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What are the main issues in the debate over CAFTA?

Author: Lionel Beehner
July 18, 2005
This publication is now archived.

What are the main issues in the debate over CAFTA?

The Central American Free Trade Agreement (CAFTA), currently under consideration in the U.S. Congress, would create a free-trade zone by eliminating most tariffs and other trade barriers between the United States and Central America. President Bush and other CAFTA proponents say it will boost trade, help bring stability to Central America by creating jobs, and reduce the $2.3 billion U.S. trade deficit with the region. But CAFTA faces stiff opposition from a coalition of U.S. consumer, labor, and agricultural groups whose members say the agreement will cost the United States jobs, impinge workers’ rights in the region, and do little to close the trade gap.

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Which countries are parties to the agreement

The United States, Honduras, Nicaragua, El Salvador, Costa Rica, Guatemala, and the Dominican Republic.

What’s the legislative status of the agreement?

On June 30, the Senate approved CAFTA in a 54-45 vote. Some experts say the bill will face tougher opposition in the House, which is expected to hold an up-or-down vote in late July; under the terms of fast-track trade authority granted the White House in 2002, Congress cannot modify trade agreements. If the House fails to ratify CAFTA, the agreement is effectively dead, many trade experts say. CAFTA still awaits ratification in Costa Rica, the Dominican Republic, and Nicaragua, where the agreement is opposed by left-wing political parties and local labor groups.

Which U.S. industries will be most affected by the agreement?

Economists disagree about the impact CAFTA will have on various sectors of the U.S. economy. Among the U.S. industries with the most at stake are:

  • Sugar.U.S. sugar producers say CAFTA will result in an influx of cheap sugar from Central America and shift jobs overseas from an industry that employs more than 300,000 U.S. workers. (Some economists say this figure includes workers in jobs that are only marginally related to sugar production; they say the number of employees working directly on sugar may be as low as 60,000). U.S. sugar growers receive government subsidies, and quotas limit sugar imports. As a result of the subsidies, Americans pay twice as much for sugar than consumers in other countries, says Russell Roberts, a trade professor at George Mason University in Virginia. The agreement would have no effect on the subsidies U.S. sugar producers currently receive. Over a phase-in period of 15 years, CAFTA would slightly expand quotas on sugar imports from Central America. That is expected to add 100,000 tons of sugar—roughly one day’s U.S. production—into the U.S. market annually. Still, sugar producers “are afraid it will set a bad precedent,” says Fran Smith, an adjunct fellow at the Competitive Enterprise Institute.
  • Textiles.Central America already buys most of its cloth duty-free from the United States, but U.S. textile producers are worried about the increasing amount of cheap cloth from China available in the region. Under CAFTA’s “rule of origin” clause, 90 percent of apparel produced in Central America must use fabric originating in the United States. But some U.S. textiles producers are concerned that a loophole in the agreement would allow non-CAFTA countries like Mexico or China to sell fabric to Central American countries, where it could be made into clothes that could then be exported duty-free to the United States. The fears of the loophole’s effect, Smith says, may be overstated; it applies only to Nicaragua and to Central America’s smaller apparel makers. Still, the Bush administration intends to try to alter the agreement to bar Chinese textiles from entering the United States via Central America as duty-free apparel, the Washington Times reported.
  • Agriculture.Aside from sugar-beet and cane growers, most U.S. farmers are generally in favor of CAFTA because tariffs on U.S. farm exports, which average around 11 percent, would be eliminated. The United States sells roughly $1.6 billion annually in agricultural products to Central America, a figure that’s estimated to climb by $1.5 billion over its 20-year implementation period, according to the American Farm Bureau. But if farm imports outpace U.S. exports, which happened under the 1994 North American Free Trade Agreement (NAFTA), American farmers will suffer, argues Robert E. Scott, a trade expert with the Economic Policy Institute (EPI), a think tank opposed to the agreement.
What are the main components of CAFTA?

The trade agreement would:

  • Remove tariffs.Most imports from Central America already enter the United States duty-free as part of the 2000 U.S.-Caribbean Basin Trade Partnership Act, which is due to expire in 2008. CAFTA would lock in these trade preferences. The agreement would also immediately remove tariffs from 80 percent of U.S. consumer and industrial goods and more than half of U.S. agricultural products exported to Central America. On “sensitive” products—that is, goods such as Central American corn or U.S. sugar that are protected by subsidies and import quotas—tariffs would be phased out over a 15-to-20-year implementation period.
  • Eliminate barriers to investments. CAFTA would lift restrictions on U.S. investment in several government-run sectors of the economies of Central American countries, including energy, transport, and telecommunications. CAFTA would also guarantee the protection of patents, trademarks, and other forms of intellectual property. Some CAFTA opponents say the agreement offers too much protection for foreign firms; for example, they argue that CAFTA’s extension of pharmaceutical patents will drive out generic medicines and push up the price of brand-name drugs in the region. 
  • Enforce labor regulations. CAFTA requires its member states to uphold their national labor laws. Governments that fail to do so face fines of up to $15 million per violation. Currently, many of Central America’s low-wage laborers are routinely harassed or fired for organizing unions or exercising basic workers’ rights, labor experts say.
What effect will CAFTA have on the U.S. economy?

A small but generally positive one, most experts say. The combined gross domestic product of the other six CAFTA members is around $81 billion, smaller than the Czech Republic’s and a tiny fraction of the United States’ $10 trillion economy. Moreover, these nations account for just 1.4 percent of the United States’ overall global trade. Still, Central America’s 45 million consumers buy more U.S. products than the 1.5 billion people in India, Indonesia, and Russia combined. The U.S. Chamber of Commerce also predicts the agreement will create some 130,000 U.S. jobs, many of them in agriculture, over the next decade.

What is the predicted benefit to Central American members?

It’s unclear, experts say. A June 28 World Bank report predicts that over CAFTA’s first five years, the economies of Central American countries will grow by only 0.6 percent more than they would without the trade agreement. But CAFTA proponents say the trade agreement would create jobs in the region by encouraging foreign investment, which would, in turn, increase demand for labor. This could then give Central American workers more bargaining power and a greater ability to unionize. Others, including President Bush, have said CAFTA would benefit the region’s security as much as its economy; the area is undergoing a resurgence of civil strife, gang-related crime, and drug trafficking. Another added benefit, some CAFTA backers point out, is that the expected job creation would help stem the flow of Central American immigrants, both legal and illegal, into the United States.

Is there opposition to CAFTA in Central America?

Yes. It was hotly debated in all six countries. Opposition was particularly fierce in Costa Rica, Central America’s wealthiest country on a per-capita basis, where telephone and electrical workers feared their jobs would be outsourced if the telecommunications industry were privatized. Similar concerns were voiced by healthcare workers in El Salvador.

Many of Central America’s opponents of freer trade fear a repeat of what they see as the harmful effects of NAFTA. That pact, they argue, greatly reduced Mexican farm-subsidy programs and lifted import quotas on U.S. corn and other commodities. NAFTA critics say, as a result of NAFTA-induced economic upheaval, nearly 1 million small farmers lost their land, and many took low-wage factory jobs along the U.S.-Mexican border. Most economists, however, argue that Mexico was hurt more by the 1994 financial crisis and devaluation of the peso than by NAFTA. Since 1994, on average $14 billion in foreign direct investment—money spent by foreign firms on tangible assets like factories, machines, and buildings—has flowed into Mexico each year from the United States, six times the amount spent in the six years prior to NAFTA.  

Which U.S. groups oppose CAFTA?
  • Organized Labor.Labor unions, including the AFL/CIO, say CAFTA will result in a net loss of U.S. jobs, and that the agreement fails to provide adequate education or job training for those left unemployed. These groups often point to NAFTA, which they say has increased the U.S. trade deficit and caused a net loss of some 900,000 U.S. jobs. Many trade experts dispute these figures.  
  • Workers’ rights groups. Some Democrats in Congress, along with groups like the International Labor Organization, say that CAFTA does not offer enough protections for workers in Central America. They say the text of the treaty calls on CAFTA members only to “strive” to enforce national labor laws. In addition, they argue that these laws often fall short of international labor standards. Enforcement will also be difficult, say CAFTA opponents, because of the region’s scarcity of labor-enforcement inspectors.
  • Environmentalists.A number of environmental groups have lined up against CAFTA, claiming the treaty does not enforce any set of environmental regulations and would further erode current environmental and public-health standards. These opponents say the accord contains dispute-resolution mechanisms, not unlike similar provisions in NAFTA, which would permit multinational corporations to bypass domestic courts and challenge local rules and regulations on natural resources—including federal oil, gas, or mineral leases—in closed-door international tribunals. CAFTA proponents counter that the agreement’s language on environmental norms is similar to that of other recently passed trade agreements and that economic development is the best catalyst for environmental reform.
  • Anti-Bush Democrats. Some experts say there is a growing protectionist streak among some Democrats in Congress, as evidenced by recent moves to curtail outsourcing and push China to revalue its currency. Many of these Congressmen question the benefits of 10 years of trade liberalization under NAFTA and other trade agreements. Other experts suggest that Democrats, upset over the White House’s domestic tax policies, may vote against CAFTA not because of free-trade concerns or objections to the text of the treaty, but because a “no” vote would deliver a political defeat to the White House.
Who is leading the fight for CAFTA?

In the United States, the pro-CAFTA camp is being led by the Bush administration, Republicans on Capitol Hill, and a coalition of free-trade and pro-business groups, including the U.S. Chamber of Commerce. In Central America, CAFTA is being promoted mostly by business leaders and pro-trade politicians, and also is supported by most of the region’s major labor unions.

What happens if CAFTA fails?

Many experts say failing to ratify CAFTA would slow the drive to create a larger Free Trade Area of the Americas (FTAA), as well as possibly derail broader efforts to increase free trade globally. The FTAA has been held up indefinitely by powerful anti-globalization forces in Latin America, particularly in Brazil, Argentina, and Venezuela, experts say. “A ‘no’ vote [by the United States] will cast a shadow on future [trade] negotiations, both bilateral and regional,” as well as in the World Trade Organization (WTO), says Daniel T. Griswold, director of the Cato Institute’s Center for Trade Policy Studies and a free-trade advocate. “If the Congress can’t stand up to the measly sugar lobby,” he says, “this will raise serious doubts that [the United States] can negotiate anything at the next round of WTO talks” slated for December in Hong Kong.

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