at the World Bank in Washington, the treaty
should answer two key questions:
1. How to ensure better market access in the U.S. for agricultural
exports and agribusiness from Central America;
2. How to promote a more open market to U.S. imports of foods
that are "sensitive" in domestic markets of Central American
countries.
The same document states, however, the categories that will take
advantage of new opportunities of DR-CAFTA:
"In Central America the only positive reactions to the new traderelated business comes from exports of traditional goods (coffee,
bananas, sugar, meat) and non-traditional and producers involved in
agriculture of import substitution or non-tradable goods."
In the same article the World Bank suggests that Central
American countries should eliminate rates that currently protect
"sensitive products" (key agricultural goods for domestic
consumption as an example, milk, yellow corn, rice, beans, sugar,
meat, pork and chicken). The restrictions are not correct, -quotes
WB- referring to the poor competitiveness of these products.
DR-CAFTA predicts for the future of American markets that they
are going to be literally flooded with cheap corn produced by U.S.
(produced in excess by very high subsidies to agribusiness in the
U.S.). This will cause the retirement from the market for small
Barahona, Amaru, “En el TLC hemos entregado en bandeja nuestras ventajas mas
valiosas” Revista Envío Número 270, Managua, Nicaragua, septiembre 2004 “In the
FTA we have given up our most valuable benefits” Envio Magazine issue # 270,
Managua, Nicaragua, September 2004.
12
19
farmers who produce corn for home consumption and then sell the
surplus to meet other expenses or emergencies.
The Washington theorists believe, however, that this is not a
problem. According to the estimates from a database collected in El
Salvador, Guatemala and Nicaragua, "Most of the families in these
countries will be benefited in some way from the price change
associated with the elimination of trade barriers for agricultural goods
classified as "sensitive." More specifically, 90% of all families in
Nicaragua, 84% in Guatemala and 68% in El Salvador, respectively,
were recognized as net consumers of the basket of sensitive goods
and therefore can be assumed to be able to benefit from price
changes related to the DR-CAFTA. Only 9% of families in Nicaragua,
16% in Guatemala and 5% in El Salvador have been classified as net
producers of the basket of sensitive goods and therefore may
experience reductions in their welfare."
The lack of dialogue between the two positions is undoubtedly a
deep cultural gap, starting with the definition of "poverty" developed
by the World Bank for those who earn less than US$2 a day, which
considers subsistence farming and the existence of small Indigenous
farmers as a relic of the past, and admits that is not possible to
survive out of the market and to fight those who would eliminate that
right.
The opening of these markets is a matter of survival for the
economic model and the industrial system that goes through a phase
of overproduction and finding it increasingly difficult to enter new
markets.
The Maquiladora Industry
The word maquiladora is used to describe any factory, domestic
or foreign ownership, with central government permission to import
and export products under a special regime of tariffs and taxes on
income. The term evokes often typical images of the first generation
of maquiladoras a very large plant throughout the country, owned by
transnational companies. However, there is great diversity in the
manufacturing sector, from huge subsidiaries of transnational
corporations to small businesses that export only a portion of their
production under the maquila system to complement the domestic
market sales.
Millions of peasants expelled of their land will be forced, as we
have seen, to relocate into to the maquiladora industry. The sector is
an important outlet for many who otherwise would have to seek their
destiny in America.
20
It is a sector, however, that witness several years of deep crisis
(exacerbated at the beginning of 2005 by the expiry of Multi Fiber
Agreement, which restricted the export volume of textile products
from China). Notwithstanding the claims of its promoters, even the
DR-CAFTA will save the textile industry, one of the main turns of the
maquiladoras in Central American countries. Todd Tucker, Research
Director of Global Trade Watch of Public Citizen in the United States
of America, discuss some of the economic myths related to DRCAFTA, and highlights structural conditions that make Chinese
cotton totally invincible for firms located in Central America.
With or without DR-CAFTA, says Tucker, "Central America will
lose its market share, for the huge cost advantages in China." The
low level of Chinese wages, usually about 15-30 cents per hour,
costs of production yields are unlikely to be equal, while in
Guatemala, the Dominican Republic and Costa Rica are anything but
decent wages (U.S. $ 1.49 per hour, $ 1.65 and $ 2.70 respectively).
Even the geographical proximity between Central America and
the U.S. can secure important advantages over the Chinese industry.
First, some Chinese shipping companies have significantly reduced
the journey time to the U.S. west coast and also Central American
producers can never become, for reasons of scale and production
capacity, to providers "on measure" (they will not be able to present
to the great U.S. stores new styles in a short term when the way of
life and fashion changes so suddenly).
It is therefore necessary to think about whether it can be
considered positive or negative the presence of a greater amount of
assembly companies in these countries.
The estimates for Mexico, the birthplace of the maquiladoras, along the U.S. border- show that the domestic value added per dollar
exported by the maquiladora industry does not exceed two cents
(2%).
It is seen that this type of industry, already receiving large
government grants (do not pay taxes, have unlimited access to
water, are not recognized trade union rights-) does not produce
wealth for the country. Can all this be considered "development”?
The control of natural resources
The Indigenous are forced to leave their land also for corporate
strategies of some multinational corporations. The corporate
interests, and the search for new and higher profits, are indeed the
21
engine of economic policy promoted by the U.S. government. For the
rural sector, strategies promote only grabbing acreage and always
higher for large agricultural plantations. DR-CAFTA recognizes the
“competitive advantage" of these Central American products in
comparison to those from US. In addition there are plentiful natural
resources currently concentrated in areas traditionally inhabited by
indigenous people.
According to the neoliberal logics, no matter what, it will be
necessary to divest the control of the indigenous population from the
land. Whether through the DR-CAFTA or through the constitutional
reforms approved and that will take part of the Agreement or
approved in previous years to please the World Bank or International
Monetary Fund is seeking to legalize the looting.
To understand this situation, it is enough to read the General
Law on Concessions that the Guatemalan Congress held in 2004,
concerning the arrangements to promote the development of the
State's infrastructure and public services and secure the basic
regulations for its implementation and / or provision of legal persons
on private, domestic or foreign, by granting concessions.
The law, which applies to the construction and / or maintenance
of roads, highways, viaducts, tunnels, railways, ports, airports,
aqueducts, pipelines, installation and / or operation and / or service
delivery of electricity generation, tourism development, public
buildings, clean and environmental protection, postal services, food
services for hospitals, prisons and schools, development of identity
documents such as passports, certificates, patents, public transport
systems (bus, surface trains, subways, etc.), and tourist parks, has
received the approval of the Committees for Decentralization and
Development of Congress to recognize, through this, right-legal or
legal persons who invest heavy sums of capital in the country, "to
recover and get the profits that an investor is required to participate
in the process of concession of public services or public works."
It is worth asking whether the North could have interest in
controlling some of these sectors.
What they failed to understand on the northern Central America,
specifically in Mexico, is the strategy of activist organizations in
Central America to relegate to second place the PPP. The PPP is
embedded, as we have seen, with free trade and, specifically, the
DR-CAFTA. The PPP, is clear, is not a free trade agreement, but
responds to the same interests of American elites that move in close
collaboration with Central America. I is well understood that it has
22
been a priority for social and civic organizations in Central America to
beat DR-CAFTA, detach it from the PPP, and not draw their intimate
relationship, has produced a predictable effect: the DR-CAFTA has
been approved in six from seven legislatures and begin to govern
trade relations soon, notwithstanding the delay has had on Costa
Rican legislature. But the PPP is now a subject virtually unknown in
Central America. Its reintroduction will take some extra effort, as
seen in the Sixth Mesoamerican Forum in San Jose Costa Rica, held
in December 2005 and where 1,500 representatives attended various
regional organizations. Despite its importance to Central America
and Mexico, the PPP was not a point of analysis (except for a brief
roundtable discussion sponsored by Mexican organizations), and
proposed strategies to fight against it. Worse than the prevailing
ignorance, is the progress that still has the mega infrastructure
projects in the region without proper organization and response of
the people who most suffer its effects.
In summary, the strategy to "isolate" the DR-CAFTA and
concentrate all the weight of the opposition to defeat it was not as
successful as expected. Instead, it missed the opportunity to
continue to link the two phenomena as individual and local
expressions of a larger project and where we need to point all
batteries: capitalism in its present neoliberal phase.
23
Chapter 5
The Context
As we have discussed in previous chapters, the Central American
governments, opted to sign a free trade agreement with the United
States of America. When taking effect, it was neither a panacea that
boosted the development of the countries of the region, nor the
devastating consequences predicted by extremists’ critics. How
positive or adverse outcome would have as an element to contribute
to development depended mainly on the policies that the Central
American governments adopted at national and collective level, to
avail the opportunities offered and still offers such legal instrument.
The come into force of DR-CAFTA was a fact of complex and
diverse consequences, which inevitably had and still have not
provided many leads. Therefore, at the time, the issue raised so
many conflicting reactions, ranging from opponents and proponents,
through a wide range of intermediate positions. This was so, that in
the short term, some businesses and their employees benefited from
the Treaty and others could not withstand competition from imported
goods and services of the United States of America, notwithstanding
the gradual elimination regimes for products more sensitive. At the
same time, some stakeholders were willing to adapt to greater
discipline demanded by the commitments contained in the
instrument, and others were reluctant to do so. Still other opponents
were behind the Treaty a new expression of historical vocation by the
United States of America to maintain a dominant presence on the
national stage. Therefore, those who did not share the latter view,
and believed to benefit from DR-CAFTA would defend, and
conversely, those who may suffer suspected or doubted the
intentions of the other party, would be seen with reluctance or
outright opposition.
In addition, it also had a temporary problem, since the potential
benefits for society as a whole required some time to establish, while
the potential costs could arise almost immediately. In that sense, it
would be little comfort to employers who wrecked or individuals who
lose their jobs to try to convince them that in the medium to long
term, the country as a whole would be benefited.
But that was exactly the challenge that lay ahead Guatemalan
community. The challenge was to imagine if the Central American
economies and the Dominican Republic would be better positioned,
because of the rearrangements that involved creating a free trade
area with the United States of America to promote their development.
On the other hand, in order to calculate the net effects for the future
of gradual and progressive integration of markets in the region and
24
the United States of America, it was also convenient to consider the
cost of not doing so. In an increasingly globalized economy, and
given the strategy chosen by the United States of America to address
the eventual establishment of a zone of hemispheric free trade
through partial agreements with other countries, or groups of
countries in Latin America; Central America and the Dominican
Republic simply could not afford to be left out. To do so would yield
some ground to other countries in terms of investment flows and
trade.
In consequence the Central American governments decided to
sign the Treaty; it seemed accurate and consistent with the choice
made a few years ago, to try to improve the quality of integration of
their economies in international trade and financial flows. Indeed, one
could argue that the option of further integration into the global
economy through various instruments, including the signing of this
and other free trade agreements, was the best that Central America
and the Dominican Republic had could do, and it would be wrong not
to take advantage of it, despite its inherent risks.
We must acknowledge the complexity of the issue and the
legitimacy of the fears aroused. First, as noted in the short term, DRCAFTA does not only generate benefits but also costs, regardless of
whether the net balance shows a positive balance of net generation
in terms of production, employment and welfare, or as they are
derived to major macroeconomic variables. Second, DR-CAFTA
commitments involve rules, laws and policies that would not be
necessarily welcomed by all sectors of the Central American
population. Third, the region tends to redeem a non-reciprocal
preferential treatment agreed with the United States of America, a
new regime where preferential treatment is based on reciprocity,
however, the asymmetries between the United States of America, on
one hand, and Central America and the Dominican Republic on the
other. Fourth, many of the commitments would have a huge impact
and its consequences would be very difficult to assess.
According to this, we find the incidence of DR-CAFTA on the
Central America integration, and since its conceptual standpoint, this
instrument not only has the potential of bringing together the
countries of the region around a common initiative, but also to divide
them around the possible need to reconcile national positions and
gathering into a regional position.
5.1 Globalization, Integration and development
The debate over economic integration, free trade and development is
part of a much broader debate that has gained considerable strength
in the world: the effects of economic globalization on developing
25
countries. This is a very complex issue and many shades. As it is
well known, since the 80s, the international economy began to run on
new bases, shaped by technological innovations, especially in
computing, communications and transportation. This gave great
flexibility to international companies to decentralize their production
and marketing patterns, and taking the advantage of changing the
way they dealt with the goods and services between countries. It
became feasible to produce and assemble components on more than
one country and set up a large distribution center - including a free
zone, all based on the comparative advantages offered by each
location in terms of efficiency and productivity.
In reaction to this new status of things, all developing countries,
with differences of degree and intensity, were forced to change their
economic policies in order to participate in a global economy
promising opportunities, but also burdened with threats. The past
paradigm, combining an export orientation based on static
comparative advantages of home country with an incipient
industrialization based on import substitution led to a new paradigm,
characterized by trade and financial liberalization and a readjustment
in the relationship State-market, favoring the latter. In the world of
ideas, these trends were favored by certain tiredness which was
perceived as the excesses of state interventionism and the welfare
state, pointing in several countries to approach closer to traditional
liberalism.
In order to have the opportunity to participate in globalization, the
countries were faced with the need to respond to certain patterns of
conduct,
including
prudent
macroeconomic
management,
privatization of public enterprises, the strengthening of institutions
considered important for a good "business climate" and
strengthening the rule of law, and deregulation to promote the free
competition. This new paradigm - described by many analysts as the
"neoliberal model" - was embraced by some countries to
enthusiastically and intentionally, in the belief that when inserted into
the global economy and allow market stimuli extended exercise their
magic, the export sector became the engine of economic growth. In
contrast, other countries showed more apprehension to the risks of
exposing their poor economies and weak institutions to intensely
competitive global economy, but given the imperative of adopting the
new paradigm in a defensive way, as not doing so would have meant
even greater risk to "stay out" the most dynamic currents of
international trade and major external capital flows.
Empirical results from the application of "openness" in its
different alternatives have been less than satisfactory up to date.
With the exception of Chile in Latin America and some Asian
countries - having China and India in the lead, although both of these
26
models, especially Chinese, have very peculiar features - in general
economic performance of countries development during the last ten
years has been less satisfactory than the ones observed during the
fifties, sixties and seventies. However, it is difficult to establish
precisely causal relationships between the effects of globalization,
the policy response in each country, and economic performance,
since it is a function of many variables, both internal and external.
Indeed, there are no absolute truths when it comes to assessing
the impact of globalization on a country like Guatemala. Some
industries and some companies respond to the opportunities of
globalization, others operating under enhanced protection regimes,
aren’t they able to survive? Even businesses that are internationally
competitive and eager to progress can increase productivity per
employee to the extent that, the generation of employment would be
modest, zero or even negative. In addition, tend to measure the
effects of short-term policies without taking into consideration the
potential impact on future productivity and benefit to the consumer.
It is not surprising that relying on market signals as a great
resource allocation mechanism, the benefits of growth tend to focus,
at least in the absence of policies to mitigate this effect. Obviously,
those with greater calling to work into the market
-firms with
economies of scale, with good business organization and access to
technology and finance - to thrive more than those who do not have
the necessary requirements. Therefore, it is said often and with some
reason, that globalization tends, at least in the early stages of
adapting to the global economy; to benefit the most developed
countries and questioning the benefits to the poorest countries.
Following this logic, it also argues that, in the inside of each country,
are the strata of the population with greater ability to defend those
who benefit, often at the expense of the strata of the population
behind.
There is abundant evidence supporting this hypothesis of
increasing concentration of the benefits of globalization in favor of
more economically advanced countries and from within each country,
between different strata of the population (ECLAC, 2002). This is the
basis of the vigorous debate that is ongoing about the advantages or
disadvantages of the phenomenon, including up controversy
emotional elements. Thus, opposition to globalization has led to
street protests if the authorities of multilateral emblematic of the new
paradigm - the International Monetary Fund, World Bank and WTO held its regular conferences, and has even given rise to a Forum
27
which takes place every year to bring together opponents and critics
of globalization.13
The complexity of the issue also has another expression: the
difficulty of measuring, objectively, the net costs and benefits of
globalization from the perspective of a developing country like
Guatemala. This is because, in addition to methodological problems
involved both the costs and benefits are direct and indirect effects,
and both have multiplier effects that can be positive or negative.
Moreover, the relation of costs and benefits of globalization is not the
past model, but what would happen in the absence of incentives to
try to exploit potential of globalization. For example, Guatemala
achieved an average economic growth rate of 5.5% annually in real
terms in the sixties and seventies, the rate fell to 4.1% in the nineties,
and 2.2% from 2000 to 2004. But you can not say that if Guatemala
had persisted in the policy implementation bygone growth rates over
the past decade had recovered the dynamism of the sixties and
seventies, but rather, it is likely that within the constraints of
globalization economic performance would have been even more
disappointing.
But the strongest reason to not fall into the trap of an analysis of
costs and benefits of globalization is that it places the emphasis
where it should be. The right question that Central would have to ask
is: What policies should continue to benefit from globalization and
reduce the risks? This is due to the fact that globalization seems to
be an irreversible fact, at least from the perspective of small
countries that are not in a position to influence mostly on the main
parameters of the global economy. This does not mean resigning
ourselves to expect the effects of an external phenomenon, but to
adopt an active attitude to assimilate in the most constructive way
possible. So America and the Dominican Republic are undergoing a
more competitive regime, marked by market signals, but this does
not mean that there is room - even an important place - for public
policy, aiming to support employers and employees in the region to
seize the opportunities of globalization and mitigate its risks.
This observation - which insist on repeatedly throughout this
chapter - provides an opportunity not only to support the productive
sectors to improve their productivity through investment in
infrastructure, education, research, funding, and a favorable
investment environment but to reduce or even reverse the trend
towards concentration of income brought about by globalization
World Social Forum held in Porto Alegre, Brazil, as an antagonistic event of the
simultaneous World Economic Forum in Davos, Switzerland.
13
28
before alluded. Indeed, one of the opportunities that Central
American countries, but especially Guatemala, is that DR-CAFTA
would raise its exports consists of ornamental plants, vegetables and
fruits, building on successful experiences already registered. Thus,
many small and medium farmers in the Guatemalan highlands have
the possibility of joining an incipient tendency to participate in
supplying the U.S. market (Mellor, 2003). This will be benefiting the
Guatemalan population strata that today as well as years ago, are
lagging behind. The central point to be emphasized is that there is a
wide range of topics to be addressed to facilitate the transition
towards an international competitiveness. This gives special meaning
to the Central American integration, which can help supporting this
transition, for example, through the spread of "best practices" in any
country in the region to other countries.
In summary, the author argues that Central America was not an
option on whether or not it wished to participate in the process of
globalization. However, if would be accessible to the countries of the
region more proactive policies to connect with the potential that
globalization offers and to take certain measures to protect
themselves from risks. The truth is that the realities of global
economic performance would not admit old schemes, as the return of
high protective tariffs, exchange control regimes, and
macroeconomic management that undermines financial stability. Like
it or not, the quest to conquer markets and access to financing (and
technologies that accompany such funding) does not leave much
room for maneuver. That is the context in which to place the test
hoist, the Central American integration, the signing of DR-CAFTA
and the link between both processes.
5.2 Inclusion into the global economy and central American
integration
One could argue that the agenda for free trade agreements for new
generation (those concluded after 198814) is the same agenda of
globalization, at least in regard to the trade regime. In that sense, the
debate on DR-CAFTA is a microcosm of the debate about
globalization, and most of the Treaty rules derived from the rules of
the World Trade Organization (WTO). It was not always so, the
Central American integration process, whose formative years
occurred in the late fifties and especially after the signing of the
General Treaty on Central American Economic Integration in
Free Trade Agreement between Canada and the United States of America in 1988,
which opened doors for the NAFTA in 1994)
14
29
December 1960, was designed among other things, as a functional
process of industrialization.
Reasoning, right at that time, was that markets were at a too
small scale to promote efficient industrialization; as opposed to
import substitution based regional market, economies of scale that
would allow reasonably. They also adopted the figure of regulated
monopolies, under the Convention on the Regime for Central
American Integration Industries. Some designated industries were
free trade granted for a certain period. At the end, this instrument
was used only in rare cases due to stiff opposition from the
Government of the United States of America to the excessive state
intervention that this mechanism assumed. But the remarkable thing
here is that Central American integration reflected the paradigm in
vogue in the fifties: the creation of tariff barriers to protect rising
industries, with a healthy dose of state intervention in support of
industrialists. This support took the form of protection, tax incentives,
financing and development of physical infrastructure to support the
production and trade in Central America.
From the second half of the eighties, and more pronounced
throughout the nineties with the signing of the Protocol to the General
Treaty (Protocol of Guatemala) in December 1993, economic policy
at the internal level each Central American country and regional
level, reveals a gradual but steady transition to the new paradigm of
globalization. In particular, it enters a period of tariff reduction and
economic policies that favor the export outside the region even more
than the intra-trade. This effort to combine regional integration with
the "openness" should be seen as an ongoing process not yet
concluded.
The General Agreement is a reflection of the "old school
integration" open regionalism while postulating a functional
integration to globalization, that is, an effort to reconcile the
interdependence basically driven by market signals resulting trade
liberalization in general (the effect of globalization) with those born
under special preferential status. What is pursued with the "modern
integration is the integration and complimentarily of explicit policies to
be consistent with policies to improve international competitiveness.
Central American integration today contains elements of both
models - the "old", compatible with import substitution and to a much
greater proportion of the "modern", compatible with globalization-. It
is characterized by an incomplete process of trade liberalization,
external tariff items with few but important outstanding uniformity,
and pressure groups resistant to wear this transformation to its
logical model. Moreover, they warn into different positions in the
30
region about the speed with which is desirable to move towards the
establishment of a customs union.
Then perhaps, it should be said that while progress has been
moving forward in direction to achieve the Central American
integration to adapt to the requirements of globalization, that
adaptation process is not complete. One of the main questions that
raised the entry into force of DR-CAFTA was whether its provisions
would become sources of tension to advance this process of
alignment, causing disruption to the interior of Central American
integration, or whether, on the contrary, would serve as incentive for
the alignment process to be completed.
5.3 The DR-CAFTA in the globalization context
Under the past paradigm, under which the Central American
Common Market was established, would have been an unthinkable
part of a free trade area with any industrialized country, much less
with the United States of America, the larger economy on the planet .
The economic thought of the time claimed that there were significant
asymmetries between developing and industrialized economies, and
that the only way to overcome these asymmetries was partially
through the protective tariff and non tariff, supplemented by nonreciprocal preferential treatment by industrialized countries for
developing countries. It was argued with some logic, that the
emerging Central and weak industries would be literally destroyed if
they had to compete without protection, with similar U.S. firms,
operating with much greater economies of scale, not to mention their
ability to organize and access to knowledge, technology and
financing. It was also argued that industrialization was necessary to
remedy an international division of labor in comparative advantages
supported by the Central American countries relegated to the role of
producing commodities for which demand in world markets was
volatile and low dynamism, insufficient to support a level of decent
life for all people.
The prevailing attitude was that in the international trade
relations, when a small and weak country was facing a big and
powerful country, the first had everything to lose. This contradicted
the thinking of economists of the classical school, in the late
eighteenth and early nineteenth centuries, including Adam Smith and
David Ricardo, who argued that international trade benefits relatively
more to small and weak economies, which had no the option to
support their supply of goods and services in a large domestic
demand, as occurred with the fastest-economic dimension. Today, in
the context of globalization, argues that it makes sense that a rich
country with a great capital would sign a trade agreement with a
relatively poor country that has abundant labor as the complementary
31
aspects of their economies are at sight, and contribute to the
generation of new flows of investment and trade for the benefit of
both parties, and their societies as a whole.
Whatever the case, the fact is that the demands of globalization
led to developing countries, including Central America, a trade
liberalization policy. The average nominal tariff in Central America
went from 27% in 1986 to 7.2% in 2000 and today at 6.5%. A drastic
way to consider the advisability of forming a free trade area with an
industrialized country is to ask whether, having spent a mean
protection level of 27.0% to 6.5% in a period of less than twenty
years, would not be worth to go the extra mile, from 6.5% to virtually
0%, in exchange for a stable relationship to market access in that
country - one of the larger markets of the world - as well as the
possibility of attracting new investment. This question brings up many
nuances, but underlines the fact that the tariff implicit in DR-CAFTA
is not new, and that the extent of trade liberalization and treated
since 1986 has been much higher than the rebate owed to the
Treaty.
Since then, the average tariff of 6.5% still contains some scatter,
with some zero or low tariffs and other still relatively high. But it is
also true that the Treaty itself provides for long relief regimes,
including some that include grace periods. It’s important to
emphasize that the decision to conform a free trade area with highly
developed countries is substantially less daring in the context of
globalization than it would have been the case just a decade ago.
Moreover, from the American perspective, the stakes behind DRCAFTA has three additional elements. In the first place, it means the
consolidation of all the policies being applied in the region - with
differences in content and scope from one country to another designed to cope globalization in a successful way. The discipline of
the DR-CAFTA to the conduct of economic policy and institutional
arrangements undoubtedly mark an intensification of the trend in
recent times regarding the implementation of policies consistent with
globalization. Secondly, it means the opportunity to attract new
investment, and to encourage not only the Central AmericanDominican market, but the U.S. market itself. In that sense, it would
reinforce the trend of globalization, which led many United States
companies, for example, clothing, electronics and medical devices to
install or outsource apparel clothing or assembly in Central America.
The assumption would be that the stability conditions that provide a
free trade area would enhance the interest of American businessmen
to install some activities in the region to supply the U.S. market (and
by extension, the global market), based on comparative advantages
Central American countries, which include, for now, relatively cheap
labor.
32
Third, the signing of DR-CAFTA does not limit the subscription of
another treaty, as occurred with the Association Agreement between
Central America and the European Union; this suggests that Central
America should not put all its bets on one developed country. Indeed,
the FTA with the United States of America and the Dominican
Republic would cover a phenomenon that economists call "trade
diversion" to prevent American importers entering the cheapest
product on the market under artificial advantage to establish a regime
of free trade for American goods, as opposed, for example, substitute
products originating in Japan or Europe.
It is worth mentioning that the concept of net profits through trade
creation, partially offset by the costs of trade diversion, was raised
around 1950 by Professor Jacob Viner, and generated a strong
controversy academia. Today, in the context of globalization, the
concept of trade diversion is less debated, and even some scholars
consider it irrelevant. However, for arguments are handled in this
paper, the distinction is still useful.
33
Chapter 6
The DR-CAFTA Political and Economical analysis
Developing countries have limited options to join the global economy.
Not only are at a distinct disadvantage compared to developed
countries, but are excluded from the overall markets and the global
economy.
The only path that remains to follow is that, if and only if, they are
integrated into economic blocs.
In Central America, Guatemala is the largest market and the
biggest economy of the region, with an estimated population of
fourteen million inhabitants and a GDP of about thirty six thousand
seven hundred eighty seven million seven hundred and fifty two
thousand
hundred
and
forty
two
American
Dollars
15
(36.787.752.142$) .
This nation alone is not interesting or appealing to any other
developed country, or any other global economic bloc.
The differences and disadvantages of all Central American
countries such as Belize, Panama and the Dominican Republic, are
obvious.
Even as an economic bloc they are unattractive to other regions.
The negotiations conducted with the United States of America
known as the Free Trade Agreement (DR-CAFTA) has special
features, starting with the market leading position of one of the
parties and the way the negotiations were held.
The negotiation was never held as an economic bloc from
Central America and Dominican Republic. Each of the smaller
countries tried to negotiate and make trade preferences for certain
products and services that are unique. Within the overall negotiating
FTA bilateral negotiations were given by each of these countries and
the United States of America, which were often made in a reserved
manner, treating each one and all to gain advantages over their
Central American peers.
15
http://datos.bancomundial.org/pais/guatemala
34
The result is pretty obvious. The treaty as an instrument of
economic development has not bore the fruits that the negotiators
considered and proposed.
Within the negotiation and cited the example reference only to
the predominant position of the United States of America, there are
obligations for each of the small countries that even forced them to
make legal reforms to its domestic law, as preconditions for the treaty
to enter into force.
Undoubtedly we can say that the negotiations were never held
on an equal footing and that the final result of the treaty is achieved
only by the acceptance of the small countries that joins the
requirements and conditions of the economically dominant country.
It is obvious that under these conditions and circumstances in
each country's internal approval, since the treaty and amendments
needed a resolution from its Parliaments, it claimed in many cases
an ideological tinge and, in every country is born then a front of
opposition.
The approval process in the case of Guatemala was not easy.
The objections made by social groups who saw the treaty entirely
unfavorable for the country conditions and adverse consequences for
the economy and especially for the agricultural area; and for some
conditions such as actual loss of jobs as opposed to the possible
creation of new employment sources; it generated a slow process full
of contradictions that at the end resulted in an urgent approval of the
Treaty in the Congress and
consequently the arose
of
manifestations of rejection from employment sectors.
As I mentioned earlier in this chapter, small countries have no
choice. Although conditions of treaties and economic blocs’
integrations are not entirely favorable, it is the only way to travel.
Either that or face a slow but assured economic death and therefore
condemn to more underdevelopment, poverty, extreme poverty and
hopeless conditions to the settlers.
We all understand that a free trade agreement will always seek
benefits for each country, but I think it requires a system and method
of trading in equity and compensation rules that the result of these
agreements actually enable countries with small economies to join
the world market with positive and tangible results that help raise the
standard of living of those underdeveloped and poor regions of the
world.
In the past five years, the globalization of markets for goods,
services and capital has increased, creating more interdependence
35
between countries and regions. This requires, in particular, from
small countries like Guatemala to raise their competitiveness and to
achieve a better integration into the global market, and thus achieve
a sustainable process of economic growth and development. It is
necessary to have strategies to harness the benefits of globalization
in general and free trade in particular. In this vein, in the present
research paper are described and analyzed the government's plans
of two political parties such as the Gran Alianza Nacional (GANA)
and Unidad Nacional de la Esperanza (UNE), with the express
purpose to compare these plans, governmental actions undertaken in
this area, and the proviso that only the first year of government
administration of UNE has been analyzed.
Indeed, the United States of America is the world's leading
economic power, which is still the economic slowdown is the biggest
world market, and in the case of Guatemala, is still the main trading
partner. In this context, Guatemala in conjunction with other Central
American countries and the Dominican Republic signed a Free Trade
Agreement with the United States of America, popularly known as
DR-CAFTA, with the aim of strengthening trade preferences granted
in previous agreements. The implications of this treaty in the
commercial area were also studied and analyzed in this paper.
To evaluate the progress and a forecast on the impact to this
date of the free trade agreement (DR-CAFTA) in Guatemala, it is
also necessary to note the economic conditions prevailing in the
region, which can be summarized as presented below.
6.1 External Environment
The international scene during the first half of 2010 was slightly more
optimistic than expected in late December 2009 and was
characterized by an improvement in economic growth projections of
the major economies, except those of the Euro Zone, associated
with uncertainty generated by the fiscal problems of some of their
economies and a strong economic recovery in Latin America. This
while taking into consideration that there is uncertainty in some
countries that are being forced to withdraw early tax and monetary
incentives implemented in the most difficult times of financial crisis,
which is a risk to sustainable recovery process in a global economy.
The United States of America continue showing signs of
recovery, perception indicators have stabilized, while industrial
production and consumer confidence and business continue to
improve and there is evidence of some improvements in financial
and credit conditions; however, the weakness of labor markets,
banking systems and fiscal conditions, moreover, the housing market
36
remains depressed, continues subtracting dynamism to the process
of recovery.
The Euro Zone, in the third quarter of 2009, showed positive
growth after five quarters of contraction. However, fiscal sustainability
problems were observed in Portugal, Ireland, Italy, Spain and Greece
which have been reflected in a loss of confidence by investors in a
depreciation of the euro and in some cases in a review of grades
sovereign risk, it has forced the adoption of agreements within the
European Union countries aimed at implementing austerity programs
and reduction of public deficits in order to restore confidence and
avoid a reversal in the process of economic recovery. Due to the
above, the International Monetary Fund (IMF) announced downward
risks in forecasts. In the short term, the main risk is an escalation of
tensions and financial contagion, due to growing concern about
sovereign risk. This could contribute to additional increases in
funding costs and a weakening of the balance sheets of banks and,
therefore, higher credit constraints, a deterioration of business and
consumers confidence, and strong variations in exchange rates.
Given the trade and financial linkages, this could effect a
considerable reduction in global demand. Regarding economic
activity, with the latest International Monetary Fund estimates (IMF)
1, Latin America is expected to show a growth rate of 4.8% in 2010 (1.8% in 2009) and the States economy to grow 3.3% in 2010 (-2.4%
in 2009).
The International trade, after the sharp fall recorded in 2009,
begins to show a more favorable trend, registering to April 2010,
according to the Netherlands Bureau of Economic Analysis, an
increase in volume of 17.2%, which means a substantial
improvement, after showing negative changes in 2009.
The international prices of oil and its derivatives have shown a
slight increase in the first half of 2010. For the average price of oil, an
increase of 8.2% was shown over the same period last year,
associated, among other things, to the gradual recovery in global
economic activity. Furthermore, international prices of corn and
wheat have less volatility and a downward trend.
Financial markets had shown better conditions in the first quarter
of the year, assisted by the spread of corporate earnings that beat
expectations and confirming the improved performance of global
economic growth. However, from May, this evolution has been
marked by tensions arising from the fiscal situation of some
European economies, which has caused an increase in the
perception of risk in both sovereign and corporate instruments.
37
Regarding to foreign exchange markets in the period under
review, one of the most important is the appreciation of U.S. Dollar
against the Euro, mainly due to the uncertainty surrounding the
economic situation in Portugal, Ireland, Italy, Spain and Greece,
while in the major economies of Latin America the U.S. currency has
a tendency to depreciate. Regarding inflation, during the year it
displays a widespread but very moderate rebound and associated, in
part to higher international prices of oil and its derivatives and the
reactivation of economic activity. Inflation expectations in Latin
American economies begin to show an increase for 2010 and
maintained an upward trend. In this sense, central banks have
continued the gradual removal of non-conventional measures of
monetary policies; however, decisions on changes in interest rate
monetary policy have been mixed, showing some pause in the
process of adjustment due to uncertainty in international markets. In
Latin America, Brazil was the first to start the cycle of raising interest
rates a cumulative 150 basis points increase in a context where the
trend of inflation and inflation expectations keep rising. Then the
central banks of Peru and Chile increased its interest rates (50 basis
points each). Market expectations about future increases in policy
rates, particularly in the major developed economies are postponed
and in some cases even until next year, given the possibility that
problems in Europe will intensify or spread, affecting the global
economic recovery. In accordance with the foregoing, the Committee
on Open Market Operations of the Federal Reserve of the United
States of America, in their most recent decision not to change the
interest rate target federal funds, argued that economic conditions
including low rates of resource utilization, the trend of inflation
contained and stable inflation expectations to justify their
exceptionally low levels of the federal funds rate for an extended
period.
6.2 Internal Environment
After the worst economic crisis in recent history, we began to notice
a change in expectations of economic agents in the country on the
national economic outlook for 2010, reflected primarily that tax
revenues have been showing a positive trend since the last quarter
of 2009, that indicators such as the generation and electricity
demand have continued to show positive behavior during the past six
months, the declining trend shown by the exports and imports of
goods are reversed from the last quarter of 2009 and the remittances
behavior begins to show a slight recovery. In addition, net flows of
private capital have been more dynamic and the private sector credit
is reversing the downward performance that had been observed
since the last quarter of 2008. Furthermore, the interpretation of
employers regarding the behavior expected about the production
volumes from the manufacturing industry are more favorable for the
38
first half of 2010, according to the results of the Survey of Business
Opinion, in addition to the banking system not only showed
resistance to the crisis in 2009, but the expectations of both rating
agencies and economic agents is to maintain adequate levels of
liquidity, solvency and solidity, which would contribute to sustaining
the recovery, if the conditions are not externally reversed.
Meanwhile, the Monthly Index of Economic Activity
also
continued showing signs of recovery, registering to May 2010 a
variation of 2.85%, higher than that observed in the same month in
2009 (2.20%).
With regard to foreign trade, the declining trends shown by the
exports and imports of goods during the period January to
September 2009 were reversed from the last quarter of this year. In
May 2010, exports and imports, according to preliminary figures
showed growth rates of 17.7% and 21.6% respectively, reflecting the
economic recovery not only of the country but also of the main
trading partners.
In the described context, it is important to mention that the new
information available from short-term indicators of trade associations,
chambers and associations of business opinion survey, as well as
possible global economic outlook allowed the registration of the
growth rate and GDP in real terms, which is estimated to be located
between 1.7% and 2.5%, higher than the estimated growth rate for
2009 of 0.6%. Within this dimension, in late May of this year were
two natural phenomena which impacted negatively on the country's
economic activity, as it was Tropical Storm Agatha (between 29 and
30 May) and the eruption of Pacaya Volcano ( May 27.) In this
regard, at the request of the Guatemalan Government, a
multidisciplinary mission led by the Economic Commission for Latin
America and the Caribbean (ECLAC), conducted an assessment of
damages and losses caused by these phenomena, using the
methodology contained in the Manual for Estimating the
Socioeconomic Effects of Natural Disasters developed by the
institution. According to the report, the losses would impact a
reduction in 2010 GDP of 0.5 percentage points. It is inferred that the
negative impacts of the eruption of Pacaya Volcano and Tropical
Storm Agatha could be offset by the higher dynamism represented,
but his is something that will be determined upon completion of the
survey to approximately 1,200 manufacturing companies.
Public finances continued to experience significant challenges in
the first half of the year. While tax revenues registered a growth of
9.0%, reflecting in general a more dynamic economic activity and
particularly the recovery of imports, until May prevailing uncertainty
regarding the financing of fiscal deficits, forcing the central
government to make adjustments to budget allocations, in this
39
context, public expenditure grew in a dynamic manner in the first two
months of the year (20.1%), slowed from March (14.2%) and April
(4.4%) and began to accelerate again in May, after approval of the
issuance of treasury bonds for Q4,500.0 million, growth rates were
registered for 12.6% in May and 14.9% in June. The fiscal deficit
observed at that time reached Q3,135.4 million, equivalent to 1.0% of
Gross Domestic Product (GDP) higher than in the same period last
year, which was Q1,903.1 million and 0.6% in terms of GDP.
Operating expenses were charged with much more dynamism,
increasing by 19.4% during the first half, while investment
expenditure recorded a moderate increase of only 2.3%. The need
for emergency response and to finance a reconstruction program
after the damage caused by the two recent natural disasters, in the
context of a tax burden already weak and increasing fiscal spending,
poses new challenges for public finances in the remainder of the year
and for subsequent years, and requires a monetary policy to remain
vigilant to take appropriate action in a timely manner that will
maintain anchored inflation expectations of economic agents.
The inflation rate was in the first three months of an upward trend
(1.43% in January, 2.48% in February and 3.93% in March)
explained by the increase in international prices of raw materials
(mainly oil and derivatives) and the drought that hit the country in
2009, which affected the prices of some vegetables and legumes, the
adjustments in the rate of electrical energy and further adjustments in
the price of sugar also explain this development. In April and May,
the pace slowed from 3.75% to 3.51%, respectively, these slight
variations are associated with negative inter reducing oversupply,
prices for some vegetables and legumes, and tomato and onion. In
June, as expected from the effects of Tropical Storm Agatha, price
increases were generated mainly by the division of food, beverages
and meals at public places, which showed a variation of 1.12%,
which had an impact on the year-one-year variation in the CPI that
reached a 4.07%.
The core inflation had a moderate growth and lower than overall
inflation, which, joined with the behavior of bank credit to private
sector as the output gap still remains negative, evidencing that
inflationary pressures on the side of aggregate demand have internal
state, in general, contained in the first half of 2010. Although the
effect of the Tropical Storm Agatha caused an increase in inflation in
June, it was smaller than the expected amount, so that forecasts and
inflation expectations by this year's end will be located within the
range goal.
In regard to the money market, it is noted that although there are
still excess liquidity in the economy, as evidenced by the available
liquid assets of the banking system and the behavior of the broad
40
monetary base, the still low dynamism of domestic aggregate
demand would not anticipate additional inflationary pressures.
Regarding the exchange market, the nominal exchange rate was
a trend toward appreciation, particularly in February, which would
have obeyed two main factors: first, an increase in private capital
flows, a situation which is denoted in fact that some people,
individuals or corporations, would have been liable to pay off debts in
dollars, particularly in the case of large corporations that have direct
access to foreign credit. Secondly, the expectations of appreciation
of the economic agents, resulting from a change in the trend of
nominal exchange rate and a better perception about the
performance of a global and national economy. Since March, the
behavior of the exchange rate has been stable and consistent with its
seasonality. In this context, the intercessions of the National Bank in
the exchange market have been limited and, in general, have been
made only to activate the regulation, having only used the
discretionary faculty only once.
In short, during the first half of 2010 the implementation of
monetary policy was held in an external environment slightly more
optimistic, projections for economic growth and moderate inflation
with global expectations, with signs of economic recovery, a slight
growth of bank credit to private sector, a slight appreciation of the
nominal exchange rate, and an increase in actual inflation and
inflation expectations. When performing a prospective analysis of
inflation it can be seen the continuing latent risks, both external and
internal environment, which suggest caution and gradualism in
monetary policy actions. In particular, if it is considered that the
forecasts and inflation expectations for 2010 and 2011 confirms that
the space for a relaxed monetary policy stance would be gone.
Moreover, the uncertainty of public finances and the need to shore
up the country's economic recovery require a firm stance of fiscal and
monetary policies, consistent with the Stand-By Arrangement with
the IMF so as to continue meeting the monetary, fiscal and structural
goals. In this context of caution, the Monetary Board in the first half of
2010, decided to maintain unmovable the level of the leading interest
rate.
41
Chapter 7
Government Commercial Policy Plans and the Relationship between Guatemala and the United States of America
The analysis of the DR-CAFTA is ambitious for two reasons: first, it
only had passed a short time since it was signed, and that makes
difficult to display clear commercial trends: second, free trade
agreements depends on the decisions taken by the State to
maximize their profits, predominantly based on policies aimed at long
term, and not all focused on a purely commercial sense: such is the
case that it can take several years without observing significant
changes. It should also be borne in mind that the DR-CAFTA is a
multilateral treaty that can contribute to greater regional integration.
In this prospect is not surprising that companies that, instead of
presenting significant growth in its exports to the United States of
America, they increased them to any other country in Central
America or Dominican Republic.
DR-CAFTA has consolidated the access for companies that
already had business relationship with the United States of America.
In this vein, it was understandable that the export sector made
emphasis on an early ratification of the Treaty, given that firms first
seek nearby markets to export their products, in this case Central
America, to subsequently expand to more distant places such as the
United States of America and Europe.
7.1 Beneficiary sectors
As I mentioned in previous chapters, it is not an easy task to confirm
that the DR-CAFTA opened the doors for diversification of export
production of Guatemala. However, it is feasible to identify the
sectors that in 2008 were shown as promising, by observing their
growth rates.
Period: from July 2006 to June 2008
Product
Annual average growth rate
Non-monetary gold
967.3%
Non-ferrous metals
441.0%
Crude rubber
159.9%
Industrial machinery
82.5%
Organic chemicals
48.6%
Drinks
43.1%
42
Oil
31.8%
Waste metals
25.9%
Wood and Cork
Prefabricated structures
23.1
16.9%
Source: United States International Trade Commission.
The first impression noted above, is that most of the products
that represented important growth after the entry into force of DRCAFTA are goods that were dynamically growing many years ago.
These include gold, crude rubber, scrap metals, drinks, and organic
chemicals. By this it can be said that the Treaty has not altered the
existing commercial trend. Also, since these goods have a high
variability, depart from low export volume and international relatively
small markets, is difficult for them to become products of great
relevance within the structure of exports, except the case of the
"gold16”.
The only traditional product in the list of products with higher
growth rates is oil, whose dynamism is associated with price
increases rather than increases in the exported volume.
Thus, it is also wise to observe the behavior of imports from the
United States of America with a higher growing, which are detailed in
the following table.
Period: July 2006-June 2008
Product
Non-ferrous metals
Iron and steel
Transport equipment
Oil
Cereals
Plastics
Fertilizer
Metals manufacturing
Machinery in general
Scientific team
Annual average growth rate
205.7%
116.6%
42.5%
35.0%
34.1%
33.1%
27.2%
24.7%
23.7%
21.5%
Source: United States International Trade Commission.
Because they have a great market, derived from that still represents a means of
wealth, hoarding especially in contexts of economic crisis.
16
43
Within the rubric of imports, it stands out the loss of dynamism of
textile fibers as a result of more flexible rules of origin concerning use
material originated in Central America, and under certain
circumstances Canada and Mexico, in the production of textile
articles.
In contrast, cereals, mostly yellow corn and wheat had a dynamic
behavior. The growth recorded by the petroleum and fertilizers, were
also important, products with sustained hikes in their prices in the
analyzed period.
At this point it is appropriate to express that the benefits
expected by the entry into force of DR-CAFTA are associated with
exports; an interesting case is the clothing sector, main export sector
that while receiving benefits, it has failed to take off, moreover it has
become a sector in decline; due to its importance, the national
economic activity suffers what any events may occur in this industry.
In that vein, the decline in the clothing sector attached to the
economic crisis in the United States of America it has had adverse
global effects, impacting significantly on employment. This because
the maquila industry is characterized by an intensive labor, capable
of generating important occupational places necessary in the current
recessive context. On the other hand, there are a large number of
sectors of economic activity that have not been benefited by the
Treaty, such is the case of vehicles, equipment and machinery,
chemicals, rubber and tobacco, which either by its own volatility or
because they are non-core assets, and rather specific, were not
eligible to be included in trade agreements.
In conclusion it could be argued that the beneficiaries of DRCAFTA in the area of imports are the clothing area, as well as the
sector of cereals, which obtained a decrease in the rate of customs
duty, or was completely liberated.
7.2 Analysis of important beneficiary sectors of the DRCAFTA
At the ratification and entering into force of the DR-CAFTA in July
2006, it was expected that not all productive sectors of the country
would benefit, since this would have required the implementation of
various policies short-term oriented to training for the workforce, the
diversification of the exportable supply in areas susceptible to it,
credit support and assistance to the small and medium businesses,
the regularization of land within a framework of resources and
capacity to make productive land tenure. By such reason, sectors
44
that could take advantage of DR-CAFTA since its inception are those
which before that date already claimed an economic relationship with
the North neighbor; among others, clothing, fruits and vegetables,
sugar, coffee and oil on the exports side and yellow corn on the
import side.
Clothing
The most notable achievements of DR-CAFTA, outstands the
permission to textile maquilas to the use other raw materials which
were not of American origin. However, two years after entry into force
of the Treaty, it can be observed that this sector declined its share of
total exports, which since is not strange that in recent years many
maquilas have closed operations in Guatemala, due to competition
that they face from the economies of Asia, which can operate with
lower costs of inputs, such as electricity and labor.
The previous situation, accentuated by the end of the ATC17 (in
spanish ATV18) in December 2004, has allowed Asian countries,
especially China, access to world markets. Therefore we can say that
after 2005, Guatemala passes from a business model based on
limiting export quotas to a business whose main comparative
advantage is the geographical location model, due to the proximity to
the United States of America; such matter explains the need to
upbraid this sector to focus on the so-called full Package and
Package Speed19 systems.
Agreement on textiles and clothing, established in 1995, replacing the Multifibre
Agreement dating from 1974, a transitional instrument whose purpose was to regulate
the global trade in textiles and clothing. Under this agreement the advanced countries
import quotas were removed in four stages over a period of ten years ended
December 31, 2004.
18 Acuerdo Sobre Textiles y el Vestido
19 These systems allow delivering products in a third, or half the time with those
coming from Asia, though its price is higher.
17
45
United States of America: Growth Rates
of Clothing Imports
50,00%
Change Rate
40,00%
30,00%
20,00%
10,00%
0,00%
-10,00%
2003
2004
2005
2006
2007
-20,00%
Year
China
Guatemala
Source: United States International Trade Commission.
Review of the rates of growth allows us to observe the decrease
in the sector of Guatemalan clothing departing from the year 2005,
with falls increasingly higher. In contrast, China has been increasing
steadily their participation in the American market observable by high
growth rates that posted its clothing exports.
Fruits and vegetables, coffee, oil and sugar
With the entry into force of DR-CAFTA has been observed as
from the year 2002 there has been sustained growth of exports of
fruit and vegetables, coffee, sugar and oil. Also it highlights how
exports of fruit and vegetables have gained ground in the United
States of America, which went from a 17% in 2005 to a 21% in 2008.
In this particular case the increase may be attributable to DR-CAFTA
since the United States of America freed 89% of tariff headings of
agricultural goods in the first year of validity. Also, exports of fruit and
vegetables had passed in recent years to those derived from
traditional products as evidence of a small diversification of export
production.
Contrary to what it has been thought, the production of fruits and
vegetables is done in both small and large plantations20; This
aggregation hides various particularities in the cultivation and
marketing of such products. For this reason in principle it cannot be
expected that the simple entry into force of the free trade agreement
Fradejas, A. and S. Gauster (2006). “Prospects for Guatemala peasant family
economy in a context of DR-CAFTA.” Guatemala p. 58 (translation into english by
author)
20
46
will generate rural development; for such a goal it is required active
public policies coordinated with the private sector so that small
farmers diversify its exportable supply within spaces generated by
DR-CAFTA, to achieve a better international insertion and to use the
opportunities arising from globalization.
In this context, it is worthy of pointing that experiences of
productive and commercial success has had always some sort of
promotion from the public sector in the country. The production of
vegetables for export, usually in the hands of small producers in
some municipalities which has happening for the last 20 years, has
its origins in an ambitious program of productive reconstruction of the
1980’s, in which the public sector and the export sector organized
together with technical cooperation from the United States of
America and Northern European countries have actively supported
the productive diversification with infrastructure, credit and training
techniques.
As a result of the increase in the price of traditional products, it is
observed according to statistics from the United States International
Trade Commission a modest increase in exports of coffee in the
period 2002-2007, as well as it also indicates how it has managed to
position itself for good quality in the American market.
It is important to mention that coffee enjoyed free access prior to
the CBTPA.
Gold
In the range of Guatemalan exports the export of gold - new
product - according to statistics from the United States International
Trade Commission this product has come to represent 3% of the
total exports in 2008 to United States of America. This is the result of
the settlement of the extractive industries of gold, which were
attracted to Guatemala, because of its high price in the international
market and also because of the legal framework offered by DRCAFTA.
Yellow corn
As mentioned above, imports of cereals was one of the lines that
took a notable increase with the Treaty, among these it is important
to study the behavior of yellow corn, main cereal imported together
with wheat and key input for poultry and swine industries.
It should be noted that DR-CAFTA has accelerated the trend that
had been used to happen since the 1990s towards a greater import
47
of yellow corn, which has replaced the national production; this fact is
corroborated by the Food Administration Organization of the United
Nations (FAO), showing that since 1990 the national production of
yellow corn has been in a frank decline21.
21
http://faostat.fao.org/site/567
48
Chapter 8
Critical Analysis of the four principal rules of the DR-CAFTA
The regulatory framework under which are built the foundations of
trade between the United States of North America, Central America
and the Dominican Republic, rest on four basic rules:
• First, the recognition of the importance of opening markets through
the reduction and elimination of major barriers to trade such as: tariffs and other nontariff measures, while allowing countries to protect
domestic production especially in the most sensitive items such as
agricultural goods, against competition from imported goods. Some
of the mechanisms used were:
a. Fee application,
b. Long tax exemptions periods, which can reach up to twenty years, to give an opportunity for the most vulnerable
sectors to make the necessary adjustments to become
more competitive.
Analysis:
In general terms, the rule applied in this treaty is effective, because is
seeking through the elimination or reduction of tariffs a smooth transit
of goods, enabling countries with less economic capacity to achieve
new export fields.
The rule also allows to those products with less economic
competitiveness to maintain the protection for longer periods in order
to give the chance to smaller economies to grow and to be in a
position to compete respectively to products at the beginning of the
treaty importing them would mean a high risk of losing production or
local industry.
• The second important rule is the certainty and stability that occurs
in relationships, by explicitly forbidding the adoption of unilateral
measures which may affect bilateral trade. This is reflected in
standards ranging from the prohibition of increasing tariffs that have
been eliminated, except in special cases as in the application of a
safeguard measure, the effect of a measure adopted in the
framework of dispute settlement, antidumping or countervailing
duties, and a commitment to publish and notify all the measures that
countries adopt and somehow have or may have an impact on
imports of another member country.
Analysis:
The provision generally prohibits unilateral action by the parties in the
free trade agreement is an appropriate rule to maintain trust and
good faith in the agreement. This rule keeps the effects of the treaty
and agreements for longer than a business relationship without a
49
party who considers itself injured or disagrees with the effects of the
agreement or decides to take action to break the agreement.
It also suggests that this rule helps to keep the dialogue within
the treaty and the amicable resolution of disputes without recourse to
third parties or courts of arbitration. This rule is itself a declaration of
trust between trading partners.
• The third rule is called "national treatment" which requires each
country to give equal treatment to goods imported than domestic
goods, once they have entered the market after fulfilling the
requirements of customs of the border. For example, it is forbidden to
tax the imported goods with excise taxes higher than those applied to
similar domestic products. The national treatment principle also
applies to trade in services.
Analysis:
This is basically a rule that protects the activities developed in the
text of the agreement as binding upon the parties, once the goods
are imported and admitted or the mechanisms for service are
delivered, the agreed conditions can not be changed to the detriment
deciding whoever utilizes the treaty, plan and execute any type of
business or service.
This rule allows to give stability to the activities within the free
trade agreement, giving confidence to investors since planning is
made for the activity or service and it may not be adversely affected
by unilateral or arbitrary rules or contrary to good faith that should
report these arrangements, In the case of analysis of States or
Parties to the treaty there are not only two but several parties
bounded by the pact.
• The fourth rule is an innovation within the preferential trade
instruments that Guatemala has signed and is related to how the
treaty will be applied. This is a "plurilateral" rule and applies
according to the provisions of this Treaty that have applicability in the
Central American trade, and is governed under the General Treaty
on Central American Economic Integration, a system where both
coexist and do not depend from each other. This will lead countries
to seek a harmonization of trading arrangements in order to facilitate
administration and implementation of treaties and agreements.
This involves the commitment of governments to intensify their
efforts to streamline its procedures and build the facilities for traders
and business community that requires engaging in knowledge of new
rules that govern the markets.
50
Analysis:
The existence of a free trade in Central America, Panama and the
Dominican Republic, the systems of integration and the regional
integration bodies, requires the existence of this rule within DRCAFTA, because all countries of the area are obliged to respect in
bilateral or multilateral trade in the region the same rules of analysis
and implementation of the agreement.
If in the ratio of two or three of the countries were conflicts of any
nature, it will affect the functioning of the general treaty and within a
short time this could became inoperative or into a system of different
rules for each and every activity or services.
Conclusion
Overall analyzed the four rules are agreed on the basis of trust,
goodwill and good intentions of the parties to the treaty and mean for
each of the states a guarantee in the planning and implementation
strategies for both the State itself and persons engaged in such
business relationships.
51
Conclusions and Reflections
Conclusions
The negotiation process of DR-CAFTA highlights the political
vulnerability of Central American counterparts, which finally came to
accept the proposal by the United States without major counterproposals. The relevance of the Treaty for the Americans is based on
the policy agenda toward the region, focusing on corruption, drug
trafficking and migration, which was a great door of opportunity for
economic concessions for Central America, and that the United
States of America.
The main feature of trade between Central America and the United
States is asymmetric. Despite the signing of DR-CAFTA, the
dynamism of exports to the United States has been lower than in the
rest of the world, mainly due to sustained contraction of the clothing
sector. However, the Treaty has served to strengthen the opening of
the U.S. market, allowing saying that if the treaty had not been
ratified, exports to the United States would surely have fallen.
Among the main potential benefits of DR-CAFTA is the investment.
The direct determinants of investment include economic policy
variables, uncertainty and political and social stability as well as
investment in physical and human capital, government expenditure
and macroeconomic stability.
The progress in the diversification of markets has led to the
progressive loss of importance of U.S. as Guatemala's main trading
partner.
The institutional framework that was created to support state policies,
which attend efforts of both public and private sectors, has to be
acknowledged although its limitations.
The areas most benefited by the DR-CAFTA are the ones that had a
higher pre-commercial relationship with the United States, with the
exception of clothing, which has lagged for their loss of
competitiveness against other regions. The export sector that has
more benefited items is mainly commodities such as coffee, sugar,
fruits and vegetables, and gold. On the side of imports from the
United States of America stands out cereals such as corn and some
inputs such as petroleum products, although for the latter case its
importance is due to rising prices, the effect of the latest economic
expansion.
52
Another area benefited is in the sugar industry, which achieved a
substantial increase in membership fees to the U.S. market, ranging
from 32.000 metric tons for the first year to 49.820 for 15 years and
an annual increase further after this Last year, 940 metric tons.
In relation to pharmaceuticals and agrochemicals, data protection
requirements limit industrial production of some generic drugs, in
employment there would not be a very large impact, since the
sectors are relatively small, but some lines can make expensive
agricultural chemicals and medicines that address chronic diseases.
The industrial sector's high exposure to competition resulting from
the DR-CAFTA is the beverage and food processing. But more than
a risk is considered that the domestic sector has all the potential to
respond to increased competition resulting from tariff reduction,
because it shows evidence of oligopolistic structured way, which
could be generating extra income that would give space to compete
on price.
Reflections and Recommendations
In general terms, the topics on the FTA related to services are an
adoption of requirements not only to improve access for investment
in any of these areas (telecommunications, financial services and
other border services), but a matching agenda policy (monitoring,
competition, etc..) to ensure access to markets more safely and
without any discrimination on the side of the incumbent operator.
The Treaty reflects the need for develop important domestic reforms.
Reforms of policy and institutional base to take positive benefits that
the Treaty could offer. These reforms are related to: a) political
stability (economic performance), b) implementing policies to raise
productivity, c) strengthen institutions, d) governance; e) improving
the investment climate; f) to adopt an adequate system of innovation;
g) improve the level of human resources (education policy), h)
improve the legal and regulatory measures to strengthen investor
protection; i) progress in reform and labor market flexibility.
It should be emphasized; in general, for all service sectors that the
country should not wait for institutional improvements. The country
must work in advancing the reform agenda that the treaty requires. In
this area the country's politics will have a key role, especially
legislators, and regulators, since these are new challenges for those
who will make the market conditions that truly promote competition
and attract investment.
53
It is generally thought that the countries compete when actually only
the businesses do so. That is why some mistakenly believe that
exports and competitiveness are the same. However, the
competitiveness of a country can be seen by the size of enterprises,
export performance and economic growth.
It is essential to support the State to meet the minimum elements of a
country's development agenda and an agenda to promote exports.
Other important elements for insertion into the world economy and to
maximize favorable conditions for access to key markets like the
United States of America, are the efforts to improve financial
services, offset tax costs, facilitate access to market information,
instead of supporting specific sectors, as in previous years.
International trade can be a permanent source of growth if it operates
as a channel of assimilation of new knowledge and technologies, and
as a stimulus for continuous improvement in productivity.
54
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