U.S. Investors and Its Multinationals Will Emerge As Main Winners from CAFTA Ratification
• As part of the Bush administration’s move to expand and legitimize the interests of U.S. investment capital throughout
the hemisphere, on May 28 Washington signed a multilateral free trade accord with five Central American nations that, if
ratified, threatens to adversely affect living standards for a large percentage of the region’s population.
• Although the Central American Free Trade Agreement (CAFTA) clearly and forcefully addresses the most pressing demands
of multinational corporations, such as protecting investor and intellectual property rights, it fails to ensure the
enhancement and enforcement of labor rights and environmental regulations and limits the exercise of national
sovereignty.
• CAFTA’s provisions undermine Central America’s sovereignty because they establish a set of supranational mechanisms
that, by their very definition, supersede laws promulgated by each respective country’s legislative branch. These
CAFTA-implemented mechanisms will mainly protect the economic interests of international and domestic investment
sources, but will offer worker and environmental groups little protection or right of redress.
• CAFTA will exacerbate the unequal economic relationship that currently exists between the world’s largest economy and
Central America’s underdeveloped societies, by eliminating the only recourses the latter possess to protect their
national interests, to politically determine governmental policy and to mobilize social reforms.
• CAFTA advocates in Congress may attempt to ratify it in a lame duck session before the legislative chambers officially
reconvene next January.
On May 28, 2004, Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua, together with the United States, signed a
free trade accord whose underlying principle is the aggressive protection and expansion of individual and corporate
investor rights. These privileges come at the expense of environmental protection, legislative independence, and a
nation’s right to autonomously determine social and economic policy. Despite the assurances of its proponents, the
Central America Free Trade Accord (CAFTA) is not likely to translate into a significant improvement for the region’s
atrocious labor rights record because it does not institute the fixed penalties and incentives required for such a
profound change. The absence of such provisions is especially distressing in Central American societies that, in a
twisted and deadly caricature of respectable collective bargaining, have historically witnessed hundreds of labor
leaders gunned down and intimidated by hired hands on the payrolls of land owners and factory managers.
The agreement’s limited and unbalanced scope is a result of a heavily delimited negotiating process that lacked any
sense of transparency and only involved government-sponsored experts. In its present form, CAFTA represents a very
significant undermining of the traditional sovereign rights of nations and exposes a lamentable deference on the part of
Central American governments. This clearly demonstrates their intent of mainly serving privileged elements of their
societies at the expense of the generality of their populations. Once implemented, CAFTA will, in fact, likely condemn
the area’s agricultural, service and industrial workers to further marginalization, with the accompanying risk that they
might fall into abject poverty. Most likely, comparable Central American enterprises will be hard-pressed to
successfully compete with foreign competitors because they lack the economies of scale, investor control, access to low
interest loans, investor pool and an outreach to skilled management which is readily available to transnational
commercial entities.
Numerous NGO’s, civic organizations, trade unions groups and political figures in both Central America and the U.S. have
expressed their opposition to the agreement. Despite the recent lull in activity regarding its ratification, due in
large part to Washington’s absorption with the November U.S. presidential elections, many Republican advocates of the
agreement, such as Rep. Kevin Brady of Texas, hope to push CAFTA through Congress during a possible lame duck session
before it reconvenes next January 2. The Congress Daily quoted Brady as stating that “A lot depends on the November
elections, [but] a lame duck session is a powerful weapon.” CAFTA critics maintain that now is the time for those likely
to be adversely affected by the pact to make their arguments known and quickly form a broad-based domestic opposition
and tap into the already existent anti-free trade international movement in order to coalesce against it, on an urgent
basis, before it is too late. A victory by Democratic presidential hopeful John Kerry, who has repeatedly stated his
intention to reevaluate all free-trade agreements, could also provide anti-CAFTA advocates with an opportunity to
participate in producing a more balanced draft than the one now ready for ratification.
Uneven ground
If and when CAFTA is ratified, it will represent a momentous victory to business sectors in the U.S. and in Central
America. The five Central American nations that are taking part in the agreement constitute a relatively underdeveloped
region whose total GDP equals only $152 billion, or a negligible fraction of the U.S.’s $11 trillion economy. CAFTA
fails to adequately consider this facet of the signatories’ asymmetrical relationship. According to renowned Nicaraguan
academic Rene Oscar Vargas, “CAFTA is a vehicle for an increase of U.S. exports and an opportunity to maximize the
potential of its basic industries: information technology, telecommunications, the service industry, agriculture and
intellectual property.” On another occasion Vargas commented, “What is CAFTA but an agreement between unequal partners.”
The principle that states that free trade is beneficial to all those involved is misleading and simplistic as it
disregards the fact that with unfettered access, the advantage almost always lies with the powerful. In its current
format, CAFTA is the economic equivalent of a 220-pound heavyweight being allowed to step into the ring against a 112-
pound flyweight. Although international trade and foreign investment are necessary components of any economy, it is a
state’s responsibility to prioritize the interests of all its citizens, not just the privileged few, and certainly not
that of transnational corporations.
For the CAFTA agreement to be ratified, it must be approved by the legislature and signed by the president of each
signatory country. A full and transparent reexamination of its costs and benefits, and who will be the winners and
losers, is imperative because renegotiation of contested clauses will be all but impossible once the agreement is
ratified. A look at Mexico’s experience with NAFTA, and its unsuccessful attempts to renegotiate agriculture-related
provisions, underscores the serious implications of ratifying CAFTA. Free-trade agreements are not in themselves
pernicious instruments. However, they must prove beneficial to both parties, and the Central American Free Trade
Agreement, in its current format, does not satisfy this overriding requirement. If this agreement is implemented without
alterations, it will demonstrate that unscrupulousness and greed will prevail over the best interests of the citizens
directly concerned.
Foreign investment is the panacea
Behind the rhetoric used to tout CAFTA’s virtues - that it promotes a win-win scenario - the reality is that it will
provide already well-heeled international and domestic corporations and investors with lucrative incentives,
protections, and almost plenary immunity from prosecution. In Article 10.28 of the agreement, the definition of an
investor is purposefully vague as it encompasses any individual involved or considering participation in a business
venture. If CAFTA is ratified, any investing individual or corporation will have the vested right to challenge a
nation’s national or local policy, regulation, or law which they perceive as an impediment to their business dealings,
and can call for it to be voided before a supranational dispute panel. This ability to circumscribe constitutionally
enacted national legislation and regulation, or seek monetary compensation for their enforcement, gives rise to a new
class of parties who essentially will be above the rule of local law. Like the North American Free Trade Agreement
(NAFTA) ratified by Mexico, the U.S. and Canada and put into effect in 1994, this accord would provide private parties a
protection that today is not in conformity with existing U.S. law. In addition, CAFTA does not clearly and reciprocally
address a nation’s legitimate course of action when a corporation is thought to have participated in unlawful behavior
within its boundaries.
To enforce its bylaws, CAFTA will create an unaccountable supranational body bestowed with the authority to redress any
so-called infringement on a foreign corporation’s or investor’s economic interests. Not only is the burden of proof in
these cases placed upon the respective government, the plaintiffs face little consequence if they submit a frivolous
complaint. Past experience with NAFTA suggests that environmental regulations will be the object of most of the
infringement suits that will be filed because, despite Central America being the second most biodiverse region in the
world, sustainable development is not a central tenet of CAFTA. In fact, the mere threat of legal action, and the
accompanying litigation costs, should discourage the region’s economically-strapped nations from aggressively enforcing
environmental regulations.
The optimistic contention made by the Office of the U.S. Trade Representative in an August 2003 Interim Environmental
Review, that “CAFTA may have positive environmental consequences in Central America,” is disputed by Dr. Angel Maria
Ibarra, president of the Salvadoran Ecological Unit (UNES). He notes that “a simple reading of the text and its
relationship to other chapters reveals its essentially cosmetic nature. CAFTA is a custom-made agreement for
transnational corporations.” This is a thesis that U.S.-based private environmental organizations, such as the Center
for International Environmental Law and the Sierra Club, have consistently reaffirmed.
In negotiations with the Central American countries, Washington pushed for and succeeded in institutionalizing a
mechanism that suborns the very tenets of a country’s sovereignty. There is no doubt that CAFTA will hinder the ability
of the region’s citizens to propose, discuss, and implement the rules of conduct which they may consider to be desirable
and appropriate. The pact, therefore, challenges the very essence of using legislative action as a legitimate vehicle to
achieve economic and social redress. Interestingly, whereas Washington refuses to participate in many supranational
bodies, like the International Criminal Court and the Kyoto Protocol, citing their need to protect national interests,
such fears are hypocritically brushed aside when lucrative private business transactions involving the state are at
stake and the possibility of unfavorable rulings against enterprises are most likely to be minimal.
Handcuffing the state
The restrictions which CAFTA imposes on Central American governments will extend well beyond the capacity, or lack
thereof, of states to bind companies to comply with domestic laws. In simplest terms, CAFTA will prohibit states from
determining and implementing economic and social policies which their branches of government believe are most suitable
to their developmental needs, thus forcing them to adhere to a “one size fits all” liberalizing recipe that does not
account for the unique particularities of a given country. Under this system, the agreement’s provisions substitute for
an objective cost-benefit analysis of the beneficial or negative impacts a particular policy, regulation, or law would
have on society. If, for example, Costa Rican authorities decide that they wish to encourage an emerging and possibly
lucrative sector of the economy through tariffs and incentives, as Ireland and the lauded Asian Tigers most successfully
did with their information technology and manufacturing industries, respectively, CAFTA provisions could be used to
prohibit them from doing so.
In addition, the eventual elimination of all tariffs will expose essential domestic industries to potentially
devastating competition from multinational corporations that enjoy a tremendous advantage based on their economies of
scale or, as is the case with white corn, Washington-subsidized production. Even government procurement, a mechanism
that the U.S. government itself utilizes in certain instances to offset market inequities, will not be exempt from
CAFTA’s strict regulations. According to Chapter Ten of the pact’s text, foreign actors must be guaranteed the same
treatment, in both the public and private sphere, as a nation’s citizens. This begs the question of who the Central
American negotiators were in fact representing when they agreed to these stipulations, because they demonstrably will
not benefit the majority of their own citizens. In the long term, the region’s severely underdeveloped economies can be
expected to fall prey to the natural forces of the market and will undoubtedly incur heavy domestic job attrition, the
displacement of thousands of small and medium scale farmers and a more skewed distribution of wealth to the benefit of
the nation’s privileged capital-holding minority. Salvador Arias, a Salvadoran legislator with the Faribundo Marti
Liberation Front (FMLN), told La Nacion USA, a Washington D.C. area daily, that his country alone would likely lose
upwards of 54,000 agricultural jobs during the first year of CAFTA’s implementation.
No new labor protections
CAFTA’s proponents assure critics that the agreement will encourage a marked improvement in labor rights for Central
American workers. The chapter in CAFTA that addresses this issue, however, seems much more concerned with ensuring a
level playing field for U.S-based corporations than protecting the region’s workers. The real aim of the agreement’s
provisions appears to be the ability to retain the excessively low costs of production that grossly unsatisfactory
working conditions help maintain without appearing to do so. In this respect, even though Article 16.2 states that
Central American governments must “strive to ensure” compliance with their domestic labor laws and guarantee not to
“encourage trade or investment by weakening or reducing the protections” these laws provide, this, and other passages
like it, fall far short of constituting a sturdy defense of labor rights and make the chapter’s overall lackadaisical
tone one of the agreement’s most grievous deficiencies.
In a March press release, Human Rights Watch (HRW) strongly criticized the agreement’s glaring reliance on current
Central American domestic legislation that, until now, has been ineffective in curbing labor rights abuses. In addition,
that organization maintains that real change will not come about unless CAFTA adopts strong “procedural guarantees for
[their] enforcement.” Without clearer mechanisms that redress worker abuse (which ideally would be equal to those that
CAFTA would provide to investors) only blind optimists foresee anything more than a marginal improvement of the
currently corrosive, if not deplorable and inhumane, labor rights situation in Central America. In fact, the question of
whether CAFTA, in its current format, will improve the overall standard of living of the region’s inhabitants is highly
debatable at best.
This analysis was prepared by Gabriel Espinosa Gonzalez, COHA Research Associate.